Obtaining a Property Valuation

The servicer must obtain a property valuation in accordance with Determining the Fannie Mae Flex Modification Terms in D2-3.2-09, Fannie Mae Flex Modification.

The servicer must obtain a property valuation, which must not be more than 90 days old at the time the servicer evaluates the borrower for the mortgage loan modification, using one of the following:

  • an exterior BPO;

  • an appraisal;

  • Fannie Mae's APS;

  • Freddie Mac's AVM;

  • a third-party AVM; or

  • the servicer's own internal AVM, provided that

    • the servicer is subject to supervision by a federal regulatory agency, and

      other servicer's primary federal regulatory agency has reviewed the model.

If Fannie Mae's APS, Freddie Mac's AVM, the third-party AVM, or the servicer's internal AVM does not render a reliable confidence score, the servicer must obtain an assessment of the property value utilizing an exterior BPO, an appraisal, or a property valuation method documented as acceptable to the servicer's federal regulatory supervisor. The property value assessment must be rendered in accordance with the FDIC's Interagency Appraisal and Evaluation Guidelines regardless of whether such guidelines apply to mortgage loan modifications.

The servicer must attach the valuation and documentation when submitting its proposed recommendation to Fannie Mae through its servicing solutions system.

Determining New Modified Mortgage Loan Terms

The servicer must determine the borrower's new modified mortgage loan terms in accordance with Determining the Fannie Mae Flex Modification Terms in D2-3.2-09, Fannie Mae Flex Modification, and the requirements below.

The servicer must determine the post-modification MTMLTV ratio, which is defined as the gross UPB of the mortgage loan including capitalized arrearages, divided by the current value of the property.

The servicer must complete all the steps in the order shown in the following table, unless prohibited by applicable law, to determine the borrower's new modified mortgage loan terms.

Step Servicer Action
1 Capitalize eligible arrearages. The following are considered as acceptable arrearages for capitalization:
  • accrued interest;

  • out-of-pocket escrow advances to third parties;

  • any required escrow advances that will be paid to third parties by the servicer during the Trial Period Plan; and

  • servicing advances paid to third parties in the ordinary course of business and not retained by the servicer, if allowed by state laws.

Note: If applicable state law prohibits capitalization of past due interest or any other amount, the servicer must collect such funds from the borrower over a period not to exceed 60 months unless the borrower decides to pay the amount up-front. Late charges may not be capitalized and must be waived if the borrower satisfies all conditions of the Trial Period Plan.

See A dministering an Escrow Account in Connection With a Mortgage Loan Modification in B-1-01, Administering an Escrow Account and Paying Expensesfor additional information.
2 Set the modification interest rate to a fixed rate based on the requirements in the following table using the contractual interest rate in effect for the periodic payment due in the month of the evaluation date.
If the mortgage loan is… Then the servicer must...
a fixed rate, (including an ARM or step-rate that has reached its final interest rate) with a post-modification MTMLTV less than 80% set the modified interest rate to the borrower's contractual interest rate.
a fixed rate, (including an ARM or step-rate that has reached its final interest rate) with a post-modification MTMLTV greater than or equal to 80% set the modified interest rate to the lesser of
  • the Fannie Mae Modification Interest Rate, or

  • the borrower’s contractual interest rate.

an ARM or step-rate that has not reached its final interest rate set the interest rate to the lesser of
  • the Fannie Mae Modification Interest Rate,

  • the final interest rate for the step-rate modification, or

  • the lifetime interest rate cap for the ARM.

3 Extend the term to 480 months from the mortgage loan modification effective date.

Note: When the mortgage loan is secured by a property where the title is held as a leasehold estate, the term of the leasehold estate must not expire prior to the date that is five years beyond the new maturity date of the modified mortgage loan. In the event that the current term of the leasehold estate would expire prior to such date, the term of the leasehold estate must be renegotiated to satisfy this requirement for the mortgage loan to be eligible for the mortgage loan modification.

4 Forbear principal if the post-modification MTMLTV ratio is greater than 100%, in an amount that is the lesser of
  • an amount that would create a post-modification MTMLTV ratio of 100% using the interest-bearing principal balance, or

  • 30% of the gross post-modification UPB of the mortgage loan.

5 Provide or increase principal forbearance until a 20% P&I payment reduction is achieved; however, the servicer must not forbear more than
  • an amount that would create a post-modification MTMLTV ratio less than 80% using the interest-bearing principal balance, or

  • 30% of the gross post-modification UPB of the mortgage loan.

