NEW YORK (Reuters) - Fannie Mae and Freddie Mac, aiming to quash inefficiencies clogging the home finance system, are taking a new carrot and stick approach to companies that service home loans, a federal housing finance regulator said on Thursday.
The Federal Housing Finance Agency has directed Fannie and Freddie to align the guidelines taken by so-called mortgage servicing firms that are often blamed for fumbling efforts to keep borrowers in their homes, as well as in foreclosures.
Many servicers are under investigation by state attorneys general for their roles in mortgage failures and foreclosures.
The directive “should result in earlier servicer engagement to identify the best possible solution for homeowners,” Edward DeMarco, acting director of the FHFA, said in a statement.
Aligning approaches to servicing should also help reduce the cost to taxpayers, who are bearing billions of dollars in losses for the companies as the housing slump lingers, the FHFA said. Both Fannie Mae and Freddie Mac have complained that delays or other servicing problems have raised their costs.
Among the common guidelines, servicers will receive incentives to perform modifications sooner when a borrower is delinquent, while sanctions will be imposed for failure to meet certain goals, the FHFA said. For example, a servicer that eases payments for a borrower within four months of a delinquency will receive $1,600, but only $400 if the process lasts more than seven months.
The guidelines also prevent servicers from seeking foreclosure at the same time a borrower is considered for a loan modification.
The changes could help form the basis of a nationwide servicing standard sought by regulators and lawmakers, given the reach of the companies. The new guidelines will be issued to servicers in the third and fourth quarter, the FHFA said.
The guidelines are sure to be a monumental task for Freddie and Fannie, which funnel cash from investors to about 90 percent of all new loans and own or guarantee more than $5 trillion in mortgages. Fannie Mae and Freddie Mac each work with more than 1,400 and 2,000 servicers, respectively, according to spokesmen for the companies.
Freddie Mac noted that there will be “operational differences” in implementation.
Major banks, including Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co are among the biggest mortgage servicers.
Reporting by Al Yoon; Editing by Dan Grebler