Fannie Mae Single-Family Balloon

Mortgage Loan Servicing Manual

November 12, 2014
 November 12, 2014

Fannie Mae Copyright Notice

(1) © 2014 Fannie Mae. No part of this publication may be reproduced in any form or by any means without
Fannie Mae’s prior written permission, except as may be provided herein or unless otherwise permitted by law.
Limited permission to reproduce this publication in print in whole or in part and limited permission to distribute
electronically parts of this publication are granted to Fannie Mae-approved lenders, servicers, and other
mortgage finance professionals, strictly for their own use in originating mortgages, selling mortgages to Fannie
Mae, or servicing mortgages for Fannie Mae. Fannie Mae may revoke these limited permissions by written
notice to any or all Fannie Mae-approved users.
Trademarks are the property of their respective owners.
A full version of this publication is available on Fannie Mae's website. If there should ever be a difference
between this publication as it appears on the AllRegs® website and the version published by Fannie Mae, the
difference is an error. In such event, the Fannie Mae version of this publication shall be deemed the correct
authoritative version. Material discrepancies between the two versions, identified by Fannie Mae or otherwise
brought to our attention, may be addressed by Announcement.
(2) Disclaimer: This publication is posted on the AllRegs website of Mortgage Resource Center, Inc., (“MRC”)
under license from and with the express permission of Fannie Mae. MRC is the exclusive third-party electronic
publisher of this publication. Fannie Mae makes no representation or warranty regarding any of the features,
functionality, or other contents of the AllRegs website.
You acknowledge and agree (individually and on behalf of the entity for which you are accessing this
publication, “You”) that You may not make any claim against Fannie Mae or MRC for any errors, and: (i)
neither Fannie Mae nor MRC shall be liable to You for any losses or damages whatsoever resulting directly or
indirectly from any errors, and (ii) MRC expressly disclaims any warranty as to the results to be obtained by
You from use of the AllRegs website, and MRC shall not be liable to You for any damages arising directly or
indirectly out of the use of the AllRegs website by You.

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Preface

This Balloon Mortgage Loan Servicing Manual (Manual) incorporates all Fannie Mae servicing-related policies
and procedures for single-family balloon mortgage loans. This Manual is incorporated into the Servicing Guide
by reference. In the event that the Manual and the Servicing Guide are conflicting, the servicer must follow the
requirements set forth in the Servicing Guide.

Content Organization
This Manual is organized into chapters:
• Chapter 1: Notifying the Borrower of Balloon Mortgage Loan Maturity
• Chapter 2: Processing the Refinancing of a Matured Balloon Mortgage Loan
• Chapter 3: Performing Final Accounting and Reporting for a Balloon Mortgage Loan
To learn more about the details on the content included in a chapter, see the Table of Contents.

Effective Dates for the Manual

Each topic within the Manual is followed by a date shown in parentheses. With the publication of the new
Manual, this date will represent the date of the most recent Servicing Announcement that amended content
within an individual topic. The servicer must refer to the individual Announcement to locate the policy effective
date.

Access Options
The Manual is available on AllRegs and in Adobe® PDF format on Fannie Mae’s website. Related
Announcements, Lender Letters, and Notices may be obtained through a variety of mediums, including:
• using a free electronic version on the AllRegs website through a link from Fannie Mae’s website;
• a subscription paid directly to AllRegs for an enhanced electronic version with additional features and a
higher degree of functionality (than the free version); and
• in PDF format on Fannie Mae’s website.

Amendments to the Manual

Fannie Mae may at any time alter or waive any of the requirements of this Manual, impose other additional
requirements, or rescind or amend any and all material set forth in this Manual. The servicer must ensure that
its staff is thoroughly familiar with the content and requirements of the Manual as it now exists and as it may be
changed.

