On November 28, 2012 Fannie Mae announced new requirements for the Fannie Mae Mortgage Release process. Fannie Mae’s Mortgage Release procedures are a new name for the previous Deed-In-Lieu of Foreclosure policies. Servicers are required to implement the new Mortgage Release policies for all covered mortgage loans on or after March 1, 2013.
Fannie Mae’s new Mortgage Release guidelines are part of a broader Servicing Alignment Initiative. The Servicing Alignment Initiative is a FHFA directed effort to establish more consistent processes for the servicing of delinquent loans owned or guaranteed by Fannie Mae and Freddie Mac. The goal of the Servicing Alignment Initiative is to establish servicer guidelines that resolve delinquencies in a more consistent and expeditious manner, keep people in their homes when possible and minimize losses to the companies and taxpayers.
Servicers must follow Fannie Mae’s newly announced Mortgage Release procedures for delinquency management of all conventional mortgage loans:
- held in Fannie Mae’s portfolio,
- sold to Fannie Mae for cash and subsequently securitized into MBS pools (known as Pooled from Portfolio or PFP mortgage loans), and
- that are part of an MBS pool serviced under the special servicing option or a shared-risk MBS pool for which Fannie Mae markets the acquired property.
To be eligible for a Mortgage Release, a borrower must have a financial hardship and be ineligible for other foreclosure prevention alternatives. A servicer must first evaluate a borrower’s eligibility for other home retention options, including a standard Fannie Mae short sale, before evaluating the borrower for a Mortgage Release as a final foreclosure prevention option.
Fannie Mae’s new Mortgage Release policy includes three exit options for the borrower. The servicer must inform the borrower of these options as part of the Mortgage Release evaluation.
The three exit options are:
- immediate move (standard Mortgage Release),
- three-month transition with no rent payment required, and
- twelve-month lease with market rent payment.
The three-month transition with no rental payment is a new program from Fannie Mae that was not previously offered as part of the Fannie Mae Deed-for-Lease program.
The key components of the new Mortgage Release policy are summarized and discussed below, including: borrower eligibility requirements, property eligibility requirements, streamlined documentation flexibility, borrower contribution requirements, subordinate lien payments, deficiency waiver requirements, borrower relocation incentives and interaction with an ongoing foreclosure process.
Borrower Eligibility- Hardship Requirements
Borrowers 90 days or more delinquent must document a general financial hardship. Borrowers less than 90 days delinquent must document one of the following specific hardships: (1) death of a borrower or co-borrower, (2) long-term or permanent illness or disability of a borrower or co-borrower or dependent family member or (3) previous discharge from the debt obligation through a Chapter 7 bankruptcy and no reaffirmation of the mortgage loan.
Borrower Eligibility- Occupancy Requirements
For mortgage loans that are 31 or more days delinquent, the property may be a principal residence, a second home, or an investment property and either occupied or vacant. For mortgage loans that are current or less than 31 days delinquent, the property must be the borrower’s principal residence.
Borrower Eligibility – Debt-to-Income Ratio
For mortgage loans that are current or less than 31 days delinquent, the borrower's total current monthly debt- to-income ratio must be greater than 55% to be considered for a Mortgage Release.
Streamlined Documentation Option
Streamlined documentation is possible in a subset of cases. Servicers may approve a borrower for a Mortgage Release without verifying the borrower’s hardship or obtaining detailed documentation if:
- the borrower is 90 days or more delinquent as of the date of the servicer evaluation, and
- the borrower’s credit score is less than 620.
Borrower Contribution Requirement
Each borrower that is offered a Mortgage Release must be evaluated for a cash contribution and/or promissory note request to pay back some of the deficiency between the outstanding principal balance and the current value of the property, to the extent this is permitted by law in the applicable jurisdiction. No contribution evaluation is required if the borrower qualifies for the Streamlined Documentation process described above.
Subordinate Lien Payments
Properties that qualify for a Mortgage Release in many cases have subordinate liens associated with the properties. In order to increase the probability of a successful Mortgage Release and foreclosure prevention solution, Fannie Mae permits payments to subordinate lienholders of up to $6,000 in aggregate. Any payments to subordinate lienholders must be made in exchange for a lien release and full release of liability for the borrower. This $6000 limit is the same amount offered for second lien extinguishment as part of the Treasury’s Home Affordable Foreclosure Program in connection with short sales and deeds-in-lieu of foreclosure.
About two-thirds of states permit lenders to pursue deficiency judgments from borrowers following a foreclosure or short sale. As a part of the Mortgage Release, Fannie Mae requires the servicer to release the borrower from liability for any deficiency associated with the Fannie Mae mortgage loan upon successful completion of a Mortgage Release. This applies to insured mortgage loans with delegations of authority from the mortgage insurer and uninsured mortgage
loans. This deficiency waiver does not extend to any subordinate liens that remain outstanding after the Mortgage Release is executed and are not resolved as part of the transaction.
Borrower Relocation Incentives
For occupied principal residences, borrowers are entitled incentive payments of $3,000 from Fannie Mae to assist with relocation expenses following successful completion of a
Mortgage Release unless the borrower is required to make a contribution (as described above) or is receiving relocation assistance from other sources.
No Postponement of Foreclosure Process until Mortgage Release Transaction is Complete
According to the Fannie Mae guidelines, the foreclosure process must continue until the Mortgage Release transaction is closed. When the servicer offers the borrower a Mortgage Release, the servicer must not suspend the foreclosure process until the borrower has executed the deed and the servicer has accepted the deed.