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Fannie Mae Cracks The Foreclosure Whip

Fannie Mae says it will begin fining loan servicers who take too long to complete foreclosures once it’s been determined that delinquent borrowers don’t qualify for a loan modification or other alternatives like short sales.

The fines — or “compensatory fees” — will be assessed when loan servicers can’t provide a reasonable explanation for failing to meet timelines for completing routine foreclosures that vary from state to state, Fannie Mae said in a bulletin to servicers.

The time allotted to complete a foreclosure, starting from the referral of a loan file to an attorney or trustee until the date of a foreclosure sale, varies from as little as 60 days in Georgia, Michigan, Missouri, Tennessee, Texas, Virginia and West Virginia, to 300 days or more in Illinois, Maine, New Jersey, New York, Vermont and Wisconsin.

The foreclosure timelines Fannie Mae has established for the four states hit hardest by foreclosure during the downturn fall in between: 120 days in California and Arizona, 150 days in Nevada, and 185 days in Florida.

Fannie Mae said the foreclosure schedules it’s established for each state represent the time “typically required for routine, uncontested foreclosure proceedings, given the legal requirements of the applicable jurisdiction.” The timeline in Florida, for example, was extended by 35 days to allow for a state-mandated mediation process.

Fannie Mae promised it “will not impose compensatory fees for delays beyond the control of the servicer, such as unavoidable mediation or court delays, or sales delays by sheriffs or other selling officers.”

When fines are levied, they will be based on the outstanding principal balance of the mortgage loan, the rate of return paid to investors in mortgage-backed securities backed by the loan, the length of the delay, and any additional costs directly attributable to the delay.

According to mortgage data aggregator Lender Processing Services, an estimated 2.02 million homeowners were in foreclosure in July nationwide. Another 5.02 million homeowners were behind on their mortgages.

On average, borrowers in foreclosure were 469 days behind on their mortgage payments, up from 351 days a year ago and 196 days in January 2009, LPS said.

Properties that are vacant and held off the market, combined with whatever portion of homes with delinquent mortgages that are not currently listed for sale, “represent a shadow inventory putting downward pressure on both home prices and rents,” Fannie Mae warned in the company’s most recent quarterly report to investors.

According to the report, 4.99 percent of the roughly 9 million single-family loans securitized into mortgage-backed securities guaranteed by Fannie Mae were seriously delinquent or in the foreclosure process as of June 30 — about 450,000 loans.

Of those, about 170,000 were in foreclosure. About two-thirds of seriously delinquent loans had been delinquent for more than 180 days.

In the first half of 2010, Fannie Mae’s loan servicers negotiated 276,059 loan workouts — more than three times as many as the same time period the year before.

Fannie Mae’s loan servicers also signed off on 38,841 short sales and deeds-in-lieu of foreclosure during the first half of 2010, a 171 percent increase from the same period a year ago that nearly matched the total for all of 2009.

Fannie Mae nevertheless acquired 130,767 properties through foreclosure in the first half of the year, up from 57,469 during the first half of 2009.

At the end of the foreclosure process, loan servicers schedule properties for auction. If nobody bids for a property, or if the bids that are received fall short of the properties’ estimated worth, Fannie Mae takes possession of the home and handles its resale.

The company was only able to sell 87,612 of the properties it acquired through foreclosure in the first half of 2010, leaving it with an REO inventory of 129,310 homes valued at $13 billion.