A1-3-02, Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations (10/11/2023)

The Lender Contract provides remedies to Fannie Mae for the seller/servicer’s nonperformance. Any remedies that are applied will, in Fannie Mae’s sole judgment, be commensurate with the associated level of risk; Fannie Mae will strive to apply the most appropriate remedy to compensate Fannie Mae for the harm caused by the violation.

Fannie Mae may, in addition to any other remedy available at law or in equity, require a party responsible for a breach to repurchase Fannie Mae’s interest in a mortgage loan, remit a make whole payment, or indemnify or otherwise hold Fannie Mae harmless for any Fannie Mae losses. If Fannie Mae, in its discretion, determines that a breach of the seller/servicer’s obligations may be reasonably corrected, Fannie Mae will provide the seller/servicer an opportunity to correct such breach within a specified time frame and manner as specified in the Guides, if any.

Fannie Mae may offer or decline to offer the seller/servicer certain servicing alternative remedies based on the seller/servicer counterparty status to the extent there are future obligations required as part of the servicing alternative remedy. Other factors to be considered by Fannie Mae may include, but are not limited to, the failure to maintain a quality servicing practice and the seller/servicer’s ability and willingness to comply with the other provisions of the Lender Contract.

Subject to Servicing Defect Remedies Framework for servicing defects attributable to servicing violations, Fannie Mae may require the repurchase of a mortgage loan (or of an acquired property) or the remittance of a make whole payment for reasons including, but not limited to

• the breach of any contractual warranty (including instances of fraud or misrepresentation),

• under the terms of any applicable repurchase agreement or contract provisions, or

• because of an uncorrected servicing defect.

For servicing defects attributable to servicing violations in connection with MBS mortgage loans, the mortgage loan must have been properly removed from an MBS pool on a separate basis consistent with the Servicing Guide before a demand for a servicing repurchase remedy is issued based on a servicing defect. A servicing defect, by itself, does not form a basis for removing a loan from an MBS Pool.

Additionally, Fannie Mae requires some repurchases because the terms under which the mortgage loans were purchased or securitized call for a repurchase under certain conditions or circumstances. Repurchases that fall into this category generally include, but are not limited to, Charter violations, an ARM loan in an MBS pool that has converted to a fixed rate mortgage loan per the borrower’s exercise of its option in the mortgage loan documents, or an MBS mortgage loan that has 24 payments past due.

Following the repurchase of any mortgage loan, losses are the responsibility and legal obligation of the responsible party. For modified mortgage loans, the responsible party must comply with all legal obligations in connection with the mortgage loan.

The servicing defect remedies framework relates specifically to the categorization of servicing defects, seller/servicer corrections of those defects, and available remedies when defects are identified, including alternatives to repurchase. If Fannie Mae identifies a servicing violation, it may issue either a notice of servicing defect or a demand for a servicing remedy.

The following table provides the definition of terms related to the servicing defect remedies framework.

The following table describes the servicing defect remedies framework.

Subject to the Servicing Defect Remedies Framework, Fannie Mae may issue a repurchase or make whole payment request or pursue another remedy with the entity that is responsible for the selling representations or warranties or for the servicing responsibilities or liabilities (the ”seller/servicer” or the ”responsible party”) and Fannie Mae may require the immediate repurchase of a mortgage loan or an acquired property or the remittance of make whole payments in accordance with the Guides.

The seller/servicer must submit the requested documentation for an underwriting or servicing review so that Fannie Mae receives the file within 30 days after Fannie Mae notifies the seller/servicer that it has selected a mortgage loan for review, unless Fannie Mae advises that it needs the files in a different time frame. Fannie Mae, in its sole discretion, may request the documentation in a shorter or longer period of time based upon circumstances at the time.

The seller/servicer must pay Fannie Mae the funds that are due in connection with a request for repurchase, indemnification, or make whole payment within 60 days after receipt of the request or within such other time frame as specified by Fannie Mae unless an appeal is made. For repurchase requests made on active mortgage loans (mortgage loans that have not been foreclosed upon or liquidated), the payment of the repurchase price may be made by the seller/servicer with its next scheduled remittance following the completion of the 60-day period.

See A2-4-01, Quality Control ReviewsA2-4-01, Quality Control Reviews for the requirements when Fannie Mae receives an offer to purchase an acquired property prior to the completion of an underwriting or servicing review.