Notification of Changes and Manual Updates

Fannie Mae notifies servicers of changes and updates to its Manual policies and procedures, as
communicated in Announcements, Lender Letters, and Notices, in two ways:

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• posting the documents on Fannie Mae’s website and the AllRegs website, and
• emailing notification of those postings to servicers that subscribe to Fannie Mae’s email subscription
service and select the option “Servicing News.”

Forms, Exhibits, and Content Incorporated by Reference

The Manual provides information about the specific forms servicers must use to fulfill Fannie Mae’s
requirements. Servicers can access the actual forms on Fannie Mae’s website.
Some materials are only referenced in the Manual and are posted in their entirety on Fannie Mae’s website. All
forms and exhibits – whether it currently exists or is subsequently created – referenced in the Manual now or
later are legally a part of this Manual, the Servicing Guide and Fannie Mae’s contract with its servicers.

Technical Issues
In the event of technical difficulties or system failures with Fannie Mae’s website, the delivery of the “Servicing
News” option of Fannie Mae’s email subscription service, or the AllRegs website, users may contact the
following resources:
• For Fannie Mae’s website and Fannie Mae’s email subscription service, use the “Contact Us” link on
the website to ask questions or obtain more information or contact Fannie Mae’s Single-Family
Technology Support at 1-877-722-6757.
• For the AllRegs website, submit an e-mail support request from the website or contact AllRegs
Customer Service at 1-800-848-4904

When Questions Arise

The Manual provides information about normal and routine balloon mortgage loan servicing matters. Servicers
must address questions relevant to a particular situation not covered in the Manual to its Fannie Mae Servicing
Representative, or its Fannie Mae Investor Reporting Representative, as applicable.

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Table of Contents
Chapter 1, Notifying the Borrower of Balloon Mortgage Loan Maturity ........................................ 1
1-01, Servicer Responsibilities (11/12/2014) ................................................................................. 2
1-02, Content of the Balloon Mortgage Loan Maturity Notice (11/12/2014) ................................... 2
1-03, Timing of the Balloon Maturity Notice (11/12/2014) .............................................................. 3
Chapter 2, Processing the Refinancing of a Matured Balloon Mortgage Loan ............................. 5
2.1, Determining Eligibility for Refinancing Upon Receipt of the Declaration of Intent....................... 6
2.1-01, Receipt of the Declaration of Intent (11/12/2014) .............................................................. 6
2.1-02, Evaluating Conditions for Refinance (11/12/2014)............................................................. 6
2.1-03, Verifying Ownership, Property Lien Status and the Status of Any Other Liens
(11/12/2014) .................................................................................................................................. 8
2.1-04, Verifying Occupancy (11/12/2014)..................................................................................... 8
2.1-05, Determining the Impact of Bankruptcy (11/12/2014).......................................................... 9
2.1-06, Verifying the Borrower’s Payment History After the Balloon Maturity Notice (11/12/2014) 9
2.1-07, Quoting the New Interest Rate to the Borrower (11/12/2014) ............................................ 9
Exhibit 1: Declaration of Intent (11/12/2014) ................................................................................ 10
2.2, Allowable Exceptions for Refinancing a Balloon Mortgage Loan When It Is Technically
Ineligible .......................................................................................................................................... 13
2.2-01, Approving the Refinance Based on Transfers of Ownership in Properties Securing
Balloon Mortgage Loans (11/12/2014) ......................................................................................... 13
2.2-02, Approving a Request for Refinancing When the Borrower No Longer Occupies the
Property (11/12/2014) .................................................................................................................. 13
2.2-03, Approving a Request for Refinancing When the Borrower’s Payment History Is
Unsatisfactory (11/12/2014) ......................................................................................................... 15
2.2-04, Approving a Request for Refinancing When the Property Is Ineligible Due to Lien Status
Issues, Including Delinquent Taxes (11/12/2014) ........................................................................ 15
2.3, Processing an Approved Refinance Transaction...................................................................... 19
2.3-01, Preparing the Refinance Package for Delivery to the Borrower (11/12/2014) ................. 19
2.3-02, Establishing the Terms of the New Refinance Mortgage Loan (11/12/2014) ................... 21
2.3-03, Obtaining Title Insurance Coverage (11/12/2014) ........................................................... 22
2.4, Delivery and Documentation Requirements for Balloon Mortgage Loans Refinanced at Maturity
........................................................................................................................................................ 23
2.4-01, Documenting the Refinanced Balloon Mortgage Loan (11/12/2014) ............................... 23
2.4-02, Loan Delivery Documents (11/12/2014) .......................................................................... 24
2.4-03, Delivery Options for Balloon Mortgage Loans Refinanced at Maturity (11/12/2014) ....... 24
Chapter 3, Performing Final Accounting and Reporting for a Balloon Mortgage Loan .............. 25
3.1, Remitting and Reporting Payoff Proceeds ............................................................................... 26