Note: Fannie Mae If the mortgage loan was previously modified into a mortgage loan with a step-rate feature, an interest rate adjustment occurred within the last 12 months, the mortgage loan became 60 days delinquent after the interest rate adjustment and the borrower did not submit a complete BRP, the servicer must not proceed to step 6.

6 Continue to forbear principal if the mortgage loan is less than 90 days past due when the borrower submitted a complete BRP until a 40% Housing Expense-to-Income Ratio (HTI) is achieved; however, the servicer must not forbear more than:
  • an amount that would create a post-modification MTMLTV ratio less than 80% using the interest-bearing principal balance, or

  • 30% of the gross post-modification UPB of the mortgage loan.

Note: Calculating the Housing Expense-to-Income Ratio later in this topic provides instructions on the HTI calculation.

Note: Interest must not accrue on any principal forbearance. Principal forbearance is payable upon the earliest of the maturity of the mortgage loan modification, sale or transfer of the property, refinance of the mortgage loan, or payoff of the interest-bearing UPB.

If the 20% payment reduction or 40% HTI targets are not achieved as described above, the mortgage loan remains eligible for a Fannie Mae Flex Modification if the monthly P&I payment satisfies the requirements in Determining the Fannie Mae Flex Modification Terms in D2-3.2-09, Fannie Mae Flex Modification.

Calculating the Housing Expense-to-Income Ratio

The servicer must ensure that the mortgage loan modification meets the requirements in accordance with Determining the Fannie Mae Flex Modification Terms in D2-3.2-09, Fannie Mae Flex Modification, and the requirements above.

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 employment (such as severance payments), as part of the monthly gross income for mortgage loans being evaluated for a mortgage loan modification.

The servicer must calculate the post-modification housing expense-to-income ratio depending upon the type of property, as described in the following table.

If the mortgage loan is secured by... Then the servicer must...
a principal residence divide the borrower's monthly housing expense, 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);

  • 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); and

  • any projected monthly escrow shortage payment.

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

a second home add the monthly housing expense of the second home to the monthly housing expense on the borrower's principal residence and divide this amount by the borrower's monthly gross income.
an investment property add any monthly net rental income on the subject property to the borrower's gross monthly income for purposes of calculating the post-modification housing expense-to-income ratio.
  • The net rental income (or net rental loss) on the subject property must be calculated as 75% of the monthly gross rental income, reduced by the monthly housing expense on the rental property

  • Any monthly negative net rental income ( i.e., net rental loss) on the subject property must be added to the monthly housing expense on the borrower's principal residence, and then divided by the borrower's monthly gross income.

  • If the borrower currently is not receiving rental income on the subject property, the monthly housing expense on the subject property must be added to the monthly housing expense on the borrower's principal residence and then divided by the borrower's monthly gross income.

Preparing the Loan Modification Agreement

The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in D2-3.2-09, Fannie Mae Flex Modification.

The servicer must prepare the Loan Modification Agreement (Form 3179) early enough in the Trial Period Plan to allow sufficient processing time so that the mortgage loan modification becomes effective on the first day of the month following the Trial Period Plan (modification effective date). The servicer is authorized to, at its discretion, complete the Loan Modification Agreement so the mortgage loan modification becomes effective on the first day of the second month following the final Trial Period Plan payment to allow for sufficient processing time. However, the servicer must treat all borrowers the same in applying this option by selecting, at its discretion and as evidenced by a written policy, the date by which the final Trial Period Plan payment must be submitted before the servicer applies this option ("cut-off date"). The cut-off date must be after the due date for the final Trial Period Plan payment as set forth in the Evaluation Notice.

Note: If the servicer elects this option, the borrower will not be required to make an additional Trial Period Plan payment during the month (the "interim month") in between the final Trial Period Plan month and the month in which the mortgage loan modification becomes effective. For example, if the last Trial Period Plan month is March and the servicer elects the option described above, the borrower is not required to make any payment during April, and the mortgage loan modification becomes effective, and the first payment under the Loan Modification Agreement is due, on May 1.

The servicer must incorporate into the (Form 3179) the applicable provisions in accordance with the requirements in Summary: Modification Agreement (Form 3179).

Executing and Recording the Loan Modification Agreement

The servicer is responsible for ensuring that the mortgage loan as modified complies with applicable laws, preserves Fannie Mae's first lien position, and is enforceable against the borrower(s) in accordance with its terms. The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in D2-3.2-09, Fannie Mae Flex Modification.

