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F-1-27, Processing a Fannie Mae Flex Modification (11/13/2024)

Introduction
This Servicing Guide Procedure contains the following:

Obtaining a Property Valuation

The servicer must obtain a property valuation in accordance with Determining the Fannie Mae Flex Modification Terms in D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification.

The servicer must obtain a property valuation, which must not be more than 90 days old at the time the servicer evaluates the borrower for the mortgage loan modification, using one of the following:

  • an exterior BPO;

  • an appraisal;

  • Fannie Mae’s servicing solutions system;

  • Freddie Mac’s AVM;

  • a third-party AVM; or

  • the servicer’s own internal AVM, provided that

    • the servicer is subject to supervision by a federal regulatory agency, and the servicer’s primary federal regulatory agency has reviewed the model.

If Fannie Mae's servicing solutions system, Freddie Mac's AVM, the third-party AVM, or the servicer’s internal AVM does not render a reliable confidence score, the servicer must obtain an assessment of the property value utilizing an exterior BPO, an appraisal, or a property valuation method documented as acceptable to the servicer’s federal regulatory supervisor. The property value assessment must be rendered in accordance with the FDIC's Interagency Appraisal and Evaluation Guidelines regardless of whether such guidelines apply to mortgage loan modifications.

The servicer must attach the valuation and documentation when submitting its proposed recommendation to Fannie Mae through its servicing solutions system.


Determining the New Modified Mortgage Loan Terms

The servicer must determine the borrower's new modified mortgage loan terms in accordance with Determining the Fannie Mae Flex Modification Terms in  D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification, and the requirements below.

The servicer must determine the post-modification MTMLTV ratio, which is defined as the gross UPB of the mortgage loan including capitalized arrearages, divided by the current value of the property.

In order to determine the borrower's new modified mortgage loan terms, the servicer must apply the steps in the order shown in the following table, unless prohibited by applicable law, until the earlier of 

  • achieving a 20% P&I payment reduction target, or 
  • exhausting the steps for determining the Fannie Mae Flex Modification terms.

Note: With regard to achieving the 20% P&I payment reduction target, the servicer must apply the increment or amount as described in each step of the following table to result in a payment reduction that exceeds but is as close as possible to 20% (for example, 20.01%).

Note: When determining the final Fannie Mae Flex Modification terms prior to granting the permanent mortgage loan modification, the servicer must use the same interest rate as established when determining the terms for the Trial Period Plan.

Step Servicer Action
1

Capitalize eligible arrearages. The following are considered as acceptable arrearages for capitalization:

  • accrued interest;

  • out-of-pocket escrow advances to third parties, provided they are paid prior to the effective date of the mortgage loan modification; 

  • servicing advances paid to third parties in the ordinary course of business and not retained by the servicer, provided they are paid prior to the effective date of the mortgage loan modification, if allowed by state laws; and

  • any outstanding non-interest bearing balance from a previously completed loan modification or a previously completed payment deferral.

Note: If applicable state law prohibits capitalization of past due interest or any other amount, the servicer must collect such funds from the borrower over a period not to exceed 60 months unless the borrower decides to pay the amount up-front. Late charges may not be capitalized and must be waived if the borrower satisfies all conditions of the Trial Period Plan.

See Administering an Escrow Account in Connection With a Mortgage Loan in B-1-01, Administering an Escrow Account and Paying ExpensesB-1-01, Administering an Escrow Account and Paying Expenses for additional information.

 

Step Servicer Action
2 Set the interest rate to a fixed rate based on the requirements in the following table.
If the mortgage loan is... Then the servicer must...
a fixed rate (including an ARM or step-rate that has reached its final interest rate)  set the modified interest rate to the contractual interest rate in effect for the periodic payment due in the month of the evaluation date.
an ARM or step-rate that has not reached its final interest rate

set the interest rate to the greater of

Note: If the Fannie Mae Modification Interest Rate exceeds the lifetime interest rate cap of the ARM or the final interest rate for the step-rate, then the servicer must set the contractual interest rate to the lifetime interest rate cap for the ARM or the final interest rate for the step-rate, as applicable.