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3.1-01, Collecting the Balloon Payment, Accrued Interest, and Unpaid Late Charges
(11/12/2014) ................................................................................................................................ 26
3.1-02, Determining and Collecting Allowable Transaction Costs (11/12/2014) .......................... 27
3.1-03, Removing the Balloon Mortgage Loan from Fannie Mae’s Accounting Records
(11/12/2014) ................................................................................................................................ 29
3.2, Processing Alternatives to Mature Balloon Mortgage Loan Refinance Transactions ............... 31
3.2-01, When the Balloon Payment Is Not Received by the Balloon Maturity Date (11/12/2014) 31
3.2-02, Determining Why the Balloon Payment Was Not Made (11/12/2014) ............................. 31
3.2-03, Granting the Borrower Temporary Forbearance to Allow Them to Make the Balloon
Payment Post-Maturity (11/12/2014) ........................................................................................... 33

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Chapter 1, Notifying the Borrower of Balloon Mortgage Loan Maturity

In this Chapter

This Chapter contains the following Topics:

 1-01, Servicer Responsibilities

 1-02, Content of the Balloon Mortgage Loan Maturity Notice
 1-03, Timing of the Balloon Maturity Notice

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1-01, Servicer The following table outlines the servicer's responsibilities related to servicing
Responsibilities mature balloon mortgage loans.
(11/12/2014)
 The servicer must…
Notify the borrower of the upcoming balloon payment as follows:
 180 days prior to the balloon maturity date, send notification
detailing the pending balloon payment due, and
 60 days prior to the balloon maturity date, make at least one
telephone call and/or mail a reminder letter to the borrower
who does not submit a written request to exercise the
conditional refinance option.
Comply with the balloon mortgage loan instruments, all
applicable laws and conventional mortgage insurer
requirements.
Retain all documentation related to the resolution of the matured
balloon mortgage loan in the mortgage loan file.

1-02, Content of the In addition to the requirements in the balloon mortgage loan instruments, the
Balloon Mortgage Loan balloon maturity notice must also provide the information shown in the
Maturity Notice following table, tailored to meet the borrower’s individual circumstances.
(11/12/2014)
 Information that Must Be Provided in the Balloon Maturity
Notice
A requirement for the borrower to submit evidence of the
occupancy status of the property no later than 30 days after the
written request for the refinancing is submitted.
See also 2.1-03, Verifying Ownership, Property Lien Status, and
the Status of Any Other Liens for further details on required
documentation.
An explanation of the process for completing the refinancing,
including, but not limited to the following:
 the borrower's responsibilities (including the requirement that
all payments that become due before the effective date of
any refinance be made without occurrence of a 30–day
delinquency),
 the dates by which specific actions must be taken and the
consequences of not meeting those dates, and
 the documents that need to be executed, and how the
execution is to be accomplished.
Information about the balloon payment amount, including, but
not limited to the following:
 the UPB,
 accrued interest, and

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 any unpaid late charges that will be due on the balloon

maturity date.
The servicer must also explain the consequences of the
borrower's not paying the final payment on the balloon maturity
date if he or she chooses not to exercise the conditional
refinancing option.

