Servicing Guide

Published December 12, 2018

F-1-15: Processing a Fannie Mae Mortgage Release (Deed-In-Lieu of Foreclosure) (11/14/2018)

This Servicing Guide Procedure contains the following:

Verifying Clear and Marketable Title

The servicer must adhere to General Requirements When Processing a Fannie Mae Mortgage Release in D2-3.3-02, Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure).

The servicer must order a title search. In addition to the title search, the servicer must review the following to determine if the borrower will be able to deliver clear and marketable title:

  • readily available information provided by the borrower,

  • the borrower’s credit report,

  • the mortgage loan servicing file, and

  • other sources identifying subordinate liens and other claims on title.

Calculating the Borrower’s Housing Expense-to-Income Ratio

The servicer must determine the borrower’s housing expense-to-income ratio as outlined in Evaluating a Borrower’s Ability to Make a Cash Contribution in D2-3.3-02, Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure).

The borrower’s monthly gross income is defined as the borrower’s monthly income amount before any payroll deductions and includes the following items, as applicable:

  • wages and salaries;

  • overtime pay;

  • commissions;

  • fees;

  • tips;

  • bonuses;

  • housing allowances;

  • other compensation for personal services;

  • Social Security payments (including Social Security received by adults on behalf of minors or by minors intended for their own support); and

  • monthly income from annuities, insurance policies, retirement funds, pensions, disability or death benefits, rental income, and other income such as adoption assistance.

Note: The servicer must not consider unemployment insurance benefits or any other temporary sources of income related to unemployment (such as severance payments), as part of the monthly gross income for mortgage loans being evaluated for a Mortgage Release.

The servicer must then divide the borrower’s monthly housing expense on the property securing the mortgage loan, which includes the following items (as applicable), by the borrower’s monthly gross income:

  • P&I;

  • property and flood insurance premiums;

  • real estate taxes;

  • ground rent;

  • special assessments;

  • HOA dues (including utility charges that are attributable to the common areas, but excluding any utility charges that apply to the individual unit); and

  • co-op corporation fee (less the pro rata share of the master utility charges for servicing individual units that is attributable to the borrower’s unit).

    Note: The servicer must exclude monthly mortgage insurance premiums from the monthly housing expense-to-income calculation.

Obtaining a Property Valuation

The servicer must obtain a property valuation for a Mortgage Release or a Mortgage Release transition option in accordance with Obtaining a Property Valuation and Evaluating the Condition of the Property in D2-3.3-02, Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure).

The property valuation for a Mortgage Release can be

  • an interior and exterior inspection of the property in the form of a BPO;

  • an interior and exterior inspection of the property in the form of a an appraisal, which must be performed in accordance with USPAP; or

  • a valuation obtained through Fannie Mae’s APS.

    Note: For a Mortgage Release transition option, the property valuation must be an interior and exterior inspection of the property in the form of

    • a BPO; or

    • an appraisal, which must be performed in accordance with USPAP.

The property valuation must be dated or have been refreshed by Fannie Mae within 90 calendar days of the servicer approving the borrower for a Mortgage Release.

The following table provides the requirements for placing a property valuation order with Fannie Mae when the servicer does not obtain a valuation through Fannie Mae’s APS.

The servicer must…

Submit property valuation orders using the VMS application and the VMS Valuation Order Template.

Note: To obtain access to the VMS application, the servicer must complete a VMS User Setup Template and submit it to valuation_operations@fanniemae.com

Include the cost of the property value order in the MI claim.

The results of the property value will be available through Fannie Mae’s servicing solutions system within seven to ten calendar days from the date the servicer submits the order.

Processing a Mortgage Release Transition Option

The servicer must evaluate the borrower for Mortgage Release transition options and refer the case to Fannie Mae in accordance with Evaluating a Borrower for Fannie Mae Mortgage Release Transition Options in D2-3.3-02, Fannie Mae Mortgage Release (Deed-in-Lieu of Foreclosure).