3

If the mortgage loan has a post-modification MTMLTV greater than or equal to 50% and the interest rate as determined in step 2 is greater that the Fannie Mae Modification Interest Rate, then the servicer must reduce the rate in 0.125% increments until the earlier of

Note: In instances where the 20% P&I payment reduction target has not yet been achieved but applying a full 0.125% increment would set the modified interest rate to a rate below the Fannie Mae Modification Interest Rate, then the servicer must apply a partial rate reduction increment (that is, an amount less than 0.125%) to reach the Fannie Mae Modification Interest Rate.

4

Extend the term in monthly increments until the earlier of

  • achieving the 20% P&I payment reduction target, or
  • reaching a term that is 480 months from the mortgage loan modification effective date.

Note: When the mortgage loan is secured by a property where the title is held as a leasehold estate, the term of the leasehold estate must not expire prior to the date that is five years beyond the new maturity date of the modified mortgage loan. In the event that the current term of the leasehold estate would expire prior to such date, the term of the leasehold estate must be renegotiated to satisfy this requirement for the mortgage loan to be eligible for the mortgage loan modification.

5

Forbear principal if the post-modification MTMLTV ratio is greater than 50%, in an amount that is the lesser of

  • an amount that would achieve the 20% P&I payment reduction target,

  • amount that would create a post-modification MTMLTV ratio of 50% using the interest-bearing principal balance, or

  • 30% of the gross post-modification UPB of the mortgage loan.

Note: Interest must not accrue on any principal forbearance. Principal forbearance is payable upon the earliest of the maturity of the mortgage loan modification, sale or transfer of the property, refinance of the mortgage loan, or payoff of the interest-bearing UPB.

If the steps above are exhausted without achieving the 20% P&I payment reduction target, then the servicer must offer the resulting modified mortgage loan terms to the borrower provided the monthly P&I payment satisfies the P&I-specific requirements in Determining the Fannie Mae Flex Modification Terms in D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification.


Preparing the Loan Modification Agreement

The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in  D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification.

The servicer must prepare the Loan Modification Agreement (Form 3179) early enough in the Trial Period Plan to allow sufficient processing time so that the mortgage loan modification becomes effective on the first day of the month following the Trial Period Plan (modification effective date). The servicer is authorized to, at its discretion, complete the Loan Modification Agreement so the mortgage loan modification becomes effective on the first day of the second month following the final Trial Period Plan payment to allow for sufficient processing time. However, the servicer must treat all borrowers the same in applying this option by selecting, at its discretion and as evidenced by a written policy, the date by which the final Trial Period Plan payment must be submitted before the servicer applies this option ("cut-off date"). The cut-off date must be after the due date for the final Trial Period Plan payment as set forth in the Evaluation Notice.

Note: If the servicer elects this option, the borrower will not be required to make an additional Trial Period Plan payment during the month (the "processing month") in between the final Trial Period Plan month and the month in which the mortgage loan modification becomes effective. For example, if the last Trial Period Plan month is March and the servicer elects the option described above, the borrower is not required to make any payment during April, and the mortgage loan modification becomes effective, and the first payment under the Loan Modification Agreement is due, on May 1.

The servicer must incorporate into the Form 3179 the applicable provisions in accordance with the requirements in Summary: Modification Agreement (Form 3179).


Executing and Recording the Loan Modification Agreement

The servicer is responsible for ensuring that the mortgage loan as modified complies with applicable laws, preserves Fannie Mae's first lien position, and is enforceable against the borrower(s) in accordance with its terms. The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification.

In order to ensure that the modified mortgage loan retains its first lien position and is fully enforceable, the servicer must take the actions described in the following table.

The servicer must...
 

Ensure that the Loan Modification Agreement is executed by the borrower(s).

