Fannie Mae has not developed legal documents for the second mortgage component of a Community Seconds transaction; rather, the subsidized second mortgage should be closed on documents developed or acquired by the subsidy provider. Second mortgage loans delivered to Fannie Mae must meet Fannie Mae requirements or have received prior approval on a negotiated basis.
A lender’s review of the legal documents should concentrate on determining that the security instrument for the subsidized second mortgage—and any other covenants or restrictions on the borrower’s ability to sell the property or to use the land that the subsidy provider has recorded, or may later record against the property—are clearly subordinate to the first mortgage lien.
The legal documents also must set forth any and all conditions that constitute a default under the terms of the subsidized second mortgage.
Conditions that Fannie Mae considers acceptable include the borrower’s:
failure to make scheduled payments due on the mortgage;
failure to occupy the property as a principal residence;
misrepresentation of any condition required for obtaining the mortgage (such as whether the borrower satisfies any applicable income limitations);
payoff of the first mortgage;
refinancing of the first mortgage to cash out his or her equity in the property;
selling or transferring the property to a party that is ineligible to receive the subsidy (although property transfers that are exempt from enforcement of due-on-sale provisions under federal law must be allowed even if the party acquiring the property is not eligible for the subsidy, subject to the party’s assumption of the borrower’s obligations); and
voluntary termination of his or her employment (for any reason other than disability), if his or her employer is the subsidy provider.
If other default provisions are included in the legal documents for the first or second mortgage, the borrower and the subsidy provider must execute a rider to nullify or amend those provisions.
See Section B5–5.1, Community Seconds and Community Land Trusts, for more information.
Mortgages secured by properties located on a community land trust are subject to a ground lease, which may include provisions that require the continued use of the property for low- and moderate-income families, and may limit the maximum sales price of the property.
Fannie Mae has developed a standard ground lease rider for
community land trusts when the ground lease developed by the lessor
is based on the model developed by the NCLTN or the ICE. In these
instances, the lessor and the borrower must execute a
The purpose of the rider is to ensure that the ground lease conforms to Fannie Mae’s guidelines for community land trust mortgage loans without the delay that would result from the lender’s obtaining Fannie Mae’s approval of each ground lease. Fannie Mae’s approval is required, however, if the rider is modified or is not executed. In addition, if the lender determines that the ground lease does not conform to the NCLTN 2011 CLT Network Model Ground Lease or to the ICE Model Ground Lease, Fannie Mae’s approval of the ground lease is required prior to delivery of the mortgage loan(s). See B5-5.1-04, Community Land Trusts, for more information.
The table below provides references to the Announcements that have been issued that are related to this topic.