Investors who take over delinquent mortgages backed by Fannie Mae and Freddie Mac must try harder to reach agreements that allow borrowers to keep their homes, according to a new set of rules released Monday. The rules could limit foreclosures but also could cost taxpayers money.

The rules are a nod to housing advocates who have long complained that some investors have treated homeowners roughly after buying loans formerly owned by the government. Some advocates had asked for the rules in response to what they said were anecdotal reports of ill treatment from some investors who bought the homes.

The rules from the Federal Housing Finance Agency require investors to consider extending loan terms, forbearing or forgiving mortgage principal, or pursuing a short sale before foreclosure. 

Fannie and Freddie don't make mortgages but buy them from lenders, bundle them into securities and guarantee to make investors whole if the mortgages default. When a default occurs, Fannie and Freddie try to ease their losses by getting a borrower to pay again or, eventually, foreclosing on the property.

Because such a process can take years and is costly, both Fannie and Freddie have considered selling the nonperforming loans to investors who would go through the process themselves.  Loan buyers also have the flexibility to take drastic steps to keep homeowners in place, such as by cutting mortgage principal balances, which Fannie and Freddie are largely prohibited from doing. The companies are taking their cue in part from the Department of Housing and Urban Development, which has held auctions of nonperforming loans backed by the Federal Housing Administration for several years. Nonprofits have criticized some of those auctions.Some investors argue that they generally follow the practices outlined by regulators, and that to the extent the rules make them go through extra steps, it could result in lower prices for the loans, and steeper taxpayer losses. 

The FHFA's rules essentially seek to ensure that investors who buy the loans make several attempts to keep borrowers in their homes before foreclosing.

"These guidelines are a great step toward ensuring that the auctions are more responsible and have the potential to benefit homeowners and neighborhoods," said Sarah Edelman, a senior policy analyst at the left-leaning Center for American Progress.

"FHFA expects that with these enhanced requirements, [nonperforming loan] sales by Freddie Mac and Fannie Mae will result in more favorable outcomes for borrowers and local communities, while also reducing losses to the Enterprises and, therefore, to taxpayers," said FHFA Director Melvin Watt in a statement.

The rules come as Fannie's and Freddie's auctions get under way. Freddie has held auctions for loans with around $1 billion in unpaid principal. Fannie executives have said they're considering auctions but haven't yet had one.

"The problem is, what's the purpose of changing the rules midstream? The goal of an investor when he buys a nonperforming loan is already to make it perform," said Vincent Fiorillo, president of the board of the Association of Mortgage Investors and an executive at DoubleLine Capital.


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