Appeal Process

The seller/servicer or other responsible party may submit a written appeal of a demand. The ”appeal process” includes both the first and second appeals available to the seller/servicer under the conditions described in the following table. Note that the seller/servicer may provide a correction of an alleged servicing defect at any time during the appeal process. Also see Appeal and Independent Dispute Resolution Processes posted on Fannie Mae’s website for more detailed information about the requirements for each step in the appeal process.

If no written appeal is received within the applicable 60–day time frame or the time frame identified by Fannie Mae in the demand for a servicing remedy, it will be assumed that the responsible party does not contest the demand and the repurchase, indemnification or make whole payment funds are due to Fannie Mae. Thereafter, the appeal process will be unavailable to the responsible party for that particular request.

Impasse and Management Escalation Process for Repurchases and Other Remedies

At the conclusion of the first or second appeal, if the seller/servicer or other responsible party wishes to challenge the existence of a servicing defect identified in the demand, the seller/servicer or other responsible party may initiate the impasse process. If Fannie Mae reaffirms the demand during the impasse process, the seller/servicer or other responsible party may continue the challenge in the management escalation process.

The steps in the impasse and management escalation processes are described in the following table. Also see Appeal and Independent Dispute Resolution Processes posted on Fannie Mae’s website for more detailed information about the requirements for each step.

Independent Dispute Resolution (IDR) Process

The IDR process is available for disputes that are not resolved through the appeal, impasse, or management escalation processes. The IDR process is available, if the preconditions to each step have been followed and the parties have not filed litigation to attempt to address the dispute. The IDR process is available to seller/servicers or other responsible parties that have not been suspended, disqualified, or terminated by Fannie Mae, and that have complied with any prior IDR award or demand (as applicable). The IDR process is governed by the Federal Arbitration Act, 9 U.S.C. §§1 et. Seq.

The IDR process addresses loan-level demands and whether alleged breach(es) by the seller/servicer of its representations and warranties, or duties or responsibilities, as provided under the Lender Contract exist at the time the IDR process commences. The IDR process may be used for

• demands relating to a breach of a selling representation, warranty, duty or responsibility involving whole loans purchased and mortgage loans delivered into MBS with pool issue dates on or after January 1, 2016; and

• demands for a servicing remedy that are issued on or after December 1, 2016.

The IDR process cannot be used

• to resolve suspension, disqualification, or termination of a seller/servicer;

• if a seller/servicer receives a formal notice of default from Fannie Mae; or

• to resolve a breach of any servicer requirement or obligation related to the servicing of a mortgage loan that results in the assessment of a compensatory fee by Fannie Mae.

A neutral third party, selected by the IDR program administrator, will determine whether the alleged breach(es) existed at the time the IDR process commenced based on case file packages and subject matter expert reports submitted in writing by both parties. The neutral party’s decision will be final and binding upon the seller/servicer and Fannie Mae.

Initiation of the IDR Process

The following table describes the initiation of the IDR process.

The IDR process is designed to be a cost-effective way to resolve disputes involving demands for a servicing remedy that remain after the appeal, impasse and management escalation processes have been exhausted. The costs and fees associated with the IDR process itself will vary depending on the circumstances and outcome of each case. For additional information about the details of the IDR process, see Appeal and Independent Dispute Resolution Processes on Fannie Mae’s website.

Compliance with a Demand for a Repurchase Servicing Remedy

A seller/servicer or other responsible party has 15 days in which to initiate the next stage of the first or second appeal, impasse, management escalation, or IDR process, as applicable. If the seller/servicer or other responsible party fails to challenge the existence of the defect by letting the applicable 15–day initiation period expire, or if Fannie Mae reaffirms the demand for a repurchase servicing remedy at the conclusion of the appeal, impasse, management escalation, or IDR process, the seller/servicer or other responsible party must comply with the demand for a repurchase servicing remedy. For repurchases made on an active mortgage loan, the payment of the repurchase price may be made by the servicer with its next scheduled remittance following the completion of the 15–day initiation period.

There are times when a repurchase of an active mortgage loan will involve the transfer of servicing to a new servicer. In such a situation, RESPA requires that the borrowers involved in the servicing transfer receive certain notices in advance of the servicing transfer. If the repurchase of a mortgage loan will involve a servicing transfer to a new servicer, Fannie Mae will provide the parties with additional time to process the repurchase so that all regulatory notices can be provided prior to the repurchase. However, Fannie Mae requires that the party responsible for such a repurchase notify Fannie Mae within the 15–day initiation period that a servicing transfer will take place to the identified new servicer and the date of the servicing transfer. Once the transferring servicer has timely notified Fannie Mae that there will be a servicing transfer on an active mortgage loan, the repurchasing party must work with the current servicer to provide all necessary legal notices to the borrower. All repurchases of active mortgage loans involving a servicing transfer must occur at month end as quickly as reasonably possible following Fannie Mae’s repurchase request or reaffirmation.

