Servicing Guide

Published September 9, 2020

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What actions must the servicer take when a conventional first lien mortgage loan involves a leasehold estate that contains a cross-default provision and the borrower is delinquent on lease payments?

The servicer must maintain the integrity of Fannie Mae’s rights under the mortgage loan by the appropriate enforcement of cross-default provisions in the security instrument.

When a conventional first lien mortgage loan that involves a leasehold estate contains a cross-default provision and the borrower is delinquent on his or her lease payments, the servicer’s action depends on the status of the mortgage loan, as described in the following table. 

If the lease payment is delinquent and the mortgage loan is... Then the servicer must...

current

either

  • advance its own funds to cure the lease default, or

    Note: The servicer may then bill the borrower for the funds it advanced. If the borrower does not repay the advance, the servicer may apply future mortgage loan payments toward the advance if the mortgage loan documents, local law, and government regulations do not prohibit it.

  • contact its Fannie Mae Servicing Representative (see F-4-03, List of Contacts) if it has determined that the cross-default provision should be exercised.

delinquent and the servicer has determined that the default cannot be cured

contact its Fannie Mae Servicing Representative (see F-4-03, List of Contacts) and recommend an appropriate action.

In reaching its recommendation, the servicer should consider the amount of Fannie Mae’s investment in the property, the current value of the property, the nature of the real estate market in the area, and the type of MI coverage in effect. The servicer may recommend any of the following:

  • purchase of the land from the leaseholder—at the purchase price stipulated in the lease (This will enable Fannie Mae to acquire both the land and the improvements through foreclosure proceedings),

  • assumption of the borrower’s interest in the lease estate—as long as the lease is assumable by the mortgagee without the leaseholder’s consent (Fannie Mae can then acquire the improvements by foreclosing on the mortgage loan and sell the acquired property subject to assumption of the lease), or

  • forfeiture of Fannie Mae’s interest in the improvements to the leaseholder—as long as Fannie Mae would not incur any penalty or liability.

For more information please see: D1-5-01: Call Options and Cross-Default Provisions

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