Fannie Mae Servicing Guide re Pre-foreclosure [Short] Sales

Occasionally, none of the servicer's efforts to prevent or cure the delinquency will be successful and the use of relief provisions may not have been feasible or productive. When all measures short of foreclosure have been exhausted for a conventional mortgage, the servicer should 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 our indebtedness, we will consider accepting a payoff of less than the total amount owed on the mortgage if that will enable us to reduce the loss we would incur if we foreclosed and acquired the property. (We also will agree to preforeclosure sales for FHA, VA, or RHS mortgages if they comply with all of the insurer's or guarantor's guidelines and do not result in a loss to us.)

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 MI settlement, would make us whole—or, at least, would result in a loss that would be less than any loss we would incur if we had to acquire and dispose of the property. As long as the proceeds from the transaction make us whole, a servicer may negotiate and complete the preforeclosure sale without our involvement. However, a servicer must obtain our prior 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 our requirements related to the initiation of foreclosure proceedings for defaulted mortgages. The servicer must not delay the initiation or continuation of foreclosure proceedings unless it receives prior approval to do so from both Fannie Mae and the MI.

To offset a servicer's expenses for handling a preforeclosure sale for a conventional mortgage, we will pay the servicer a processing fee of $1,000 as soon as we receive verification of the completed sale.

VII, 504.01: Identifying Potential Candidates (01/31/03)

When analyzing mortgage delinquencies, the servicer should identify those borrowers who are experiencing a financial hardship that prevents them from making their mortgage payments and who can be expected to have difficulty in selling their homes because the current value is probably less than the amount owed on the mortgage. The borrower's financial hardship must be the result of an involuntary reduction in income or an unavoidable increase in his or her expenditures—such as a long-term job layoff; a job loss; a mandatory pay reduction; a disability or illness that results in a decrease in income or in major medical expenses; the death of the principal wage earner; or a decline in a self-employed borrower's earnings. However, a borrower will not be eligible for a preforeclosure sale if his or her financial hardship results from circumstances that he or she can control or plan ahead for—such as experiencing a normal seasonal layoff, voluntarily quitting a job or reducing the number of hours worked, or reducing (or eliminating) income as a result of returning to school.

VII, 504.02: Contacting Selected Borrowers (09/30/06)

The servicer should contact each borrower that it has identified as a potential candidate for a preforeclosure sale before he or she fails to pay three consecutive payments to discuss all of the foreclosure prevention opportunities that are available—special forbearance plans, delinquency repayment plans, modification of the mortgage, selling the property as a mortgage assumption, etc. The servicer should exhaust all other available means before it discusses a preforeclosure sale with the borrower. At that time, the servicer may describe how the preforeclosure sale process works, making sure that the borrower understands both the benefits and drawbacks of agreeing to a preforeclosure sale. If the foreclosure process has already begun, the servicer should advise the borrower that the foreclosure proceedings will continue even if the property is listed for sale, but that the terms of the preforeclosure sale agreement will be honored as long as the property is sold before the foreclosure sale date. If the foreclosure process has not begun, the servicer should make sure that the borrower understands that listing the property for sale will not delay the initiation of foreclosure proceedings.

The servicer should inform the borrower that, if the sales proceeds are not sufficient to satisfy the mortgage debt, the mortgage holder may require him or her to contribute funds to reduce its loss. (For example, if there are unused funds in the borrower's escrow account, we will require the borrower to waive his or her rights to the funds so that they can be applied toward the indebtedness.) As an alternative, we may agree to permitting the borrower to execute a promissory note for the amount of his or her expected contribution. The servicer should advise the borrower that there may be possible tax consequences if any portion of the outstanding debt is "forgiven" and refer the borrower to IRS Publication 544, Sales and Other Dispositions of Assets, particularly the section captioned "Foreclosure, Repossession, or Abandonment."

Sometimes a borrower may be reluctant to list his or her property for an amount that is less than that required to satisfy the entire debt unless the servicer provides written assurance that the short payoff will be accepted. When this happens, the servicer should request our prior approval of the preforeclosure sale before the property is listed. If we approve the sale (subject to receipt of a specific price), the servicer can add the requested assurance as an addendum to the listing agreement.