When the servicer refers the case to Fannie Mae, it must provide the applicable form as outlined in the following table.

If the servicer is referring the borrower for the Mortgage Release transition option that allows the borrower to execute… Then the servicer must submit a…

a three-month transition option with no rent payment required

Mortgage Release Program Transition Option Referral Form (Form 193).

a twelve-month lease with a market rent payment

Mortgage Release Program Lease Option Referral Form (Form 187).

Fannie Mae, or its designee, will take the steps necessary to further verify subject property and occupant eligibility. The following table provides the subject property eligibility criteria for a Mortgage Release transition option.

Subject Property Eligibility

There are no zoning or HOA rental limitations that would prevent a Mortgage Release transition option.

If a property inspection or property valuation reveals damage to the subject property, the estimated total cost to repair the subject property must be less than 10% of its estimated market value (estimated “As Is” sales price).

Note: If the estimated total cost to repair the subject property is between 10% and 15% of its estimated market value, the servicer must submit the Mortgage Release transition option to Fannie Mae to obtain prior written approval. A subject property with an estimated total cost for repairs greater than 15% of the estimated market value is not eligible.

The subject property does not have any environmental contaminations or pose any potential legal risk.

The subject property is in compliance with local rules and laws, or can be brought into compliance within 30 days.

The subject property is not within a target area for any corporate, government, or community neighborhood stabilization plan which may need the property as part of the plan for purposes other than residential.

The rental income, if applicable, is anticipated to cover ongoing maintenance and management costs.

The following table provides the occupant eligibility criteria for a Mortgage Release transition option.

Occupant Eligibility

Income is sufficient to cover rental payments of not more than 31% of the borrower/tenant’s monthly gross income.

Note: If the current market rent, which will be set by Fannie Mae’s property management company, is greater than 31% of the borrower/ tenant's monthly gross income, a lease agreement will not be offered. For the Mortgage Release three-month transition option with no rent payment required, this income requirement is not applicable.

The occupant agrees to

  • be responsible for regular maintenance,

  • keep the property in good condition, and

  • permit marketing of the property for sale.

    Note: For the Mortgage Release three-month transition option with no rent payment required, the borrower must agree to allow the property to be marketed for sale beginning on the 30th day of the use and occupancy agreement.

The number of occupants is appropriate for the home and in compliance with local laws and HOA rules, if applicable.

If pets are present, renter's insurance is obtained, if required.

The occupants signing the lease agreement must agree to a credit review, and all residents over 18 years of age must have an acceptable background check, including receiving clearance from OFAC.

There are no signs or reports of illegal activities conducted at the property.

The property is to be used as a principal residence.

Fannie Mae will inform the servicer whether or not a lease was finalized and whether the Mortgage Release is contingent on the property being vacant.

The servicer must then finalize the Mortgage Release accordingly.

Note: The servicer must notify Fannie Mae if a Mortgage Release is not successfully executed for any case that was approved for Mortgage Release transition options consideration. The servicer must use the Mortgage Release Program Cancellation Form (Form 188).

Prior to acceptance of a Mortgage Release in connection with the Mortgage Release transition options, the servicer must ensure that the borrowers execute (in favor of Fannie Mae, the servicer, and their agents) a general release of all claims arising prior to the acceptance of the Mortgage Release which relate in any way to the mortgage loan or the subject property.

For non-delegated cases, where Fannie Mae makes the decision, the servicer has five weeks from Fannie Mae’s approval of the Mortgage Release to complete the transaction to allow enough time for the lease approval process. Delegated servicers that might have a shorter processing time frame are instructed to allow time for the lease approval process when the borrower states an interest in the Mortgage Release transition options.

Related Announcements

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

Announcements Issue Date
Announcement SVC-2018-08 November 14, 2018
Announcement SVC–2016–05 June 8, 2016