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Mortgage Servicing and Loan Modifications: 7.4.4.1 Overview

Fannie Mae’s loss mitigation options for borrowers facing long-term hardship include both home retention and home surrender options. The home retention options include loan modification programs (as of October 1, 2017, the Flex Modification) and workout mortgage assumptions. The surrender options include short sales and deeds in lieu of foreclosure (called “mortgage release”) that follow specific Fannie Mae guidelines.

Mortgage Servicing and Loan Modifications: 7.4.4.2 Mortgage Assumption

Mortgage assumption permits a qualified individual to assume both the title to the property and the mortgage obligation from a borrower who is currently delinquent in the mortgage payments.211 This is a loss mitigation option for the original borrower and should not be confused with loss mitigation options that may be offered solely to a successor in interest when the original borrower has died or moved out through a divorce.212

Mortgage Servicing and Loan Modifications: 7.4.4.3 Short Sale

Short Sale. With a short sale, Fannie Mae agrees to accept the proceeds from the sale of a property to satisfy the amount owed on a mortgage loan when the proceeds are less than the amount owed.216 Subordinate lien holders must agree to the short sale, though they can be paid up to $6000 in aggregate to release their liens on the property.

Mortgage Servicing and Loan Modifications: 7.5.1 In General

Freddie Mac divides its workout options into three broad categories: reinstatements, relief options, and workout options. Relief options provide a borrower with temporary relief or an opportunity to cure a delinquency over a defined period of time. The workout options lead to a long-term cure of the delinquency or transfer of property other than through a foreclosure sale. Servicers must evaluate borrowers according to Freddie Mac’s loan workout hierarchy.

Mortgage Servicing and Loan Modifications: 7.5.2 The Hardship Requirement

In general, to be considered for a workout, a borrower must be delinquent in their mortgage payments, or be in imminent danger of default.248 Borrowers must submit a standard application Uniform Borrower Assistance form (Form 710) in order to be considered for the full range of loss mitigation options.249 This form includes a list of circumstances that meet Freddie Mac’s hardship standard.

Mortgage Servicing and Loan Modifications: 7.5.3 Reinstatement

Servicers are required to pursue reinstatement as the first option for resolving a delinquency.255 A reinstatement occurs when a borrower pays all delinquent mortgage payments and past-due amounts, making the mortgage current.256 A borrower may reinstate a delinquent mortgage at any time, even after foreclosure proceedings begin or while a relief or workout plan is in progress. In general, the servicer need not seek Freddie Mac’s approval to process a reinstatement.

Mortgage Servicing and Loan Modifications: 7.5.5.1 In General

Freddie Mac offers workout options that enable borrowers to address long-term or permanent reductions in income which may make homeownership unsustainable or complete a transfer of the home short of foreclosure. These home retention options include several programs to modify the terms of the mortgage. Foreclosure alternatives include short sales and deeds in lieu of foreclosure that meet Freddie Mac’s guidelines. Borrowers also have the option of transferring the home to a third party through a mortgage assumption.

Mortgage Servicing and Loan Modifications: 7.5.5.2 Workout Mortgage Assumption

A workout mortgage assumption permits a qualified individual to assume both the title to the property and the mortgage obligation from a borrower who is currently delinquent in the mortgage payments.271 This is a loss mitigation option for the original borrower and should not be confused with loss mitigation options that may be offered solely to a successor in interest when the original borrower has died or moved out through a divorce.272

Mortgage Servicing and Loan Modifications: 7.5.5.3 Short Sale

Short sale. The Freddie Mac standard short sale is a sale of the property for less than the amount owed on a mortgage.277 As with other options, the borrower must have experienced a hardship and all other workout options must be considered prior to the use of a short sale procedure.278 In addition, subordinate lien holders must agree to the short sale, although they can be paid up to $6000 in aggregate to release their liens on the property.279

Mortgage Servicing and Loan Modifications: 7.5.5.4 Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a workout option in which a borrower conveys clear and marketable property title to Freddie Mac in exchange for a discharge of the debt.296 Freddie Mac revised the requirements for its deed in lieu of foreclosure process in keeping with the servicing alignment initiative and the CFPB’s mortgage servicing rules.297

Mortgage Servicing and Loan Modifications: 7.5.5.5 Charge-Offs

Freddie Mac will consider a charge-off of a mortgage loan that has an unpaid principal balance of $5000 or less and is 120 days or more delinquent.310 The property must be owner-occupied and maintenance of the property must be up to neighborhood standards and in compliance with municipal requirements.311 Generally, a charge-off ends collection efforts on the mortgage but does not necessarily cancel the note or release the lien on the property.

Mortgage Servicing and Loan Modifications: 7.6.4 The FHFA Has Not Provided Clear Data on Performance of Loans After Sales

As noted above, since 2016 the GSEs have sold over 500,000 reperforming loans. Prior to June of 2023, the GSEs had not published any data describing how the borrowers fared after their loans were sold. In its June 2023 updated Fact Sheet, FHFA provided a brief analysis of the post-sale performance of reperforming loans and reported that only a limited number have faced foreclosure.

Mortgage Servicing and Loan Modifications: 11.7a The Merrill Doctrine

Special issues arise when a servicer acts on behalf of a loan owner that is a federal governmental entity. Most often, this occurs when one of the GSEs, such as Fannie Mae or Freddie Mac, owns the borrower’s mortgage loan. In these situations, a court-created rule known as the Merrill doctrine may limit application of otherwise controlling agency principles.

Mortgage Servicing and Loan Modifications: 11.8.2.1 Scope

The Truth in Lending Act (TILA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), effectively prohibits forced arbitration of disputes involving closed-end loans secured by a dwelling and open-end loans secured by a consumer’s principal dwelling.187 TILA defines a residential mortgage loan as “a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the co

Mortgage Servicing and Loan Modifications: 11.8.2.2 Two Separate TILA Provisions Limit Arbitration

In covered mortgage loans, TILA prohibits any terms that require arbitration or any other non-judicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction (hereinafter referred to as the “(e)(1) provision”).197 The parties can agree to arbitration or a similar procedure at any time after a dispute or claim under the transaction arises.198

Mortgage Servicing and Loan Modifications: 11.8.2.4 Effective Date and Retroactive Application

There is no question that the TILA limitation on arbitration agreements in mortgage loans applies to any arbitration agreement entered into after June 1, 2013. This subsection considers the enforceability of arbitration agreements entered into before that date. Two issues are examined. First, whether the TILA requirement was effective as of June 1, 2013, or July 22, 2010. Second, whichever date is used, does the provision prevent the current enforcement of arbitration agreements entered into before the effective date?

Mortgage Servicing and Loan Modifications: 1.1.1 Scope

This treatise covers the law and provides practical advice related to mortgage servicing and mortgage loss mitigation alternatives. It examines federal and state regulation of mortgage servicing, identifies common abusive servicing practices and potential claims, reviews loss mitigation alternatives for borrowers in financial distress, and provides practical guidance on litigating claims against mortgage servicers.