The servicer should explain to the borrower that he or she is expected to execute all of the documents that are necessary to sell the property—listing agreement, purchase/sales contract, closing documents, etc.—even though the documents will indicate that the sales proceeds should be paid to the mortgage holder. The servicer also should advise the borrower that he or she will remain responsible for maintenance of the property until it is sold and the settlement has occurred.

The servicer should inform the borrower that all sales contracts that will not fully satisfy the outstanding debt must include a contingency clause making the sale of the property "contingent on the mortgage holder's and the mortgage insurer's (if applicable) agreement to the sale." The servicer also should advise the borrower that the following specific cancellation clauses must be included in the listing agreement and sales contract:

•	Listing Agreement: "Seller may cancel this agreement prior to the ending date of the listing period without advance notice to the broker, and without payment of a commission or any other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder."
•	Sales Contract: "The seller's obligation to perform on this contact is subject to the rights of the mortgage insurer (if any) and the mortgage holder relating to the conveyance of the property."

If the borrower is agreeable to a preforeclosure sale and the property is listed with a real estate broker, the servicer should ask the borrower to provide the broker's name, address, and telephone number so the servicer can contact the broker to explain the requirements related to the preforeclosure sale. If the property has not been listed for sale, the servicer may recommend a specific real estate broker to handle the listing, as long as it makes sure that the borrower understands that he or she may select a different broker.

The servicer should request that the borrower submit a letter requesting consideration for a preforeclosure sale and providing information that will document his or her financial hardship (including the servicer’s customized financial form or Fannie Mae’s Borrower's Financial Statement (Form 1020 or 1020(S)), the borrower's most recent paystub or, if the borrower is self-employed, copies of his or her federal income tax returns for the past two years).

VII, 504.03: Determining Market Value of Property (01/31/03)

The servicer must obtain an appraisal for the property (with both an interior and an exterior inspection) to assist it in evaluating the merits of a preforeclosure sale. Occasionally, we may instruct the servicer to obtain more than one appraisal.

VII, 504.04: Discussing Sale With MI (01/31/03)

Once the servicer has obtained the appraisal, it should contact the MI (if the mortgage is insured) to discuss the possibility of pursuing a preforeclosure sale. In discussing the possibility of a preforeclosure sale with an MI, the servicer should keep in mind the conditions under which we will accept a preforeclosure sale. The servicer must not agree to a preforeclosure sale unless the MI agrees in writing

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to waive its property acquisition rights before the claim is filed, and

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to settle the claim by paying the lesser of the full percentage option under the terms of the master policy or the amount required to make us whole. (Our "make whole" amount is the sum of the outstanding principal balance, interest accrued at the note rate from the last paid installment date through the expected loan closing date, and miscellaneous expenses, less any cash contributions from the borrower or the property purchaser.)

If the MI refuses to consider a preforeclosure sale or offers to settle the claim for an amount that is less than the percentage option or our "make whole" amount, the servicer should advise its lead Fannie Mae regional office.

VII, 504.05: Requesting Fannie Mae's Approval (01/31/03)

Since the decision to accept a purchase offer that will involve a loss to us should generally be made within 24 hours of the offer, the servicer needs to provide us with as much information as possible to enable us to perform the analyses we need to make. Therefore, as soon as a purchase offer is received, the servicer should transmit a description of the borrower's financial circumstances, a property market value analysis (based on the appraisal), the specifics about the purchase offer, and the servicer's recommendation to us through the Home Saver Solutions Network. At the same time, the servicer should send this information and any required documentation to the MI by overnight mail delivery (whenever possible). It is important for both us and the MI to be notified of a sales offer immediately and simultaneously to avoid jeopardizing our claim under the mortgage insurance contract. A letter including the terms and conditions of our decision will be available to the servicer through the Home Saver Solutions Network shortly after we receive the servicer's recommendation.

VII, 504.06: Special Financing Arrangements (01/31/03)

In most instances, the property purchaser should be able to obtain financing (from the servicer or some other source) without our providing special assistance. If the servicer provides the financing and the property purchaser satisfies our eligibility requirements and underwriting guidelines, the servicer may deliver the mortgage to us under any of our standard commitments.

