A new Fannie Mae (FNM) policy that takes effect in July will potentially keep homes severely damaged by toxic drywall manufactured in China out of the foreclosure pipeline, but will add additional burden to a servicing industry already taxed by mounting work implementing loss mitigation strategies and processing foreclosures. Under the authority of its “Unusual Hardships” policy, Fannie is directing its mortgage servicers to provide borrowers impacted by Chinese drywall up to six months of forbearance on their monthly mortgage payment and to minimize the derogatory credit impact for borrowers who are current on their loans and complying with the terms of the forbearance. The Fannie policy takes effect in mid-July. A spokesperson for Freddie Mac (FRE) said it intends to announce a similar initiative as soon as Friday. The drywall was imported heavily during the housing boom and during the recovery after Hurricanes Katrina and Rita. It was used predominately in construction of homes in Florida, Louisiana and Virginia, but the US Consumer Product Safety Commission (CPSC) has fielded nearly 3,400 complaints from homeowners in 37 states. A CPSC-led task force studying the impact of the drywall said it is responsible for emitting a sulfur smell, corrodes metal pipes and makes some residents ill. The task force has further found that the only effective remediation of the drywall is complete removal and replacement of the drywall and the affected household components. That’s forcing homeowners to find alternative housing — at their own expense — while their homes are repaired. “This relief is intended to help borrowers who need payment flexibility as they take steps to mitigate … problem drywall,” said Terry Edwards, executive vice president. “The issue potentially affects thousands of homeowners in a number of states, and we want to support those who are responsibly trying to honor their mortgage obligation in good faith while correcting the problem and protecting the health and safety of their families.” Servicers will be required to document and evaluate each borrower’s circumstances on a case-by-case basis. For a borrower to be approved for the forbearance, the property must be inspected to confirm the existence of the problem drywall. The servicer then approves the hardship for the six-month forbearance. Fannie Mae must approve any extensions. The nationwide program comes after a similar forbearance program for Virginia homeowners. After Virginia Sen. Mark Warner secured the forbearances for his constituents, the government-sponsored enterprises (GSEs) came under pressure from other US senators in Florida and Louisiana for the same. The Veterans Administration (VA) also recently encouraged its servicers to provide six-month forbearances to homeowners with Chinese drywall on mortgages it guarantees. A federal judge in New Orleans earlier this year ruled against one of the drywall manufacturers and awarded $2.6m to seven families whose homes were built with the alleged defective materials. However, the company, Taishan Gypsum Co., was not present for the hearing and it is unlikely the families will recover the money. Write to Austin Kilgore. The author held no relevant investments.