Servicing Guide

Published September 18, 2018

E-3.2-03: Initiating Foreclosure Proceedings on a Second Lien Conventional Mortgage Loan (11/12/2014)

Once a final determination has been made to initiate foreclosure for a second lien mortgage loan, the servicer’s next actions will depend on whether both the first and second lien mortgage loans are in default and whether Fannie Mae has an interest in only one mortgage loan or both the first and second lien mortgage loans.

A. Insured second lien mortgage loan in default.

If an insured second lien mortgage loan is in default, but the first lien mortgage loan is current, the servicer may be instructed to

  • foreclose on the second lien mortgage loan;

  • acquire title to the property subject to the first lien mortgage loan; and

  • file a claim with the mortgage insurer. (During the course of the foreclosure proceedings, the mortgage insurer may instruct the servicer to advance funds to satisfy the first lien mortgage loan. In such cases, the servicer must do so and include the advanced funds in the insurance claim it files.)

If the mortgage insurer does not accept conveyance and take title to the acquired property, the second lien mortgage loan servicer must notify Fannie Mae’s SF CPM division (see F-4-03, List of Contacts) of this and advise Fannie Mae of the effect of any due-on-sale clause in the first lien mortgage loan.

The following table provides additional requirements based on Fannie Mae’s ownership interest in the first lien mortgage loan.

If Fannie Mae… Then the servicer…

does not have an ownership interest in the first lien mortgage loan

must advance funds to ensure the first lien mortgage loan remains current while the property is on the market.

has an ownership interest in the first lien mortgage loan

must not advance funds to keep the first lien mortgage loan current since eventually Fannie Mae will need to foreclose to acquire clear title to the property.

B. Insured first and second lien mortgage loans in default.

If both the first and second lien mortgage loans are in default, the second lien mortgage loan servicer must assume control over the foreclosure process to ensure that Fannie Mae’s interest in the second lien mortgage debt will be fully protected. However, when Fannie Mae has an ownership interest in both mortgage loans, there may be occasions when Fannie Mae decides that the most efficient liquidation method is to instruct the first lien mortgage loan servicer to bid both the first and second lien mortgage debts at the foreclosure sale and to acquire title on Fannie Mae’s behalf. If Fannie Mae pursues this alternative, the first lien mortgage loan servicer can still file a claim under the MI policy for that mortgage loan, and Fannie Mae will assume the responsibility for disposing of the acquired property if the mortgage insurer does not accept title to it.

If during foreclosure the mortgage insurer instructs the servicer to reinstate the first lien mortgage loan (or does not issue instructions to the contrary before the date of the foreclosure sale), the servicer must

  • advance the funds necessary to reinstate the first lien mortgage loan,

  • proceed with the foreclosure of the second lien mortgage loan, and

  • acquire title to the property subject to the first lien mortgage loan.

If the mortgage insurer instructs the servicer to satisfy the mortgage loan, the servicer must do so.

If the mortgage insurer does not accept conveyance and take title to the acquired property, the second lien mortgage servicer must notify Fannie Mae’s SF CPM division (see F-4-03, List of Contacts). At the same time, the servicer must also advise Fannie Mae about the effect of any due-on-sale (or transfer) clause in the first lien mortgage loan. Fannie Mae will be responsible for marketing the property.

The servicer must not pay off the first lien mortgage loan unless the mortgage insurer or Fannie Mae has issued specific instructions to do so.