Should Fannie Mae have to take legal action to enforce its right to require repurchase of a mortgage loan (or property), the responsible party also will be liable to Fannie Mae for Fannie Mae’s attorney fees, costs, and related expenses, as well as for any applicable consequential damages.

The responsible party and the mortgage loan may be eligible for an alternative to repurchase when the MI has been rescinded pursuant to the remedies framework in the Selling Guide for mortgage loans acquired after July 1, 2014 if

• the responsible party meets Fannie Mae’s eligibility criteria, and

• the only defect Fannie Mae identifies in the mortgage loan is the rescission of MI or the responsible party corrects all defects identified, except the MI rescission defect, during the required correction period.

The MI stand-in is defined as the full MI benefit that would have been payable under the original MI policy if the mortgage loan liquidates. If the responsible party and the mortgage loan are deemed eligible for an alternative to repurchase, then the responsible party will be offered one of two agreements for an MI stand-in.

A mortgage loan will not be eligible for the MI stand-in if

• Fannie Mae identifies other defects during the full file QC review which the responsible party fails to correct during the required correction period, or

• the responsible party does not respond in a timely manner or submit all the required documents within the time frames required by Fannie Mae in A2-4-01, Quality Control ReviewsA2-4-01, Quality Control Reviews.

If the responsible party corrects the defects that made the mortgage loan ineligible for the MI stand-in, Fannie Mae will review the mortgage loan and responsible party for this alternative to repurchase.

The following table describes the requirements the eligible responsible party must meet after Fannie Mae receives notification that the MI has been rescinded.

Fannie Mae is required to remove a mortgage loan, or cause the mortgage loan to be repurchased, from an MBS pool under the circumstances set forth below. The servicer must immediately notify Fannie Mae when it is aware of any of the following:

• when a court or governmental regulator determines that Fannie Mae was not authorized to acquire the mortgage loan or a court or agency requires that the mortgage loan be repurchased to comply with applicable law;

• upon notice that any of the following events will occur, or at least before

  • the borrower exercises an option in the mortgage loan documents to convert from an ARM loan to a fixed interest rate,

  • the borrower exercises an option in the mortgage loan documents to change from one index to another, or

  • if the maximum or minimum interest rate or the margin used in calculating the rate per the mortgage loan documents changes as a result of a mortgage loan assumption;

• as soon as practicable, if any governmental agency or court requires a transfer of the property securing a mortgage loan (other than to a co-borrower or in connection with a divorce or other transfer excepted from due-on-sale enforcement);

• if any mortgage insurer or the FHA or VA requires transfer of the mortgage loan or the property to it in order to obtain the benefits of the insurance or the guaranty, or requires a longer period of time in addressing certain foreclosure prevention alternatives; 

• as soon as practicable when the servicer first discovers that the borrower has transferred title to the mortgaged property to the servicer or Fannie Mae, thereby effecting a Mortgage Release (deed-in-lieu of foreclosure); or

• if the mortgage loan becomes 24 months past due with respect to payments of P&I measured from the last installment paid in full, unless an exception exists that permits the mortgage loan to remain in the MBS pool beyond the 24th month.

24–Month Rule: Under the MBS trust rules, subject to certain conditions, an MBS mortgage loan must be removed from its MBS pool no later than when the mortgage loan becomes 24 months past due, as measured from the LPI date.  However, under various circumstances Fannie Mae will remove a special servicing option delinquent MBS mortgage loan from its MBS pool prior to the mortgage loan becoming 24 months delinquent, in accordance with A1-3-06, Automatic Reclassification of MBS Mortgage LoansA1-3-06, Automatic Reclassification of MBS Mortgage Loans.

Similarly, Fannie Mae generally will reclassify a delinquent regular servicing option MBS mortgage loan - those for which the servicer has the entire foreclosure loss risk and those for which Fannie Mae and the servicer share the foreclosure loss risk, with the servicer having the responsibility for marketing the acquired property - still in the MBS pool when the mortgage loan reaches six consecutive months of delinquency (see  A1-3-06, Automatic Reclassification of MBS Mortgage LoansA1-3-06, Automatic Reclassification of MBS Mortgage Loans  ). For such mortgage loans, the servicer remains responsible for existing recourse obligations, including the responsibility to repurchase the mortgage loan no later than when it becomes 24 months past due.  If the servicer has not already repurchased the mortgage loan, Fannie Mae will issue a demand for repurchase to the servicer when the mortgage loan becomes 22 months past due.  The repurchase must be reported to Fannie Mae as activity occurring in the month that contains the due date of the 24th consecutive past due payment.

