Short Sale Late Req’d/FNMA

 When Short Sale must be initiated: detailed lender criteria that homeowner must be delinquent or not, and if Imminent Default is acceptable.

Documentation found to determine if late payments required by Fannie Mae directly. However, lenders and servicers may have additional overlays that apply.


Federal Housing Finance Agency (FHFA)

FHFA oversees both Fannie Mae and Freddie Mac.

[1]FHFA Announces New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac

The new guidelines, which go into effect Nov. 1, 2012, will permit a homeowner with a Fannie Mae or Freddie Mac mortgage to sell their home in a short sale even if they are current on their mortgage if they have an eligible hardship. Servicers will be able to expedite processing a short sale for borrowers with hardships such as death of a borrower or co-borrower, divorce, disability, or relocation for a job without any additional approval from Fannie Mae or Freddie Mac.

ELIGIBILITY REQUIREMENTS
The existing mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac.

The person must have a demonstrated hardship which includes:

•Death of a borrower or death of the primary or secondary wage earner in the household

•Unemployment

•Divorce

•Long-term disability

•Distant employment transfer/relocation (more than 50 miles one way)

•Increased housing expenses

•Disaster (natural or man-made)

•Business failure

•Borrowers that need to relocate more than 50 miles one way for a job, including service members with Permanent Change of Station Orders, can be current or delinquent on their mortgage to apply for a short sale.

•Borrowers who have the capacity to contribute to shortages will be asked to make a reasonable contribution toward the shortfall. However, service members with Permanent Change of Station Orders will not be asked for a contribution towards the shortage for properties purchased on or before June 30, 2012.

•Borrowers will not be eligible for a new mortgage backed by Fannie Mae or Freddie Mac for at least two years after a short sale.

Fannie Mae

[2]All below entries can be found on efanniemae.com in Allregs/2012 Servicing Guide/Part VII: Delinquency Management and Default Prevention (10/1/11)

Servicing Guide Foreword
•Part VII — Delinquency Management and Default Prevention —describes Fannie Mae’s requirements and procedures for servicing whole mortgage loans, participation pool mortgage loans, and MBS mortgage loans from the time they first become delinquent or default is deemed to be reasonably foreseeable (imminent) through the development of special relief measures or foreclosure prevention alternatives to avoid foreclosure proceedings.

•Part VIII — Foreclosures, Conveyances and Claims, and Acquired Properties — describes Fannie Mae’s requirements and procedures for conducting foreclosure proceedings, conveying properties to the insurer or guarantor, filing claims under the insurance or guaranty contract, and disposing of acquired properties that Fannie Mae holds for sale. It does not address any special requirements that may have been imposed under the terms of a negotiated purchase transaction. The servicer is responsible for taking all steps necessary to ensure that the terms of a negotiated contract are followed.

VII, 101: Written Procedures (10/1/11)
Occasionally, certain areas of a servicer’s performance may show poor results despite the servicer’s efforts — such as high delinquencies attributable to unforeseen changes in the economy.


An escalated case is considered to be resolved when the inquiry has been reviewed in accordance with the applicable Fannie Mae guidelines and the servicer:

•proposes a resolution that corresponds to one of the resolution categories listed below or determines that no change in the original decision is warranted;

•documents the proposed resolution in the servicing file, including a date the resolution was reached;

•has communicated in writing to the requestor and, as applicable, the borrower, the proposed resolution and next steps within five business days of identifying the proposed resolution; and

•has taken the first action to implement the resolution.

The resolution categories are:

•Action not Allowed – Bankruptcy in Progress

•No Action Taken (borrower current and determined able to pay)

•Mortgage Loan Paid Off

•Forbearance Plan

•Repayment Plan

•Fannie Mae HAMP/2MP Trial Period Plan

•Fannie Mae Standard Trial Period Plan

•Preforeclosure Sale (Short Sale)

•Deed-in-Lieu of Foreclosure

•Foreclosure Initiated/Pending

•Foreclosure Completed

•Other Foreclosure Alternative


VII, 204: Behavioral Model Tool (10/1/11)

The servicer may choose to use a Behavioral Model Tool to predict the likelihood of default or foreclosure and to use the results of the model (such as mortgage loans considered to be high risk) to target its collections and default management practices…

Both forms 731 and 761 note that short sale and deed in lieu are available options to avoid foreclosure and leave your home. (below)


VII, 205.04: Borrower Response Package (10/01/11)

Documentation required from the borrower in response to the Borrower Solicitation Package is referred to as a Borrower Response Package. A complete Borrower Response Package includes:

•a completed Uniform Borrower Assistance Form (Form 710 or equivalent);                                                      (pg 3 below lists acceptable hardships that can be reviewed.)

