Photo courtesy of Fannie Mae

The Federal Housing Finance Agency will limit how many missed payments mortgage servicers need to advance on Fannie Mae and Freddie Mac loans in a move that the agency said would address mortgage liquidity concerns. The move, however, stops short of a much-asked-for liquidity facility for servicers.

Under new guidelines announced today, Fannie Mae and Freddie Mac mortgage servicers must advance four months of missed payments on single-family mortgage loans in forbearance. The mortgage servicer then will not need to advance any more missed payments for the loan.

This new policy applies to all Fannie Mae and Freddie Mac servicers regardless of type or size, the FHFA said in a statement.

“The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion [Fannie- and Freddie]-backed housing finance market,” FHFA Director Mark Calabria said in a statement. “Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”

In making this change, the FHFA aligned Fannie Mae’s policy with Freddie Mac’s.

Previously, when a loan was in a mortgage-backed security (MBS), Fannie Mae servicers were responsible for advancing the principal and interest payment regardless of whether borrowers made their payments.

Meanwhile, Freddie Mac servicers, who generally advance scheduled interest, were only obligated to advance four months of missed borrower interest payments.

The four-month obligation limit for Fannie Mae is now consistent with the current policy at Freddie Mac. After advancing four months of missed payments on a loan, the servicer will have “no further obligation to advance scheduled payments,” according to the FHFA.

This new policy falls short of industry requests for a liquidity facility. Calabria had said previously that there would be no mortgage liquidity facility.

The new guidelines also instruct Fannie Mae and Freddie Mac to maintain loans in COVID-19 payment forbearance plans in MBS pools “for at least the duration of the forbearance plan.”

Under previous policies, mortgage loans that were delinquent for more than four months were purchased out of MBS pools by Fannie Mae and Freddie Mac. The FHFA said mortgage loans with COVID-19 payment forbearance will now be “treated like a natural disaster event and remain in the MBS pool.”

“This change reduces the potential liquidity demands on Fannie Mae and Freddie Mac resulting from loans in COVID-19 forbearance and delinquent loans,” the FHFA said.