1-03, Timing of the If the mortgage loan debt has not been accelerated, then the servicer must:
Balloon Maturity  send the required balloon maturity notice that is appropriately
Notice (11/12/2014) tailored to fit the individual borrower and mortgage loan
circumstances – the notice should not interfere or conflict with
any other collection-related or foreclosure-related activity; and
 subsequently send an acceleration letter if the servicer finds it
necessary to accelerate the debt before the balloon maturity date.

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Chapter 2, Processing the Refinancing of a Matured Balloon Mortgage Loan

In this Chapter

This Chapter contains the following Sections:

 2.1, Determining Eligibility for Refinancing Upon Receipt of the

Declaration of Intent
 2.2, Allowable Exceptions for Refinancing a Balloon Mortgage
Loan When It Is Technically Ineligible
 2.3, Processing an Approved Refinance Transaction
 2.4, Delivery and Documentation Requirements for Balloon
Mortgage Loans Refinanced at Maturity

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2.1, Determining This Section contains the following Topics:

Eligibility for  2.1-01, Receipt of the Declaration of Intent
Refinancing Upon
Receipt of the  2.1-02, Evaluating Conditions for Refinance
Declaration of Intent  2.1-03, Verifying Ownership, Property Lien Status and the Status
of Any Other Liens
 2.1-04, Verifying Occupancy
 2.1-05, Determining the Impact of Bankruptcy
 2.1-06, Verifying the Borrower’s Payment History After the
Balloon Maturity Notice
 2.1-07, Quoting the New Interest Rate to the Borrower

2.1-01, Receipt of the The servicer must evaluate the borrower for all eligibility conditions upon
Declaration of Intent receipt of the borrower’s “declaration of intent.” The requirement that the
(11/12/2014) borrower submit a written request can be satisfied by the borrower’s
completing and returning the Declaration of Intent that appears in the Exhibit
to this chapter, or some other form of written request within the specified time
frame. (See Exhibit 1, Declaration of Intent).
If the borrower fails to submit their declaration of intent at least 45 days before
the balloon maturity date, the borrower is technically ineligible for the
conditional refinancing. However, if the servicer chooses to approve the
refinance, they must calculate the new interest rate for the refinanced
mortgage loan using the method described for Fannie Mae’s allowable
eligibility exceptions.
The servicer is authorized to grant temporary forbearance to the borrower to
allow additional time for paying off the balloon mortgage loan or for
refinancing the mortgage loan, if the effective date of the refinancing will not
occur until after the end of the balloon maturity month. See also 3.2-02,
Determining Why the Balloon Payment Was Not Made for more information.

2.1-02, Evaluating In addition to the conditions described in the balloon mortgage loan
Conditions for instruments, the servicer must also verify the following criteria before a
Refinance (11/12/2014) balloon mortgage loan can be conditionally refinanced at maturity.

 Additional Fannie Mae Conditions for Refinance

The borrower must still own the property and occupy it as his or
her principal residence.
The property must not have any liens against it other than the
lien of the balloon mortgage loan, except for liens for taxes and
special assessments that are not yet due and payable.
Any other conditions outlined under a negotiated transaction
contract, if applicable.
Should requirements or conditions discussed in this manual conflict with

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those of a conventional mortgage insurer, the servicer must comply with the
insurer’s requirements when their restrictions are required to preserve
insurance coverage for the balloon mortgage loan. However, the mortgage
insurer cannot instruct the servicer to make the refinance offer subject to
conditions that are not set forth in the balloon mortgage loan instruments.

