Fannie Mae Adopts New Rules for Pre-Mod Income Verification

A general practice of servicers today is to consider borrowers for a standard ""Fannie Mae"":http://www.fanniemae.com mortgage modification based solely on the homeowners' verbal statement of their financial information. But that's about to change.

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The GSE has issued ""new servicing guidelines"":https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1008.pdf stating that effective July 15, 2010, all servicers must verify the borrower's income, liabilities, and monthly expenses before a loan modification can be offered.

""The servicer must not agree to change the terms of a mortgage loan until the servicer receives and evaluates the financial information required to verify that the borrower has a hardship, determines that a permanent standard Fannie Mae mortgage modification is the appropriate foreclosure prevention alternative, and obtains Fannie Mae's prior written approval,"" according to the newly issued guidelines.

Prior to granting a modification, the servicer must determine the borrower's total assets. The liabilities provided by the borrower on financial forms must be

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compared to a recent credit report, and monthly gross income must be verified. Fannie says the servicer may rely on verbal information obtained from the borrower to document monthly living expenses in its servicing system.

The GSE also reiterated in its guidelines that servicers must require the borrower to make a cash contribution, if financially feasible, toward reducing the delinquency.

In addition, Fannie Mae says if a borrower becomes 60 or more days delinquent within the first 12 months of receiving a modified loan, then the servicer must immediately work with the borrower to pursue either a short sale or deed-in-lieu, or commence foreclosure proceedings. If the servicer determines that another modification is appropriate for the borrower, the servicer must first obtain Fannie Mae's written approval to try a new loan restructuring.

Servicers may continue to process modifications that were previously evaluated based on stated income prior to July 15. Mortgage loans that are eligible for Fannie Mae's ""Alternative Modification program"":http://dsnews.comarticles/fannie-mae-introduces-alternative-hamp-modification-2010-03-18 are not subject to the new ""hardship"" documentation requirements.

The new income verification rules come just days after ""Fannie Mae announced"":http://dsnews.comarticles/fannie-mae-intensifies-penalties-for-strategic-defaulters-2010-06-23 new policy changes intended to deter financially competent homeowners from strategically defaulting on their mortgage.

Borrowers who walk away from their loan obligation and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage for a period of seven years from the day of foreclosure. The GSE says it will also take legal action to recoup the outstanding mortgage debt from strategic defaulters in jurisdictions that allow deficiency judgments.