E-2.3-03, Handling Cramdowns of the Mortgage Debt (05/10/2023)

A cramdown is an attempt to involuntarily modify any terms of the security deed, mortgage, or note by court order.

A borrower’s request for a cramdown is non-routine litigation and must immediately be reported to Fannie Mae’s Legal department by submitting a Non-Routine Litigation Form (Form 20). Fannie Mae must be consulted with respect to all strategy involving cramdowns. Fannie Mae will make the determination of how to respond to cramdowns.

See also  E-2.2-02, Managing Chapter 11 BankruptciesE-2.2-02, Managing Chapter 11 Bankruptcies.

The following table lists additional requirements for the servicer when it learns that a bankruptcy case has been filed that includes a cramdown proposal.

The servicer must be able to account for any scheduled interest (and principal, if applicable) that must be remitted to Fannie Mae. See Processing Pre-Petition and Post-Petition Payments in E-2.2-04, Managing Chapter 13 BankruptciesE-2.2-04, Managing Chapter 13 Bankruptcies for additional information.

The servicer’s remittance to Fannie Mae must satisfy Fannie Mae’s standard remittance requirements based on the remittance type of the mortgage loan. The servicer may not deduct its expenses from any payments the trustee forwards to it. For additional information regarding reclassifying or removing loans from a MBS pool, see Removing Regular Servicing Option MBS Mortgage Loans Upon Confirmation of a Bankruptcy Plan and Reclassifying Special Servicing Option MBS Mortgage Loans Upon Confirmation of a Bankruptcy Plan in E-2.1-11, Remitting P&I for MBS Mortgage Loans That Are Part of a BankruptcyE-2.1-11, Remitting P&I for MBS Mortgage Loans That Are Part of a Bankruptcy. In addition, the servicer must comply with the policies and procedures in Fannie Mae’s Investor Reporting Manual.

Once the bankruptcy court confirms a reorganization plan that provides for a cramdown of the mortgage debt, the servicer must separately account for payments to the secured and unsecured portions of the debt made under the repayment plan. The servicer must not make any permanent changes to the mortgage terms by actually modifying the mortgage loan documents. For additional information on reporting the terms of a confirmed cramdown to Fannie Mae, see Servicing the Mortgage Loan After Confirmation of a Chapter 11 Plan in E-2.2-02, Managing Chapter 11 BankruptciesE-2.2-02, Managing Chapter 11 Bankruptcies.

The following table lists payment details the servicer must maintain record of in its accounting system for funds applied under the terms of a confirmed cramdown.

If the court rules upon confirmation of the plan that any payments made during the confirmation process be credited against the secured claim, the servicer may need to adjust both its and Fannie Mae’s records to reallocate the payments between the secured and unsecured portions of the debt.

The servicer must track the payment of ongoing taxes and applicable property insurance for non-escrowed mortgage loans and must notify the law firm and request that a Motion for Relief from Stay or a Motion to Dismiss be filed if the borrower fails to maintain current tax or property insurance obligations.

The servicer must work with Fannie Mae to make appropriate changes to Fannie Mae’s investor reporting system records.