Servicing Guide

Published December 12, 2018

A2-1-07: First Lien Mortgage Loan Requirements (11/12/2014)

This topic contains the following:

Coordination with First Lien Mortgage Loan Servicer

The servicer of a second lien mortgage loan is responsible for coordinating with the servicer of the first lien mortgage loan on any actions it takes to protect Fannie Mae’s or an MBS trust’s investment and, if necessary, advance funds to protect that investment.

The servicer must send a written notice of Fannie Mae’s ownership interest to the servicer of the first lien mortgage loan as soon as Fannie Mae purchases or securitizes the second lien mortgage loan. This notice must include a request for the first lien mortgage loan servicer to provide immediate notice to the second lien mortgage loan servicer of any event or situation that might jeopardize Fannie Mae’s or an MBS trust’s investment in the second lien mortgage loan.

This close coordination should continue through the disposition of an acquired property or satisfaction of the mortgage loan debts.

The servicer of the second lien mortgage loan must work with the first lien mortgage loan servicer to identify specific servicing responsibilities that might be more effective if they were shared or handled by only one servicer instead of by the two servicers acting independently. Any agreement that is reached must concentrate on eliminating duplication of effort and avoiding unnecessary expenses. Both servicers must have a clear understanding of their specific responsibilities.

Required Advances for Second Lien Mortgage Loans

The servicer of a second lien mortgage loan must advance reasonable amounts for expenditures that are required to protect Fannie Mae’s investment in the second lien mortgage loan regardless of whether the mortgage loan is current or delinquent. These advances usually relate to the second lien mortgage loan, but occasionally they may be required for the first lien mortgage loan. The servicer must document the individual mortgage loan file to support fully the need for the advance.

Among other things, the servicer may be required to advance funds for

  • the payment of real estate taxes and/or property or flood insurance premiums,

  • property management expenses,

  • maintenance,

  • repairs,

  • prevention of waste, and

  • capital improvements to the property.

The servicer must advance funds to reinstate or satisfy the first lien mortgage loan with conventional MI if required by the mortgage insurer as a condition for claim filing.

Advances for Second Lien Mortgage Loans: Whenever the servicer advances funds for the protection of the security, appropriate arrangements should be made for the borrower to repay the advance. If the mortgage loan is current and the borrower cannot or will not repay the advance in a lump-sum payment or in installments, the servicer may make the advance, as described in the following table.

If the second lien mortgage loan is a... And... Then the servicer...

portfolio mortgage loan

the mortgage loan instrument, local laws, and government regulations allow the capitalization of advances

should capitalize its advance by:

1. increasing the UPB by the amount of its advance, and then

2. requesting that Fannie Mae reimburse it for Fannie Mae’s share of the advance, via request for expense reimbursement.

the mortgage loan instrument, local laws, or government regulations do not allow the capitalization of advances

should request that Fannie Mae reimburse it for Fannie Mae’s share of the advance, via request for expense reimbursement.

MBS mortgage loan

the mortgage loan instrument, local laws, and government regulations allow the capitalization of advances

may apply subsequent mortgage loan payments against the advance.

If the mortgage loan is delinquent, the servicer should arrange for the borrower to repay the advance, either in installments, or as part of the full amount required to reinstate the mortgage loan. If the mortgage loan is subsequently foreclosed and the borrower had not repaid the advance, Fannie Mae will reimburse the servicer for Fannie Mae’s share of the advance when

  • the acquired property is sold, unless the mortgage loan is an MBS mortgage loan serviced under the regular servicing option, or

  • the insurance claim is settled if the mortgage loan is insured by a conventional mortgage insurer.

Advances for the First Lien Mortgage Loan: Whether the servicer of the second lien mortgage loan is required to advance funds for the protection of the secured property depends on the conditions described in the following table.

If Fannie Mae… Then the servicer of the second lien mortgage loan…

holds both the first and second lien mortgage loans

does not need to advance funds for the protection of the security, although it may have to advance funds to reinstate or pay off the first lien mortgage loan in connection with the second lien mortgage loan foreclosure.

does not hold the first lien mortgage loan

must advance funds to pay delinquent payments, taxes, property or flood insurance premiums, and any other charges related to the first lien mortgage loan if that is required to protect Fannie Mae’s investment.

The servicer must obtain approval from its Fannie Mae Servicing Representative (see F-4-03, List of Contacts), even when Fannie Mae holds the first lien mortgage loan, before it advances funds to pay more than three monthly installments, to pay off the first lien mortgage loan, or to pay any expense if its advances for the first lien mortgage loan have reached $7,500.

To request reimbursement for Fannie Mae’s share of any advances made on the first lien mortgage loan, the servicer of a portfolio mortgage loan or MBS mortgage loan serviced under the special servicing option must submit a request for expense reimbursement to Fannie Mae.

Subordination of Second Lien Mortgage Loan

When a first lien mortgage loan is being refinanced, the second lien mortgage loan holder may be asked to execute a subordination agreement, which keeps the second lien mortgage loan in its original lien position even though it will predate the new first lien mortgage loan. The servicer should restrict the degree of subordination as much as possible.

The servicer may consider the following guidelines when evaluating a subordination offer.

If Fannie Mae... Then the servicer...

is not providing the funds to refinance the first lien mortgage loan

should agree to subordinate Fannie Mae’s interest only if the combined unpaid balances of the second lien mortgage loan and the new first lien mortgage loan represent 80% or less of the current appraised value of the property.

The servicer may require that a portion of the proceeds from the refinancing be applied to reduce the unpaid balance of Fannie Mae’s second lien mortgage loan.

is providing the funds to refinance the first lien mortgage loan

should consolidate the first and second lien mortgage loans or work to ensure the second lien is paid in full.

Otherwise, the servicer may agree to subordinate Fannie Mae’s interest as long as the combined unpaid balances of the second lien mortgage loan and the new first lien mortgage loan do not exceed Fannie Mae’s underwriting guidelines for single-family first lien mortgage loans and represent 80% or less of the current appraised value of the property. To meet these requirements, it may be necessary to apply funds toward the reduction of the second lien mortgage loan debt, reduce the amount of the new first lien mortgage loan, or both.

When a borrower who has an FHA Title I home improvement loan refinances his or her existing first lien mortgage loan to obtain a lower interest rate or a longer term, the servicer may agree to subordinate the Title I loan to the new refinance mortgage loan (without obtaining Fannie Mae’s or FHA’s prior written consent) as long as the amount of the new refinanced mortgage loan is not greater than the sum of the existing first lien mortgage loan and reasonable financing or closing costs. If the borrower is refinancing for any other reason, the servicer must obtain FHA’s written authorization to subordinate the Title I loan to the new first lien mortgage loan in order to ensure that the security value of the Title I loan is not impaired or reduced.