Fannie Mae has remedies available in the event of the seller/servicer’s breach of contract or nonperformance.
In lieu of exercising its right to terminate the Lender Contract or the servicer’s servicing arrangement, Fannie Mae may pursue a variety of other remedies, either to correct a specific problem or to improve the seller/servicer’s overall performance. Possible remedies include those identified in A1-3-02, Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations, among others.
If Fannie Mae decides not to take action against the seller/servicer at any point in time, it does not mean that it condones any action or inaction by the seller/servicer that would be grounds for suspension or termination or that Fannie Mae is waiving its right to take action in the future.
When Fannie Mae determines that the seller/servicer’s performance of its selling and/or servicing obligations does not meet the standards in its Lender Contract, Fannie Mae may impose a formal sanction to give the seller/servicer official notice of its shortcomings and an opportunity to correct its deficiencies. Prior to imposing servicing sanctions, Fannie Mae generally gives the servicer notice of the contemplated action so the servicer can submit a written response or request a meeting with its Fannie Mae Servicing Representative (see F-4-03, List of Contacts).
The servicer’s written response must include a description and explanation of any mitigating circumstances or specific proposals to satisfy Fannie Mae’s objections to the servicer’s performance of its servicing obligations under the Lender Contract. Fannie Mae reserves the right to omit these steps and take immediate action to terminate or suspend the Lender Contract at any time in accordance with the provisions thereof.
If any act, omission, or failure of performance by the servicer constitutes a breach of the Lender Contract, Fannie Mae is not obligated to impose a sanction prior to exercising its contractual right to terminate or suspend the servicing arrangement or all of its Lender Contract. If Fannie Mae initially chooses to place the servicer under a formal sanction, Fannie Mae can subsequently decide that termination or suspension is the more appropriate action and take immediate steps to effect the termination even if the terms of the sanction have not yet expired.
Fannie Mae may suspend the servicer’s right to add new mortgage loans to its Fannie Mae servicing portfolio whether those mortgage loans represent new mortgage loans Fannie Mae would purchase or securitize or existing Fannie Mae-owned or securitized mortgage loans that would be transferred from another servicer. The suspension of new servicing applies to all types of mortgage loans or to specific products, depending on the nature of the servicer’s performance deficiencies.
Fannie Mae will specify a time period for each suspension. The exact suspension period will relate to the seriousness of the deficiencies and the anticipated time it will take to correct them. In some cases, Fannie Mae may specify a definite date on which the suspension will end. In other cases, Fannie Mae may state that the suspension is for an indefinite period. Fannie Mae usually specifies an indefinite period when it wants the servicer to satisfy certain conditions — such as the hiring of additional staff or reducing a high delinquency ratio and maintaining it at an acceptable level for a certain number of months — before it removes the suspension. Fannie Mae will specify the performance areas that must be improved to avoid termination of the servicing arrangement.
Fannie Mae may remove this sanction if the servicer accomplishes the expected improvement before the suspension period ends. If it appears that no improvement is forthcoming, Fannie Mae may decide, either at or before the end of the stated suspension period, that it is appropriate to terminate either with or without cause all or part of the servicing arrangement or the entire Lender Contract under the applicable provisions of the Lender Contract.
Fannie Mae may terminate the seller/servicer’s Lender Contract, including its selling and/or servicing arrangement at any time with or without cause, in accordance with the Lender Contract. Fannie Mae will give the servicer a termination notice. Any responsibilities or liabilities related to specific portfolio or MBS mortgage loans that the servicer had before the termination will continue to exist after the termination unless Fannie Mae expressly agrees in writing to release the servicer from those responsibilities and liabilities.
As guarantor, Fannie Mae must be able to direct servicing to entities best suited to perform servicing functions to the extent the servicer is not able to meet its contractual obligations.
When Fannie Mae terminates the Lender Contract, the servicer must comply with instructions provided by Fannie Mae regarding requirements reasonably necessary to effectuate the transfer of servicing in connection with a termination. Fannie Mae may retain the servicing or hire a new servicer or subservicer to service the mortgage loans. Fannie Mae will negotiate a new servicing or subservicing fee with the entity that Fannie Mae hires to service the mortgage loans following termination of the servicer’s rights to service the mortgage loans.
The servicer shall be responsible for all reasonable and customary costs and expenses related to the transfer of servicing in connection with a termination.
When Fannie Mae terminates a servicer’s servicing arrangement for cause based on the servicer’s breach of its Lender Contract related to its servicing arrangement or in connection with the termination of the entire Lender Contract, the servicer will have no further rights in the servicing of the mortgage loans it had been servicing for Fannie Mae. Fannie Mae will not pay a termination fee in such cases and it may make the termination effective immediately.
The Lender Contract provides remedies to Fannie Mae for the seller/servicer’s breach of contract and nonperformance. Subject to the Servicing Defect Remedies Framework in A1-3-02, Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations, any remedies that are applied will, in Fannie Mae’s sole judgment, be commensurate with the associated level of risk. In addition to termination, there are less stringent sanctions and/or additional requirements that Fannie Mae may impose as a condition for not terminating the Lender Contract. Some possible requirements are set forth in the Guides, including the following conditions that apply to sellers, servicers, and responsible parties that assume the selling representations and warranties or servicing responsibilities or liabilities:
requiring the responsible party to indemnify Fannie Mae for actual and prospective Fannie Mae losses;
requiring the responsible party to repurchase a mortgage loan or an acquired property;
requiring the responsible party to remit a make whole payment;
imposing a compensatory fee;
imposing a suspension or some other formal sanction against the responsible party;
requiring additional and more frequent financial and operational reporting;
accelerating the processing and rebuttal time periods and payment of outstanding repurchases and repurchase/indemnification obligations;
requiring the servicer to take steps to sell and transfer all of its Fannie Mae servicing, or portions thereof as designated by Fannie Mae, to an unrelated entity upon 90 days’ written notice from Fannie Mae;
limiting the responsible party from acquiring additional Fannie Mae servicing (over and above its existing servicing) in either its servicing or its subservicing portfolio;
denying transfer of servicing requests or denying pledged servicing requests;
modifying or suspending any contract or agreement with the responsible party, such as a Master Agreement, including termination, suspension, or rescission of any variance approved under the terms thereof;
requiring the responsible party to post collateral in the form of cash or cash equivalents reasonably acceptable to Fannie Mae in an amount determined by Fannie Mae based on the particular circumstances;
imposing limits on trading desk transactions; and
imposing some other formal sanction on the responsible party.
Fannie Mae may offset any obligations that it may owe the responsible party against any obligations the responsible party may owe Fannie Mae under any existing agreement, whether or not Fannie Mae has made any demand under such agreement and even though such obligations may not yet be immediately due.
Fannie Mae may pursue these alternative remedies for a variety of reasons, including when it believes the servicer should have an opportunity to correct the breach of the Lender Contract and their imposition will lead to a correction. Fannie Mae has no obligation to pursue any of these alternative remedies and its decision to pursue one or more of the remedies does not waive, limit or affect its ability to terminate the Lender Contract or one or more of the individual arrangements at any time that Fannie Mae deems it appropriate to do so under the provisions of the Lender Contract. Fannie Mae will strive to apply the most appropriate remedy that is commensurate with the associated level of risk to compensate Fannie Mae for the harm caused by the violation.
Fannie Mae is willing to work with the servicer and responsible party and consider other solutions that can correct or adequately address its concerns. Fannie Mae’s decision not to take action against the servicer does not mean that Fannie Mae condones any action or inaction by the servicer, or that Fannie Mae is waiving its right to take action in the future.
The following table provides references to Announcements that are related to this topic.