Servicing Guide

Published June 13, 2018

E-2.3-03: Handling Cramdowns of the Mortgage Debt (11/25/2015)

A cramdown is an attempt to involuntarily modify any terms of the security deed, mortgage, or note by court order.

A borrower’s request for a cramdown for which Fannie Mae has not delegated authority to the servicer or the law firm to address the issues presented is non-routine litigation and must immediately be reported to Fannie Mae’s Legal department by submitting a Non-Routine Litigation Form (Form 20). Fannie Mae must be consulted with respect to all strategy involving cramdowns as to which Fannie Mae has not delegated authority to the servicer or law firm to address the issues presented. Fannie Mae will make the final determination of how to respond to cramdowns.

See also E-2.2-02, Managing Chapter 11 Bankruptcies .

This topic contains the following:

General Servicer Responsibilities

The following table lists additional requirements for the servicer when it learns that a bankruptcy case has been filed that includes a cramdown proposal.

The servicer must…

Immediately refer the case to a law firm and mark the referral package as “cramdown” or “involuntary loan modification.”

Ensure the law firm reviews the borrower’s proposed valuation of the security property and compares it to the estimated value that the servicer obtains for the property.

Work closely with the law firm in selecting an appraiser that is sufficiently familiar with the issues involved in complex bankruptcy matters and has experience testifying about these issues in court, if an appraisal is required to oppose a cramdown request.

Analyze the case and consult with both the law firm and with Fannie Mae to determine whether an appeal might be appropriate, if the valuation or confirmation hearing results in a ruling adverse to Fannie Mae’s interests.

Report the terms of the confirmed cramdown to Fannie Mae for all Chapter 11, 12, and 13 cases. In order to report cramdown terms for Chapter 12 and Chapter 13 cases, the servicer must follow the instructions set forth in Servicing the Mortgage Loan After Confirmation of a Chapter 11 Plan in E-2.2-02, Managing Chapter 11 Bankruptcies.

Applying Payments Received During the Confirmation Process

The servicer must be able to account for any scheduled interest (and principal, if applicable) that must be remitted to Fannie Mae. See Processing Pre-Petition and Post-Petition Payments in E-2.2-04, Managing Chapter 13 Bankruptcies for additional information.

The servicer’s remittance to Fannie Mae must satisfy Fannie Mae’s standard remittance requirements based on the remittance type of the mortgage loan. The servicer may not deduct its expenses from any payments the trustee forwards to it. For additional information regarding reclassifying or removing loans from a MBS pool, see Removing Regular Servicing Option MBS Mortgage Loans Upon Confirmation of a Bankruptcy Plan and Reclassifying Special Servicing Option MBS Mortgage Loans Upon Confirmation of a Bankruptcy Plan in E-2.1-11, Remitting P&I for MBS Mortgage Loans That Are Part of a Bankruptcy. In addition, the servicer must comply with the policies and procedures in Fannie Mae’s Investor Reporting Manual.

Applying Payments After Confirmation of a Cramdown

Once the bankruptcy court confirms a reorganization plan that provides for a cramdown of the mortgage debt, the servicer must separately account for payments to the secured and unsecured portions of the debt made under the repayment plan. The servicer must not make any permanent changes to the mortgage terms by actually modifying the mortgage loan documents. For additional information on reporting the terms of a confirmed cramdown to Fannie Mae, see Servicing the Mortgage Loan After Confirmation of a Chapter 11 Plan in E-2.2-02, Managing Chapter 11 Bankruptcies.

The following table lists payment details the servicer must maintain record of in its accounting system for funds applied under the terms of a confirmed cramdown.

Payment details required for a confirmed cramdown

Interest rate, monthly payment, and due date for the secured portion of the debt.

Interest rate, monthly payment, and due date for the unsecured portion of the debt.

The original terms of the mortgage note and the application of payments under those terms.

If the court rules upon confirmation of the plan that any payments made during the confirmation process be credited against the secured claim, the servicer may need to adjust both its and Fannie Mae’s records to reallocate the payments between the secured and unsecured portions of the debt.

The servicer must track the payment of ongoing taxes and applicable property insurance for non-escrowed mortgage loans and must notify the law firm and request that a Motion for Relief from Stay or a Motion to Dismiss be filed if the borrower fails to maintain current tax or property insurance obligations.

The servicer must work with Fannie Mae to make appropriate changes to Fannie Mae’s investor reporting system records.

Related Announcements

The following table provides references to Announcements that are related to this topic.

Announcements Issue Date
Announcement SVC–2015–14 November 25, 2015