We will consider providing financing on a case-by-case basis when a purchaser is unable to obtain financing elsewhere. We will offer market-rate financing to qualified purchasers in all geographic areas; we will also offer special below-market financing in certain areas. Special below-market financing includes competitive terms—such as down payments ranging from three percent to five percent, waiver of enforcement of the due-on-sale clause, closing costs assistance, etc. (A servicer may obtain more information about special financing by contacting its lead Fannie Mae regional office.) The servicer should make this information about special financing terms available to the real estate brokers it uses for preforeclosure sales.

When we agree to provide the financing, we will designate a lender to close and fund the new mortgage and to deliver it to us for purchase in accordance with special instructions we will provide at that time.

VII, 504.07: Mortgage Insurance Claims (01/31/03)

Fannie Mae will file all primary mortgage insurance claims for preforeclosure sales on all conventional first mortgages on which we bear the risk of loss and are insured under a master primary policy issued by one of the following participating mortgage insurers—Mortgage Guaranty Insurance Corporation; PMI Mortgage Insurance Company; Radian Guaranty, Inc.; and Republic Mortgage Insurance Company.

Although Fannie Mae will file the preforeclosure claims, servicers will continue to have the following responsibilities:

•	Removing the loan from LASER with a code "71"; reporting the proceeds from the sale as a special remittance; providing the mortgage insurer with a copy of the HUD-1 settlement statement, a copy of the valuation, and a copy of the approval letter stating the terms and conditions of any short payoff; and submitting a final Cash Disbursement Request (Form 571) for reimbursement via MornetPlus/MortgageLinks; no later than 30 days following the preforeclosure sale.
•	If the mortgage has flood insurance coverage, the servicer also will need to follow the procedures we have in place for determining whether there is any insured flood damage, and file any flood insurance claim that may be required.
•	Generally, the servicer is not required to take any further action unless it is contacted by our eviction attorney and asked to provide certain information or documentation.

If the mortgage is insured by a nonparticipating mortgage insurer, or if the mortgage is not a conventional first mortgage on which Fannie Mae bears the risk of loss, the servicer will remain responsible for filing the mortgage insurance claim in connection with the preforeclosure sale. The claim should be filed in our name so the MI claim proceeds will be sent directly to us. Mortgage insurance or guaranty claims related to government mortgages should be filed under the standard claim filing procedures for those mortgages.

VII, 504.08: Accounting and Reporting (01/31/03)

The servicer must account for all preforeclosure sales and report them to us regardless of whether we are made whole or incur a loss. The servicer should report the preforeclosure sale in the first delinquency status information it transmits to us after it agrees to the sale (if we will not incur a loss) or the first delinquency status information it transmits to us after we approve a preforeclosure sale that will result in a loss. Once the servicer receives the final signed settlement sheet, the net sales proceeds, any cash contributions, and the executed promissory note (if applicable), it should report the completion of the preforclosure sale to us through the Home Saver Solutions Network.

For most mortgages, the servicer should code the preforeclosure sale as a "Third-Party Sale" (Action Code 71) in the first monthly LASER activity report that it transmits following the preforeclosure sale. The sale proceeds (and any cash contributions) should be remitted to us through the MortgageLinks Cash Remittance System. In addition, the servicer should forward a copy of the HUD-1 settlement statement and a copy of the claim for loss that was filed with the MI to the National Property Disposition Center within five business days after the sale. For MBS pool mortgages accounted for under the regular servicing option (and MBS pool mortgages serviced under a shared-risk special servicing option, RHS mortgages serviced under the regular servicing option, or any mortgages subject to some type of recourse or other credit enhancement arrangement), the servicer should report the payoff just as it would report the payoff of any other regular servicing option pool mortgages, since the servicer must absorb any losses and expenses related to the preforeclosure sale.

The servicer should request reimbursement for our share of all expenses related to the preforeclosure sale for a conventional mortgage—including the processing fee and the amount required to reimburse the servicer for the appraisal (however, uncollected late charges will not be reimbursed) by submitting a Cash Disbursement Request (Form 571). The servicer must retain the original invoices that support the expenses claimed in the individual mortgage file. For MBS special servicing option pool mortgages, the servicer should not request reimbursement for our share of the amount required to remove the mortgage (or participation interest in the mortgage) from the pool, since we will automatically reimburse the servicer for this amount after it remits the funds and reports the applicable action code required to remove the mortgage (or participation interest in the mortgage) from the pool. (also see Part X, Section 302.02)