Fannie Mae’s most recent Lender Letter LL-2017-09 provides more clarification on policies related to disaster relief, which includes additional details for servicers on how to evaluate borrowers for workout options after a disaster-related forbearance.
In addition, the Lender Letter introduces the Fannie Mae Extend Modification for Disaster Relief, a new post-disaster forbearance modification developed jointly with Freddie Mac and the Federal Housing Finance Agency (FHFA).
The new Extend Modification for Disaster Relief results in a fixed-rate modification that extends the mortgage loan term in monthly increments to match the number of delinquent payments, not exceeding 12 months. This modification is designed for borrowers who were current or less than 31 days delinquent at the time of the disaster and meet the eligibility requirements as outlined in the Lender Letter. Servicers are encouraged to implement the Extend Modification for Disaster Relief immediately but must begin evaluating borrowers for this new modification program no later than February 1, 2018.
As part of the Lender Letter, Fannie Mae has established guidance to servicers to evaluate borrowers that are unable to become current on their mortgage loans after post-disaster forbearance relief and subsequently require a modification when the property securing the mortgage loan or the borrower’s place of employment is located in a FEMA Declared Disaster Area eligible for Individual Assistance. This guidance provides the hierarchy of modifications for which servicers must evaluate borrowers and the factors servicers should take into consideration in their evaluation.
These factors include:
Was the servicer able to establish a Quality Right Party Contact (QRPC)1 with the borrower during the disaster forbearance period?
Can the borrower maintain current contractual principal, interest, taxes, and insurance?
Can the borrower manage any additional escrow repayment obligation?
Upon reviewing the required factors, the servicer will work with the borrower to determine the appropriate post-disaster-related forbearance plan modification. The below information illustrates the hierarchy of the modifications for consideration and describes the corresponding steps that are taken for each modification program that Fannie Mae makes available to those impacted by a disaster event.
Cap & Extend Modification
- This workout option allows a homeowner to capitalize the delinquency including unpaid interest and advanced escrow payments (taxes and insurance) into the mortgage balance while extending the term (maturity date) in monthly increments to ensure the payment amount established is in line with the original mortgage payment prior the hardship.
- With this modification, the interest rate may stay the same depending on if the homeowner has an ARM or fix rate loan, and the market loan-to-value (MTMLTV). The term would be extended to achieve a payment equal to or less than the pre-modified payment.
- A borrower response packet is not required for this workout, but the servicer must establish Quality Right Party Contract (QRPC) to confirm the payment is affordable.
- For many homeowners facing COVID-19, they have the ability to keep making the regular contractual payment once they are back to work and this option may make sense (example: their place of employment was closed for 3 months and now is back up running with no impact to their wages).
Extend Modification
- A Fannie Mae Extend Modification allows a homeowner to extend the term of their loan (maturity date) by the number of miss payments
- Example: a homeowner with 20 years (240 payments) left on a 30-year mortgage and is 6 months past due would now have 246 payments left (240+6).
- The homeowner will need to replay any miss escrow payments (taxes & insurance) over a period of time (can be spread up to 5 years).
- The interest rate would stay the same if the homeowner has a fix rate loan and would be changed if an ARM.
- A borrower response package is not required for this workout, but the servicer must establish Quality Right Party Contact (QRPC) to confirm the payment is affordable.
Flex Modification
- A Fannie Mae Flex Modification allows a homeowner to capitalize the delinquency into the mortgage balance while extending the term (maturity date) to 480 months (number of payments) and the ARM loans, potentially adjusting the interest rate and potentially providing principal forbearance.
- With this modification, the interest rate would stay the same if the homeowner had a fix rate loan and would be changed if an ARM. This mod targets a 20% payment reduction.
- With the Flex Modification, a Borrower Response Packet must be completed if the mortgage loan is less than 90 days (3 months) delinquent after forbearance. However, if 90 days (3 months) or more delinquent, a Borrower Response Packet is not required nor QRPC.
- Unlike with the first 2 modification options, this workout gives homeowners the best chance at a lowered payment, which may be important for those facing long term income impacts related to COVID-19
For Connecticut Avenue Securities™ (CAS) transactions, the Extend Modification for Disaster Relief will not result in modification loss amounts being passed through to investors. Under our current policy, as with any other modification, a loan must be removed from the MBS trust before any permanent modification is completed. Full details on the Fannie Mae Extend Modification for Disaster Relief and additional details on policies related to disaster relief can be read here.