A hardship is required to proceed with all options for help. However, policy has alerted homeowners needing help to go delinquent even with a hardship.


VII, Chapter 3: Delinquency Prevention (10/01/11)

Fannie Mae requires servicers to have policies that support delinquent borrowers’ efforts to meet their mortgage loan obligations so they can avoid foreclosure and remain in their homes when feasible. That means, among other things, establishing QRPC as outlined in Section 201, Quality Right Party Contact (10/01/11); using available tools that are appropriate under the circumstances to avoid foreclosure; being judicious in approaching foreclosure prevention efforts (for example, not creating a mortgage loan modification that clearly cannot be supported by the borrower’s income); and promoting open and effective communication with borrowers, including giving borrowers reasonable opportunity to resolve legitimate disputes and escalated cases.

Borrowers who are experiencing temporary hardships may have difficulty making their mortgage payments. A servicer must make every effort to assist borrowers who are cooperative, acting in good faith, and willing to work out a way to prevent or cure their delinquency.

There is no direction for those in imminent default who are current, on guidelines to proceed. All guidelines found discourage delinquency. No direction shows how to proceed while staying current.


VII, 301: Assessing Late Charges (07/10/09)

Imposing late charges to help prevent delinquencies is most effective when the borrower is able to pay on time but does not do so. It may not be effective as a collection tool when the borrower is simply unable to make the payment because of some unforeseen circumstances.

The servicer may defer late charges to a future date. However, the servicer cannot foreclose the mortgage loan later if the only delinquent amount is unpaid late charges. If permitted by applicable law, a servicer may hold as unapplied funds payments that omit the late charge. However, the servicer may not impose any late charge or delinquency charge in connection with that payment or any subsequent payments that are received and would have otherwise been applied to the mortgage loan by the due date or within any grace period when the delinquency is solely attributed to the late charge or delinquency charge. Payments that cover the full mortgage loan obligation without the late charge should not be returned to the borrower to the extent that acceptance would not jeopardize the servicer’s position in legal proceedings (for example, foreclosure).

For FHA or HUD mortgage loans, the servicer must process the payments in accordance with HUD’s requirements, regardless of failure to pay any applicable late charges.  (See FHA criteria regarding 30 day delinquency only required.)


Sidebar: A solution known as the *STIP Plan was similar to “Accepting Partial Payments explained below kept credit from entering loss mitigation. This wass an option prior to 10/2009. My first short sale client had this plan, mortgage was through Citi. NONE OF MORTGAGE PAYMENTS SHOWED UP LATE, AND CREDIT WAS NOT CODED AS A FORECLOSURE! The STIP Plan required that the home be short sold within 150 days. If the home was not sold and closed, full loan payments would resume.

*VII, 302: Accepting Partial Payments (06/01/07)

The servicer of a first-lien mortgage loan must accept a partial payment, and hold it as “unapplied funds” in a T&I custodial account, if the borrower:

•has a commitment toward the repayment of the mortgage loan obligation;

•is not habitually delinquent;

•does not have a history of remitting checks that are returned for insufficient funds; and

•can pay the balance of the payment within the next 30 days.

The servicer of a second-lien mortgage loan also must accept partial payments under the above conditions as long as it is able to verify that the first-lien mortgage loan is in a current status.

As a rule, a servicer should accept partial payments only to help cure a delinquency. It should return partial payments when it believes that this action will be an effective collection tool. However, Fannie Mae does not want the servicer to return partial payments routinely. In addition, FHA, HUD, and VA require that partial payments be accepted under certain conditions that they specify.

If a borrower indicates that he or she will not be able to make full payments on a continuing—but temporary—basis, the servicer must determine whether some sort of relief provision could be used to bring the account current or at least to keep the delinquency from getting worse.


Solution to prevent mortgage payment from going to loss mitigation:

VII, 304: Collecting Under an Assignment of Rents (01/31/03)
The servicer of a delinquent mortgage loan secured by property that is being rented must diligently seek out instances in which enforcing an assignment of rents provision would be appropriate, taking into consideration the policies of the mortgage insurer or guarantor. Generally, the rental income can be applied toward the delinquency if:

•the mortgage loan provides for an assignment of rents;

•other arrangements to repay the delinquency cannot be made;

•local law allows the mortgagee to collect rents under these circumstances; and

•this action will not create any new rights for the occupant that might impair Fannie Mae’s ability to foreclose the mortgage loan at a later date.