Although most mortgage loans will be removed from the MBS pool by or before the time the mortgage loan becomes 24 months past due, an MBS mortgage loan serviced under the special servicing option - those for which Fannie Mae has the entire foreclosure loss risk and those for which Fannie Mae and the servicer share the foreclosure loss risk, with Fannie Mae having the responsibility for marketing the acquired property - may be allowed to remain in its MBS pool beyond 24 months past due if:

• the borrower has entered into and is complying with a repayment plan pursuant to which the arrearages on the mortgage loan are required to be paid in full and the mortgage loan brought current by or before the original maturity date of the mortgage loan;

• applicable law (including bankruptcy law, probate law, or the SCRA of 2004 or other relief act) requires that foreclosure on the related secured property or other legal remedy against the borrower or the related secured property be delayed and the period for delay or inaction has not elapsed; or

• the mortgage loan is in the process of being assigned to the insurer or guarantor that provided any related MI or guaranty.

If repurchase by the servicer at 24 months due is not required because a mortgage loan meets one of these conditions, including the condition that the mortgage loan has become current, but the mortgage loan later becomes delinquent, Fannie Mae will review the individual circumstances to determine whether repurchase is warranted at that time.

Note: Under the Fannie Mae/Freddie Mac uniform first lien mortgage loan security instruments, a payment is past due if not paid by close of business on the stated due date, which is normally the first day of the month.

Generally, when Fannie Mae requests that the responsible party repurchase a mortgage loan, the repurchase price is the same as the price at which Fannie Mae originally purchased the mortgage loan. This is usually true when the responsible party repurchases a mortgage loan under a repurchase agreement or because of a breach of warranty or other obligation; however, some agreements may specify other terms. If Fannie Mae agrees to a repurchase request as an accommodation to the responsible party, Fannie Mae bases its repurchase price on current market prices.

Note: The servicer must not deduct loan level price adjustments from the repurchase price or make whole payment. See the Selling Guide for additional information on loan level price adjustments.

Repurchase of a Portfolio Mortgage Loan: The proceeds Fannie Mae will receive for the repurchase of a portfolio mortgage loan that Fannie Mae holds in its portfolio are usually determined by the steps represented in the following table.

Repurchase of an MBS Mortgage Loan: The proceeds for the repurchase of an MBS mortgage loan represent the sum of Fannie Mae’s share of the outstanding security balance for the mortgage loan as of the repurchase month and one month’s interest on that balance.

Interest must be calculated in accordance with the following table.

The proceeds for the repurchase of an MBS mortgage loan represent the sum of Fannie Mae’s share of the outstanding security balance for the mortgage loan as of the repurchase month and one month’s interest on that balance.

Repurchase of an Acquired Property: Whenever the Guides permit or require repurchase of a mortgage loan without redelivery to Fannie Mae’s portfolio and, at the time of the purchase, title to the security property has passed to Fannie Mae, or is held for Fannie Mae but is in the name of the servicer pursuant to its duties as Fannie Mae’s servicer, the language of the Guides will be applied to require purchase of Fannie Mae’s interest in the property.

The purchase price

• will be the same as if the responsible party was repurchasing the mortgage loan, with accrued interest and other adjustments, including Fannie Mae’s property-related expenses such as maintenance and marketing expenses, through the date of purchase; and

• is not based on the market value of the property at the time of the purchase.

Further, when the responsible party purchases the property or remits a make whole payment Fannie Mae also will convey all rights as owner of the mortgage loan (for example, deficiency rights), if any, that it may still have pursuant to applicable state law, but it has no obligation to the responsible party to have preserved such rights.

The seller/servicer may be required to repurchase properties with tenants in place due to, among other things, violations of selling representations and warranties or improper servicing. Fannie Mae requires the servicer to promptly resolve any repurchase requests, regardless of the presence of a tenant in the related property.

Make Whole Payment: A ”make whole payment” is the amount that a party responsible for a breach of a selling representation or warranty or a servicing breach must pay Fannie Mae so that Fannie Mae does not incur a loss on the mortgage loan or the property. In the event that a repurchase demand would have been issued but the mortgage loan has been liquidated, Fannie Mae will issue a reimbursement request for a make whole payment instead.

Fannie Mae may elect an alternate remedy to the immediate repurchase of a mortgage loan when Fannie Mae identifies underwriting deficiencies during a post-purchase review. See the Selling Guide for more information regarding underwriting deficiencies and requirements for completing post-purchase date data corrections.

