Servicing Guide

Published September 9, 2020

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Can the servicer initiate foreclosure proceedings when both insured first and second lien mortgage loans are in default?

If both the first and second lien mortgage loans are in default, the second lien mortgage loan servicer must assume control over the foreclosure process to ensure that Fannie Mae’s interest in the second lien mortgage debt will be fully protected. However, when Fannie Mae has an ownership interest in both mortgage loans, there may be occasions when Fannie Mae decides that the most efficient liquidation method is to instruct the first lien mortgage loan servicer to bid both the first and second lien mortgage debts at the foreclosure sale and to acquire title on Fannie Mae’s behalf. If Fannie Mae pursues this alternative, the first lien mortgage loan servicer can still file a claim under the MI policy for that mortgage loan, and Fannie Mae will assume the responsibility for disposing of the acquired property if the mortgage insurer does not accept title to it.

If during foreclosure the mortgage insurer instructs the servicer to reinstate the first lien mortgage loan (or does not issue instructions to the contrary before the date of the foreclosure sale), the servicer must

  • advance the funds necessary to reinstate the first lien mortgage loan,

  • proceed with the foreclosure of the second lien mortgage loan, and

  • acquire title to the property subject to the first lien mortgage loan.

If the mortgage insurer instructs the servicer to satisfy the mortgage loan, the servicer must do so.

If the mortgage insurer does not accept conveyance and take title to the acquired property, the second lien mortgage servicer must notify Fannie Mae’s SF CPM division (see F-4-03, List of Contacts). At the same time, the servicer must also advise Fannie Mae about the effect of any due-on-sale (or transfer) clause in the first lien mortgage loan. Fannie Mae will be responsible for marketing the property.

The servicer must not pay off the first lien mortgage loan unless the mortgage insurer or Fannie Mae has issued specific instructions to do so.

For more information please see: E-3.2-03: Initiating Foreclosure Proceedings on a Second Lien Conventional Mortgage Loan 

 

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If you have additional questions, Fannie Mae customers can visit Ask Poli to get information from other Fannie Mae published sources.

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