 Solution to prevent mortgage payment from going to loss mitigation:

VII, 305: Reapplying Principal Prepayments (06/01/07)
In some cases, a borrower who has made additional principal payments toward his or her account at some time in the past may ask the servicer to reapply these principal prepayments to cure a delinquency. The servicer may do so for a whole mortgage loan or a participation pool mortgage loan (but not for a mortgage loan that has been pooled to back an MBS issue, including PFP mortgage loans), as long as:

•the borrower submits a written request;

•the reapplication of the principal prepayment does not result in the mortgage loan balance being higher than it would have been had the original amortization schedule for the mortgage loan been followed; and

•the borrower agrees to submit any additional funds that are needed to supplement the prepayment so that the total delinquency can be cured.


Important: VII, Chapter 4: Special Relief Measures (10/01/11)
Fannie Mae does not want to foreclose a delinquent mortgage loan if there is a reasonable chance of saving the mortgage loan.

Imminent Default

If the reason for default relates to a temporary condition and the borrower appears to have a reasonable chance of bringing the mortgage loan current, the servicer must pursue a temporary solution using Fannie Mae’s special relief provisions.

A servicer may consider special relief options and foreclosure prevention alternatives when a payment default is reasonably foreseeable (imminent) rather than wait for a payment default. In determining whether a payment default is imminent, the servicer must evaluate the borrower’s financial condition as well as the condition of and circumstances affecting the property securing the mortgage loan. The servicer also must document the basis on which it makes a determination that a payment default is reasonably foreseeable.

The following is a list of examples of the types of factors the servicer may consider when evaluating whether or not a payment default is imminent. Factors for consideration include, but are not limited to:

•information received from the borrower (for example, changes in employment and other income sources, or family medical status);

•the payment history of the borrower(s) (as reported by a credit bureau) on other indebtedness;

•the LTV ratio of the mortgage loan when it was originated;

•an estimate of the current LTV ratio;  BACK DTI’s are typically over 58%!

•whether the monthly debt service under the mortgage loan has recently changed or will soon change;

•the credit score of the borrower(s);

•the occurrence of a natural disaster (such as a tornado, hurricane, or flood), terrorist attack, or other catastrophe caused by either nature or a person other than the borrower that:the servicer reasonably believes adversely affects the value or habitability of a mortgaged property; or

the servicer reasonably believes adversely affects the borrower’s ability to make further payments or payment in full on the mortgage loan. 

A default is reasonably foreseeable when the servicer is notified or otherwise becomes aware of an event or factors (including those listed above) that is or are expected to cause the borrower to be in default in the near future, generally within 90 days.

Fannie Mae has several types of special relief provisions to help deserving borrowers who are delinquent.
There appears to be no direction written to handle those who are “current but facing imminent default.”
Available types of relief may differ depending on whether the mortgage loan is in an MBS pool (including PFP mortgage loans) or in Fannie Mae’s portfolio. The servicer must be familiar with the terms of each of these provisions. Fannie Mae wants the servicer to use Fannie Mae’s special relief provisions whenever their use is appropriate. However, Fannie Mae does not expect the servicer to grant relief unless it will result in either bringing the mortgage loan current and keeping it that way or providing the borrower with a reasonable opportunity to avoid foreclosure by selling his or her property. When a servicer grants special relief provisions, it remains responsible for making delinquency advances to Fannie Mae throughout the term of the relief, if the mortgage loan is accounted for as a scheduled/actual or scheduled/scheduled remittance type. 

Early in the delinquency or when default is determined to be imminent, the servicer must establish [3]QRPC (Quality Right Party Contact).


Achieving Quality Right Party Contact
In Servicing Announcement SVC-2011-08R, Fannie Mae introduces Quality Right Party Contact (QRPC), which is a uniform standard that must be achieved by servicers when communicating with a borrower, co-borrower, or authorized third party (collectively referred to as “borrower”) about resolution of a mortgage delinquency.

There does not appear to be party contact in many cases!
QRPC standards require:

Establish a rapport with the borrower, expressing empathy and communicating desire to help;
Determine the reason for delinquency and whether such reason is temporary or permanent in nature;
Determine the borrower’s perception of their financial circumstances and ability to repay the mortgage debt;
Set payment expectations and educating the borrowing on the availability of foreclosure prevention alternatives as appropriate; and Obtain a commitment from the borrower to either resolve the delinquency through traditional methods or engaging in a foreclosure prevention alternative.
Many clients who investigate how to proceed with a short sale while staying current are simply told “we cannot help you until you are delinquent.”

Many have provided the needed Uniform Borrower Assistance Form 710 with an eligible hardship checked and are still turned down due to being current on their loan. Most often, it is blamed on an “investor decision” and most all are unaware of the investor. On 3-way calls made with affected homeowners, the lender will not state who the investor is.