Note: The servicer may encounter circumstances where a co-borrower signature is not obtainable for the Loan Modification Agreement, for reasons such as mental incapacity or military deployment. When a co-borrower's signature is not obtainable and the servicer decides to continue with the mortgage loan modification, the servicer must appropriately document the basis for the exception in the servicing records.

  Ensure all real estate taxes and assessments that could become a first lien are current, especially those for manufactured homes taxed as personal property, personal property taxes, condo/HOA fees, utility assessments (such as water bills), ground rent, and other assessments.
  Obtain a title endorsement or similar title insurance product issued by a title insurance company if the Loan Modification Agreement will be recorded.
 

Record the executed Loan Modification Agreement if:

  • recordation is necessary to ensure that the modified mortgage loan retains its first lien position and is enforceable in accordance with its terms at the time of the modification, throughout its modified term, and during any bankruptcy or foreclosure proceeding involving the modified mortgage loan; or

  • the Loan Modification Agreement includes assignment of leases and rents provisions.

If the mortgage loan is for a manufactured home, and the lien was created, evidenced, or perfected by collateral documents that are not recorded in the land records, the servicer must also take such action as may be necessary, including any amendment, recording, and/or filing that may be required, to ensure that the collateral documents reflect the mortgage loan modification, in order to preserve Fannie Mae's lien status for the entire amount owed. See Selling Guide A2-4.1-01, Establishing Loan Files for additional information regarding collateral documents required to be retained for manufactured homes.

The servicer must execute and record the Loan Modification Agreement based upon the entity that is the mortgagee of record in accordance with A2-1-04, Execution of Legal DocumentsA2-1-04, Execution of Legal Documents. In addition, the servicer must send the Loan Modification Agreement to the document custodian if the mortgagee of record is

  • the servicer;

  • MERs; or

  • Fannie Mae, and Fannie Mae has given the servicer an LPOA that allows it to execute this type of document on Fannie Mae's behalf.

When the servicer is required to send the Loan Modification Agreement to the document custodian, the servicer must follow the requirements outlined in the following table.

If the Loan Modification Agreement... Then the servicer must...
is required to be recorded
  • send a certified copy of the fully executed Loan Modification Agreement to the document custodian within 25 days of receipt from the borrower, and

  • send the original Loan Modification Agreement that is returned from the recorder's office to the document custodian within 5 business days of receipt.

is not required to be recorded send the fully executed original Loan Modification Agreement to the document custodian within 25 days of receipt from the borrower.

Adjusting the Mortgage Loan Account Post-Mortgage Loan Modification

The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in  D2-3.2-06, Fannie Mae Flex ModificationD2-3.2-06, Fannie Mae Flex Modification.

After a mortgage loan modification is executed, the servicer must adjust the mortgage loan as described in the following table.

The servicer must...
 

For a portfolio mortgage loan, add any amounts to be capitalized to the UPB of the mortgage loan as of the date specified in the agreement. Usually, the capitalization date is one month before the new modified payment will be due.

Note: The servicer may request reimbursement from Fannie Mae when any of its costs are capitalized (see  F-1-05, Expense ReimbursementF-1-05, Expense Reimbursement).

  Revise the borrower's payment records to provide for collection of the modified payment.
 

Apply any funds that

  • the borrower deposited with the servicer as a condition of the mortgage loan modification,

  • have been deposited on behalf of the borrower in connection with the mortgage loan modification, or

  • the mortgage insurer contributed in connection with the mortgage loan modification.

    Note: Amounts due for repayment of principal, interest, or advances must be remitted promptly to Fannie Mae. The remaining funds may be used to clear any advances made by the servicer or to credit the borrower's escrow deposit account.

  Determine if it must change the servicing fee in accordance with A2-3-02, Servicing Fees for Portfolio and MBS Mortgage LoansA2-3-02, Servicing Fees for Portfolio and MBS Mortgage Loans.

 


Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.  

Announcements Issue Date
Announcement SVC-2024-06 November 13, 2024
Announcement SVC-2023-03 May 10, 2023
Announcement SVC-2021-03 June 09, 2021
Announcement SVC-2019-03 May 15, 2019