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2.1-03, Verifying If the borrower is exercising a conditional refinance option, the servicer must
Ownership, Property obtain a title report to verify:
Lien Status and the  ownership of the property,
Status of Any Other
Liens (11/12/2014)  property lien status, and
 the status of any other liens on the property.
NOTE: If an attorney's opinion of title was obtained when the balloon
mortgage loan originated, the servicer is authorized to obtain an updated
attorney's opinion instead of a title policy. The servicer is permitted to
charge the borrower for the cost of obtaining the title report, even if
refinancing does not take place.
The title report or the attorney's opinion must show that the property is free
from any of the following that may have arisen after the mortgage lien was
recorded and that could affect the title to the property:
 liens (except for the lien of the balloon mortgage loan and a lien
for taxes and special assessments that are not yet due and
payable);
 defects;
 encumbrances; or
 other adverse matters.
If the title report confirms there are no other liens, defects, encumbrances, or
other adverse matters – or the borrower pays off or otherwise removes them –
the servicer is authorized to approve the refinancing provided all of the other
eligibility conditions (or Fannie Mae’s authorized variances to them) are
satisfied.

2.1-04, Verifying The borrower must occupy the property as a principal residence or second
Occupancy home, and must provide proof of occupancy within 30 days of their declaration
(11/12/2014) of intent in order to qualify for the conditional refinancing of a balloon
mortgage loan. Proof of occupancy is evidenced by documentation, such as:
 a copy of a recent utility bill or a driver's license showing the
borrower as residing at the property address, or
 other evidence the servicer deems acceptable.
NOTE: If the borrower submits evidence of occupancy, but the servicer
does not believe the documents provide adequate proof, the servicer must
request additional information from the borrower.
Once the borrower has provided acceptable evidence of occupancy, the
servicer is authorized to approve the refinancing as long as all of the other
eligibility conditions (or Fannie Mae’s authorized variances to them) are
satisfied.

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2.1-05, Determining the If the balloon maturity date occurs while a bankruptcy action is pending, the
Impact of Bankruptcy servicer must:
(11/12/2014)  inform the bankruptcy attorney of that fact, and
 contact the mortgage insurer to confirm whether the bankruptcy
proceedings will have an effect on the mortgage insurance
coverage.
When the borrower satisfies Fannie Mae's payment history eligibility
condition, or the allowable payment history exception, he or she may still be
approved for the refinancing despite the bankruptcy filing, provided the terms
of the bankruptcy reorganization plan and Fannie Mae's other eligibility
conditions (or authorized variances) are satisfied. If applicable, the mortgage
insurer must also agree to the continuation of mortgage insurance beyond
the balloon maturity date. See also 2.2, Allowable Exceptions for Refinancing
a Balloon Mortgage Loan When It Is Technically Ineligible, for additional
information.

2.1-06, Verifying the In addition to confirming the borrower’s payment history meets the guidelines
Borrower’s Payment established in the balloon mortgage loan instrument, the servicer must also
History After the check recent account activity to ensure that any payments that came due after
Balloon Maturity the balloon maturity notice were made on time. If the borrower's payment
Notice (11/12/2014) record is still acceptable, the servicer is authorized to approve the refinancing
as long as all of the other eligibility conditions or allowable exceptions to them
are satisfied.

2.1-07, Quoting the The servicer is not required to quote the new interest rate to the borrower
New Interest Rate to before it has determined that the borrower satisfies all eligibility criteria or
the Borrower Fannie Mae’s authorized variances to these criteria.
(11/12/2014) Once the servicer decides that a refinance will be permitted, the new interest
rate must be calculated by using Fannie Mae's applicable required net yield
that was in effect for 60-day mandatory delivery actual/actual commitments
for 30-year conventional fixed-rate first lien mortgage loans on the receipt
date and time of the borrower's request. Fannie Mae’s required net yield can
be obtained from the following sources:
 Fannie Mae’s website,
 Telerate Systems,
 The Reuters Mortgage Service,
 The Bloomberg, and
 Knight-Ridder MoneyCenter Index.
The interest rate for the new refinance mortgage loan will be the sum of
Fannie Mae’s applicable required net yield in effect for the date and time that
the servicer received the borrower’s declaration of intent plus 0.5%, rounded
to the nearest 0.125%.

