Servicing Guide

Published November 10, 2020

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Can the servicer initiate foreclosure proceedings when an insured second lien mortgage loan is in default, but the first lien mortgage loan is current?

If an insured second lien mortgage loan is in default, but the first lien mortgage loan is current, the servicer may be instructed to

  • foreclose on the second lien mortgage loan;

  • acquire title to the property subject to the first lien mortgage loan; and

  • file a claim with the mortgage insurer. (During the course of the foreclosure proceedings, the mortgage insurer may instruct the servicer to advance funds to satisfy the first lien mortgage loan. In such cases, the servicer must do so and include the advanced funds in the insurance claim it files.)

If the mortgage insurer does not accept conveyance and take title to the acquired property, the second lien mortgage loan servicer must notify Fannie Mae’s SF CPM division (see F-4-03, List of Contacts) of this and advise Fannie Mae of the effect of any due-on-sale clause in the first lien mortgage loan.

The following table provides additional requirements based on Fannie Mae’s ownership interest in the first lien mortgage loan.

If Fannie Mae… Then the servicer…

does not have an ownership interest in the first lien mortgage loan

must advance funds to ensure the first lien mortgage loan remains current while the property is on the market.

has an ownership interest in the first lien mortgage loan

must not advance funds to keep the first lien mortgage loan current since eventually Fannie Mae will need to foreclose to acquire clear title to the property.

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

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