During the recent MBA Conference in New Orleans, Freddie Mac and Fannie Mae officials discussed some of their loss mitigation initiatives that are being expanded or enhanced.

The following report from Reuters discusses some of these efforts.

Freddie Mac pays up to cut foreclosure exposure

Freddie Mac is paying heavily by offering cash incentives to companies that alter terms on troubled loans and thwart more massive costs tied to home foreclosures.

The second-largest U.S. home funding company, like other mortgage companies during the worst housing market since the Great Depression, is making aggressive efforts to reduce its credit exposure and losses from souring home loans.

"Last year we paid $12 million in incentives to our customers," up sharply from $7 million in 2006, Ingrid Beckles, vice president of servicing and asset management at Freddie Mac, told Reuters after a panel here at a national mortgage servicing conference.

Mortgage servicers have typically collected loan payments from home owners and passed them along to investors.

They are now being called upon by an industry facing 2 million foreclosures to modify loans to more affordable terms for many borrowers at risk of losing their houses.

Costs for the incentives Freddie Mac is paying to servicers, among others, should increase further in 2008, but the benefits are clear, Beckles said.

"The $12 million saves us maybe $80 million or $100 million in credit losses," she said.

The 47,950 loan modifications on Freddie Mac guaranteed loans made last year brought the total number of home loans the company has preserved since 2000 to 346,917, Beckles said.

"Those incentives equate to people, real families, keeping their homes."

Reducing credit costs comes at a critical time for the housing industry. Many lenders have closed shop as risky loans failed in droves and credit for some mortgages dried up.

Earlier on Thursday, Freddie Mac reported a $2.5 billion fourth-quarter loss and warned it could lose billions of dollars more in coming quarters as more borrowers fall behind in the worsening housing slump.

News of the losses came a day after Fannie Mae the biggest U.S. home funding company, announced a $3.6 billion quarterly loss as defaults and foreclosures mounted.

Fannie Mae officials told the conference on Wednesday it was offering loans to help homeowners who have fallen behind on payments avoid permanent changes in their mortgage terms in an effort to reduce the company's credit losses. Fannie is also offering a series of incentives to servicers and others who can work out loans and avert foreclosures.

Freddie Mac's efforts are also growing. It is expanding a pilot program to pay certain attorneys who refer borrowers on the brink of foreclosure back to servicers, who will also be paid to help remedy the loans.

The program started last year in fives states and will include 19 states that represent 85 percent of Freddie Mac's business, according to Freddie Mac spokesman Brad German.

In 2007, the program helped about 18,000 borrowers whose loans were about as deep into the process as they could go to avoid foreclosure, he said.

"I don't care if I compensate the attorney and the servicer for the workout -- it's better than a foreclosure," Beckles added. The aim is to modify loans to "truly viable homeowners" as much as possible, she said.

The modification rate is rising as Freddie Mac relaxes and simplifies its processes, Beckles said. "We saw a 15 percent increase in modification approvals just in December and that number continues to rise because of those actions."

Modifications that were running between 500 to 600 monthly in 2006 have since tripled, according to Freddie Mac.

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