Another solution to prevent mortgage payment from going to loss mitigation:

VII, 402: Temporary Indulgence (01/31/03)
Temporary indulgence is the granting of a 30-day grace period to enable a borrower to repay all past-due installments at once. A servicer does not need to obtain Fannie Mae’s approval before granting temporary indulgence, nor does it need to notify Fannie Mae that it has done so.

Temporary indulgence may be granted only under special circumstances when the servicer determines that the borrower will be financially able to bring the account current by paying the delinquent installments within 30 days. Temporary indulgence may be appropriate when:

•a sale or rental of the property is pending;

•an insurance settlement is being negotiated;

•assistance from a social agency has been arranged, but funds have not been received;

•the mortgage payments were lost in transit and need to be traced; or

•time is needed to reapply previous principal prepayments (when that is permitted).


VII, 403.02: Unique Hardships (08/16/10)
Fannie Mae has identified situations that warrant the use of relief provisions for borrowers impacted by unusual circumstances that create financial hardship. Fannie Mae has classified three unique hardships and the actions servicers may take to accommodate borrowers who are struggling with such hardships.

VII, 403.02.01: Definition of Unique Hardship (08/16/10)
A unique hardship is characterized as an event or financial hardship that:

•is unlikely to re-occur and is not a natural or manmade disaster;

•is temporary in nature or of limited scope, but impacts many borrowers;

•may involve property damage, hazard in the dwelling, or other adverse property conditions;

•creates financial hardship that impacts the ability of the borrower to continue making payments on the mortgage loan;

•may involve uncertainty regarding whether insurance will cover the losses incurred; and

•has been designated as a unique hardship by Fannie Mae. 

Servicers may not treat an event (other than the ones defined below) as a unique hardship without Fannie Mae’s approval. Servicers may not apply this policy to any borrower other than those experiencing a hardship that Fannie Mae has specifically defined as a unique hardship. Fannie Mae will identify and update its guidelines to classify other circumstances as unique hardships as appropriate. 

Fannie Mae has identified the following as unique hardships that may impact the borrower’s ability to continue making mortgage loan payments.

Problem drywall. The mortgage loan is secured by a property that contains problem drywall that was new when installed between 2001 and 2008 and for which the borrower has incurred a financial hardship due to costs associated with additional housing expenses and remediation.
•If the mortgage loan is current, the servicer must request documentation from the borrower supporting the installation of new drywall. If the borrower cannot provide supporting documentation, the servicer must require a property inspection to confirm the existence of problem drywall.

U.S. servicemember injured while on active duty.
Death of a U.S. servicemember while on active duty. The borrower is unable to continue making his or her mortgage loan payment due to the death of a U.S. servicemember who was either (i) a borrower or (ii) a family member of the borrower who significantly contributed to the mortgage loan payment. The servicemember must have died while on active duty.


VII, 403.02.05: Reporting Requirements (08/16/10)/ Reporting to Fannie Mae
Regardless of the status of the borrower’s mortgage loan prior to the forbearance, the servicer must report to Fannie Mae the appropriate delinquency status code, the effective date of forbearance, the forbearance program type code, and other required information beginning in the month in which the forbearance plan became effective. 

The servicer must report all forbearance plans granted for unique hardships using delinquency status code 09—Forbearance—in HSSN during the forbearance period.

Confirm that this is a Fannie Mae credit code and not a Metro 2 credit code on the credit report. 

The servicer must designate Forbearance Program Type Code 3 (Military Assistance Program) for all forbearance plans granted for the following unique hardships:

•U.S. servicemember injured while on active duty, or

•death of a U.S. servicemember while on active duty.

Credit Bureau Reporting
During the forbearance period to a borrower under unique hardships, the servicer must not report delinquencies to the credit bureaus if it is aware that a borrower’s delinquency is directly attributable to financial hardships the borrower has incurred as the result of the unique hardship. The servicer must suspend reporting the status of the mortgage loan to the credit bureaus. The servicer must resume complete and accurate reporting of the mortgage loan status information to the credit bureaus after the forbearance period has ended.


In VII, Chapter 6: Foreclosure Prevention Alternatives (10/01/11)

Fannie Mae does not want to foreclose a delinquent mortgage loan if there is a reasonable chance of avoiding foreclosure. If the reason for default appears to be long-term or too serious for the short-term relief measures that are discussed in Chapter 3, Delinquency Prevention, or Chapter 4, Special Relief Measures, to be effective, the servicer must consider Fannie Mae’s permanent foreclosure prevention alternatives upon receipt of a complete Borrower Response Package from the borrower.