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Exhibit 1: Declaration of Intent (11/12/2014)

Declaration of Intent

A.Check one of the following boxes:

1. [ ] I will pay my mortgage in full on or before the balloon maturity date.

2. [ ] I intend to exercise the conditional refinancing option provided for in my Balloon Note Addendum and
Balloon Rider and I certify that I meet the ownership, occupancy, and lien status conditions contained in my
Balloon Note Addendum and Balloon Rider, or will meet those conditions within 30 days.

3. [ ] I cannot pay off my mortgage in full and I do not meet all of the eligibility conditions for the conditional
refinancing option provided for in my Balloon Note Addendum and Balloon Rider. However, I want to be
considered for the conditional refinancing option even though I do not qualify under the terms of my mortgage
loan documents.

B.If you checked Box #2 or #3 above, check each of the following boxes that apply to your
circumstances:

1. [ ] I currently own the property securing the balloon mortgage loan.

2. [ ] I currently use the property securing the balloon mortgage loan as my

a. [ ] Primary residence b. [ ] Second home c. [ ] Investment property

3. [ ] I do not have any lien, defect, encumbrances or adverse matter affecting the title to the property except
any that predate the lien of the balloon mortgage loan.

4. [ ] I do have another lien, defect, encumbrance or adverse matter affecting the title to the property that
postdates the lien for the balloon mortgage loan and

a. [ ] I will pay off or resolve the lien, defect, encumbrance, or adverse matter and provide you with
proof of such resolution within the next 30 days.
b. [ ] I cannot pay off or resolve the lien, defect, encumbrance, or adverse matter within the next 30
days.

5. [ ] If I directly pay my real estate taxes (i.e., no escrow deposit account is maintained for real estate taxes),
as of the date of this declaration my real estate tax payments are current.

C.By signing this Declaration of Intent, I certify and acknowledge the following:

1. I certify that all information provided in this declaration is true and correct as of the date set forth opposite
my signature and I acknowledge my understanding that any intentional or negligent misrepresentation of the
information contained in this statement may result in civil liability and/or criminal penalties. Additionally, false
and incorrect information will make any conditional offer to refinance the balloon mortgage null and void and I
will be required to pay off my mortgage loan in full not later than the balloon maturity date.

2. I understand and agree that, if I meet all of the eligibility conditions for the conditional refinance option, you
will obtain the Fannie Mae required net yield to calculate my new interest rate and monthly payment for the
refinancing as follows:

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[Insert your policy for determining when the borrower's declaration of Intent will be considered to have been
received.]

3. I understand and agree that, if I do not meet all of the eligibility conditions for the conditional refinance
option, I am not eligible for the refinancing under the original terms provided for in the Balloon Note Addendum
and Balloon Rider. I acknowledge that should you offer me refinancing, the costs of the transaction will be
higher than those permitted in the Balloon Note Addendum and Balloon Rider and that my new interest rate
does not have to be based on the Fannie Mae required net yield in effect on the date and time of the day you
receive this declaration.

Date _____________________________________

Borrower's Signature ________________________

Date _____________________________________

Borrower's Signature_________________________

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2.2, Allowable This Section contains the following Topics:

Exceptions for  2.2-01, Approving the Refinance Based on Transfers of Ownership
Refinancing a Balloon in Properties Securing Balloon Mortgage Loans
Mortgage Loan When It
Is Technically Ineligible  2.2-02, Approving a Request for Refinancing When the Borrower
No Longer Occupies the Property
 2.2-03, Approving a Request for Refinancing When the Borrower’s
Payment History is Unsatisfactory
 2.2-04, Approving a Request for Refinancing When the Property Is
Ineligible Due to Lien Status Issues, Including Delinquent Taxes