Subject to the servicing defect remedies framework, in some instances in which the seller/servicer has breached its Lender Contract, Fannie Mae may allow the servicer to correct the servicing violation.

Subject to Servicing Defect Remedies Framework, in certain circumstances, Fannie Mae may provide the seller/servicer with an alternative to the immediate repurchase of the identified mortgage loan. In each case, Fannie Mae will notify the seller/servicer of the type and terms of the servicing alternative remedy. The alternatives, as described in the following table, may include one or more of the following, as determined by Fannie Mae’s discretion.

Subject to the servicing defect remedies framework, Fannie Mae will strive to apply the most appropriate remedy that is commensurate with the associated level of risk to compensate Fannie Mae for the harm caused by the violation.

A DPO is defined as the unpaid portion of the MI claim where the failure to pay the full amount due is solely attributable to the mortgage insurer’s financial inability to pay or its insolvency. Such a mortgage insurer shall be referred to as a ”DPO mortgage insurer.” Fannie Mae bears the risk of loss that a DPO related claim filed with a mortgage insurer for a properly delivered and serviced mortgage loan that meets all of Fannie Mae’s eligibility requirements is not ultimately collectible. A mortgage insurer's financial inability to pay a claim or its insolvency is not considered to be a failure by the servicer to keep MI coverage in force, as otherwise required by A1-3-03, Repurchase Obligations Related to Bifurcated Mortgage LoansA1-3-03, Repurchase Obligations Related to Bifurcated Mortgage Loans.

For a mortgage loan where there is a demand for repurchase or make whole payment amount due to Fannie Mae because of a breach of the selling representations and warranties for a non-bifurcated loan, the servicer must remit the full amount of the repurchase price or make whole payment.

For a mortgage loan where there is a demand for repurchase or make whole payment amount due to Fannie Mae because of a breach of the selling representations and warranties for a bifurcated mortgage loan, the responsible party must remit the full amount of the bifurcated repurchase price or make whole payment to the servicer to remit to Fannie Mae. The repurchase price, make whole payment or bifurcated repurchase price must not be reduced by the DPO and must only include a credit for the MI payment actually paid by the MI company.

Fannie Mae will at all times retain the right to be indemnified according to Selling Guide A2-1-03, Indemnification for Losses.

The following table describes the Fannie Mae actions and servicer requirements once the responsible party completely satisfies its payment obligations to Fannie Mae with respect to the repurchase or make whole demand for a selling breach of a representation or warranty.

In the event the servicer receives a DPO payment or investor premium refund from a mortgage insurer after Fannie Mae has been made whole on a mortgage loan by a responsible party, the servicer must promptly remit those payments to the responsible party. It is the responsibility of the responsible party to pursue the collection from the DPO mortgage insurer of any DPO or investor premium refunds, if applicable, that are outstanding following Fannie Mae’s receipt of the repurchase price, bifurcated repurchase price or make whole funds.

As a result of an indemnification claim for the loss of the MI benefit due to a servicing breach, Fannie Mae may demand that the servicer indemnify Fannie Mae with respect to the insurance benefit that would have been paid by the mortgage insurer if the claim had been allowed. If the indemnification claim for the loss of the MI benefit due to a servicing breach involves a DPO mortgage insurer, Fannie Mae will calculate the indemnification claim as the amount it would have received in MI benefits from the DPO mortgage insurer if the claim had been allowed and if the servicer had not committed a servicing breach. As the DPO mortgage insurer’s regulator approves additional payments on the claims outstanding, Fannie Mae will bill the servicer for any increases in the amount payable on such claims after the initial indemnification claim is filed.

For example, if the DPO mortgage insurer is paying allowed claims at a rate of 60%, and a $30,000 claim is denied in full or coverage is cancelled due to a servicing breach, Fannie Mae’s current indemnification claim to the servicer for the loss of the MI benefit would be for 60% of the $30,000 claim, or $18,000 ($30,000 x 60%). If the DPO mortgage insurer is later permitted to increase the cash payment (and as a result, decrease the DPO) on such allowed claims from 60% to 70%, Fannie Mae will bill the servicer for an additional 10% of the amount Fannie Mae estimated would have constituted the MI benefit if the claim had been allowed, or $3,000 ($30,000 x 10%). The servicer is reminded that Fannie Mae is not limited to indemnification as a remedy when the servicer breaches the Lender Contract.

The servicer should contact [email protected] with questions regarding the DPO billings.