VII, 604: Preforeclosure Sales (01/31/03) (Short Sale)
Occasionally, none of the servicer’s efforts to prevent or cure the delinquency will be successful and the use of special relief provisions may not have been feasible or productive. When all measures short of foreclosure have been exhausted for a conventional mortgage loan, the servicer must consider the use of a preforeclosure sale procedure. Under this procedure, when the borrower cannot sell his or her property for the full amount of Fannie Mae’s indebtedness, Fannie Mae will consider accepting a payoff of less than the total amount owed on the mortgage loan if that will enable Fannie Mae to reduce the loss it would incur if it foreclosed and acquired the property. (Fannie Mae also will agree to preforeclosure sales for FHA, VA, or RD mortgage loans if they comply with all of the insurer’s or guarantor’s guidelines and do not result in a loss to Fannie Mae.)

A servicer may pursue a preforeclosure sale at any time prior to the actual foreclosure sale if acquisition of the property is the only alternative to the preforeclosure sale and the proceeds from the sale, along with any mortgage insurance settlement, would make Fannie Mae whole—or, at least, would result in a loss that would be less than any loss Fannie Mae would incur if it had to acquire and dispose of the property. As long as the proceeds from the transaction make Fannie Mae whole, a servicer may negotiate and complete the preforeclosure sale without Fannie Mae’s involvement. However, a servicer must obtain Fannie Mae’s prior written approval of any preforeclosure sale that will result in a loss to Fannie Mae. 

While pursuing a preforeclosure sale, the servicer will still be expected to follow Fannie Mae’s requirements related to the initiation of foreclosure proceedings for defaulted mortgage loans. If a mortgage loan has been referred to foreclosure prior to receipt of a complete Borrower Response Package, the servicer may delay the foreclosure process pursuant to the terms and conditions set forth in Part VIII, Section 107.01, Servicer-Initiated Temporary Suspension of Proceedings (10/01/11).

To offset a servicer’s expenses for handling a preforeclosure sale for a conventional mortgage loan, Fannie Mae will pay the servicer an incentive fee outlined in Section 604.07, Accounting and Reporting (06/01/11), as soon as it receives verification of the completed sale.


Common occurrences:

Delinquency is required 1st in order to proceed with a short sale.
Often, no expected timeframe for length of required delinquency in order to receive short sale approval will be given verbally from lender.
Timeframe for entry into loss mitigation is known.
Commonly, the 120 day window where dual tracking is not allowed is met or exceeded.


VIII, Chapter 1: Foreclosures (10/31/08)
Whenever a borrower shows a disregard for the mortgage loan obligation or is [4]unable to make the mortgage payments, the servicer of a whole mortgage loan or a participation pool mortgage loan that Fannie Mae holds in its portfolio, or of an MBS mortgage loan serviced under the special servicing option, must protect Fannie Mae’s investment by taking prudent action. The servicer must make every reasonable effort to contact the borrower and to cure the delinquency through Fannie Mae’s special relief provisions or foreclosure prevention alternatives before referring a mortgage loan to the foreclosure attorney (or trustee). The servicer also must have inspected the property and analyzed the individual circumstances of the delinquency. 

The servicer must be particularly diligent in investigating mortgage loans originated as investor properties and attempt to determine whether or not the borrower is collecting rental income from the property. If the servicer suspects that the property (or any unit(s) of the property) is tenant occupied, it must take appropriate action to ascertain the actual occupancy status of the property (including detailed property inspections, conducting a skip trace, etc.).

[1]FHFA Announces New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac/ 8/21/2012   http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-New-Standard-Short-Sale-Guidelines-for-Fannie-Mae-and-Freddie-Mac.aspx
[2] 2012 Servicing Guide/Part VII: Delinquency Management and Default Prevention (10/01/11)/VII, Chapter 1: Servicing Standards (01/01/11)/VII, 101: Written Procedures (10/01/11)  http://www.allregs.com/tpl/Main.aspx/
[3] Achieving Quality Right Party Contact/ Fannie Mae/ https://www.fanniemae.com/content/job_aid/achieving-qrpc.pdf
[4]Often, homeowners that need or desire to make mortgage payments have hardship but borrow funds from retirement assets and relatives trying to stay afloat. Many are planning for an exit, not an easy task when the home has negative equity. Though first glance can prove the homeowner DTI does not indicate ability to make the payment, many homeowners will find an avenue to get funds if a short term payout only is needed. These are homeowners in imminent default: ready to default within 90 days if no help can be applied.