In order to ensure that the modified mortgage loan retains its first lien position and is fully enforceable, the servicer must take the actions described in the following table.

The servicer must...
Ensure that the Loan Modification Agreement is executed by the borrower(s).

Note: The servicer may encounter circumstances where a co-borrower signature is not obtainable for the Loan Modification Agreement, for reasons such as mental incapacity or military deployment. When a co-borrower's signature is not obtainable and the servicer decides to continue with the mortgage loan modification, the servicer must appropriately document the basis for the exception in the servicing records.

Ensure all real estate taxes and assessments that could become a first lien are current, especially those for manufactured homes taxed as personal property, personal property taxes, condo/HOA fees, utility assessments (such as water bills), ground rent, and other assessments.
Obtain a title endorsement or similar title insurance product issued by a title insurance company if the Loan Modification Agreement will be recorded.
Record the executed Loan Modification Agreement if:
  • recordation is necessary to ensure that the modified mortgage loan retains its first lien position and is enforceable in accordance with its terms at the time of the modification, throughout its modified term, and during any bankruptcy or foreclosure proceeding involving the modified mortgage loan; or

  • the Loan Modification Agreement includes assignment of leases and rents provisions.

If the mortgage loan is for a manufactured home, and the lien was created, evidenced, or perfected by collateral documents that are not recorded in the land records, the servicer must also take such action as may be necessary, including any amendment, recording, and/or filing that may be required, to ensure that the collateral documents reflect the mortgage loan modification, in order to preserve Fannie Mae's lien status for the entire amount owed. See Selling Guide A2-5.1-01, Establishing Loan Files for additional information regarding collateral documents required to be retained for manufactured homes.

The servicer must execute and record the Loan Modification Agreement based upon the entity that is the mortgagee of record in accordance with A2-1-03, Execution of Legal Documents. In addition, the servicer must send the Loan Modification Agreement to the document custodian if the mortgagee of record is

  • the servicer;

  • MERs; or

  • Fannie Mae, and Fannie Mae has given the servicer an LPOA that allows it to execute this type of document on Fannie Mae's behalf.

    Note: If Fannie Mae's DDC is the custodian, the documents must be annotated with the Fannie Mae loan number and, if applicable, the MERS number, and mailed to The Bank of New York Mellon Trust Company, NA (see F-4-03, List of Contacts).

When the servicer is required to send the Loan Modification Agreement to the document custodian, the servicer must follow the requirements outlined in the following table.

If the Loan Modification Agreement. Then the servicer must...
is required to be recorded
  • send a certified copy of the fully executed Loan Modification Agreement to the document custodian within 25 days of receipt from the borrower, and

  • send the original Loan Modification Agreement that is returned from the recorder's office to the document custodian within 5 business days of receipt.

is not required to be recorded send the fully executed original Loan Modification Agreement to the document custodian within 25 days of receipt from the borrower.

Adjusting the Mortgage Loan Account Post-Mortgage Loan Modification

The servicer must complete the mortgage loan modification in accordance with Offering a Trial Period Plan and Completing a Fannie Mae Flex Modification in D2-3.2-09, Fannie Mae Flex Modification.

After a mortgage loan modification is executed, the servicer must adjust the mortgage loan as described in the following table.

The servicer must...
For a portfolio mortgage loan, add any amounts to be capitalized to the UPB of the mortgage loan as of the date specified in the agreement. Usually, the capitalization date is one month before the new modified payment will be due.

Note: The servicer may request reimbursement from Fannie Mae when any of its costs are capitalized (see F-1-05, Expense Reimbursement).

Revise the borrower's payment records to provide for collection of the modified payment.
Apply any funds that
  • the borrower deposited with the servicer as a condition of the mortgage loan modification,

  • have been deposited on behalf of the borrower in connection with the mortgage loan modification, or

  • the mortgage insurer contributed in connection with the mortgage loan modification.

    Note: Amounts due for repayment of principal, interest, or advances must be remitted promptly to Fannie Mae. The remaining funds may be used to clear any advances made by the servicer or to credit the borrower's escrow deposit account.

Determine if it must change the servicing fee in accordance with A2-3-02, Servicing Fees for Portfolio and MBS Mortgage Loans.

Related Announcements

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

Announcements Issue Date
Announcement SVC-2017-08 September 13, 2017