UPDATE 1-Fannie Mae removes obstacles to loan modifications

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By Al Yoon

NEW YORK, Dec 8 (Reuters) - Fannie Mae, the largest provider of funding for U.S. home mortgages, on Monday said it has established new guidelines to help speed modifications on home loans even before a borrower goes into default.

Fannie Mae (FNM.P) said its "early workout program" will allow mortgage servicers to negotiate a loan modification if a borrower is still making payments, but a default is foreseen. Foreclosure prevention efforts were previously only available after a delinquency has occurred, it said.

Mortgage servicing companies now also have the right to remove loans from mortgage-backed securities after just one month of delinquency for the purpose of a modification, it said.

Servicers in general have had to wait for at least four months of delinquent payments to strip loans from MBS, which must be done before a modification can be completed.

Fannie Mae and Freddie Mac, under guidance from their regulator, have recently stepped up efforts to modify, or permanently change, mortgage contracts to easier terms as a way to halt record foreclosures that have put housing in a downward spiral.

Lawmakers have also increased pressure on modifications by servicers, who must answer to bond investors that could sometimes make out better if a foreclosure is completed.

Fannie Mae added it would allow the doubling of maximum forbearance and repayment plan periods for most loans. Typical modifications may include lowering interest rates and reductions to principal.

"These changes to our servicing policies are intended to remove administrative obstacles so that Fannie Mae borrowers can get the help they need and avoid foreclosure," Herb Allison, Fannie Mae's chief executive officer, said in a statement.

Fannie Mae and Freddie Mac were seized in September by the government due to concern that mortgage losses were depleting capital needed by the companies to support the housing market with loan purchases and guarantees.

To curb losses, Fannie Mae had policies in place that tried to keep loans in MBS, since it often had to recognize losses once the mortgage is removed.

Fannie Mae and Freddie Mac own or guarantee nearly half of all U.S. residential mortgages. (Editing by Gary Crosse)