2.2-01, Approving the If the title report or attorney's opinion indicates that the borrower is no longer
Refinance Based on the owner of the property, the servicer must:
Transfers of  look into the circumstances behind the transfer of ownership and
Ownership in obtain copies of all documents that show the terms of the transfer,
Properties Securing and
Balloon Mortgage
 determine whether the transfer of ownership transaction is exempt
Loans (11/12/2014)
from the due-on-sale (or due-on-transfer) provision. See Servicing
Guide D1-4.2-02, Conventional Mortgage Loans That Include a
Due-on-Sale (or Due-on-Transfer) Provision for further information
on Transfers of Ownership.
If the transfer of ownership is exempt from the due-on-sale (or due-on-transfer)
provision, the servicer may approve the request provided all of the conditions
described in the following table are met.
 Conditions for Refinance
The new property owner must have at least a 12-month
payment history for the balloon mortgage loan by the effective
date of the refinancing.
The payments are current when the servicer reviews the
eligibility criteria.
No payments have been 30 days or more late in the 12-month
period ending with the effective date of the refinancing.
All of the other eligibility conditions or Fannie Mae's authorized
variances to them are satisfied.

2.2-02, Approving a When the borrower still owns the property, but uses it as an investment
Request for property, the servicer may still authorize the refinancing. However, there will be
Refinancing When the an additional LLPA assessed at the time of delivery. See Selling Guide B2.1.3-
Borrower No Longer 04 Refinanced Balloon Mortgages for additional information.
Occupies the Property When the servicer waives some or all of the LLPA in connection with the
(11/12/2014) refinancing of either a portfolio mortgage loan or MBS mortgage loan that is
being used as an investment property, the servicer must contact its Fannie
Mae Servicing Representative (see Servicing Guide F-4-03, List of Contacts)

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before delivering the new refinance mortgage loan to Fannie Mae.

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2.2-03, Approving a The servicer is authorized to approve a refinance even though the borrower
Request for does not satisfy Fannie Mae’s payment history eligibility conditions. If the
Refinancing When the borrower is unable to reinstate the mortgage loan or the loan has been referred
Borrower’s Payment to an attorney to initiate foreclosure proceedings, the servicer’s loss mitigation
History Is staff must determine whether an appropriate workout plan can be arranged for
Unsatisfactory the balloon mortgage loan.
(11/12/2014)

2.2-04, Approving a If the title report indicates there are defects, encumbrances, or adverse matters
Request for (other than a junior lien) that affect the title to the property, the servicer
Refinancing When the generally should not approve the refinancing unless the borrower cures the
Property Is Ineligible identified defects. However, the servicer is authorized to approve the
Due to Lien Status refinancing without the defects being cured if it determines:
Issues, Including  the defects will not negatively affect the value or marketability of
Delinquent Taxes the property,
(11/12/2014)  the title insurer is willing to insure the new refinance mortgage loan
as a first-lien despite any uncured title defects, and
 all other eligibility conditions (or Fannie Mae’s allowable exceptions
to them) are satisfied.
If a junior lienholder refuses to subordinate its lien, the servicer must determine
whether:
 the title insurer is willing to issue an endorsement to the current title
policy,
 the title insurer is willing to issue a new title policy that shows the
new refinance mortgage loan as a first lien, or
 the borrower is able to pay off the junior lien.
The following table provides the servicer with additional instructions depending
on whether the mortgage insurer will agree to continue coverage.
If the title insurer… Then the servicer…
will insure the new mortgage is authorized to approve the
as a first lien without an refinancing, as long as all other
executed subordination eligibility conditions (or Fannie Mae’s
agreement from the junior authorized variances to them) are
lienholder satisfied.

will not insure the new must contact the junior lienholder
mortgage as a first lien without and explain that foreclosure
an executed subordination proceedings for the balloon
agreement from the junior mortgage loan will be initiated unless
lienholder they agree to subordinate the debt of
the junior lien or the borrower pays
off the junior lien.

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If the junior lienholder refuses to

subordinate its debt, the servicer can
only approve the refinance only if the
borrower
 pays off the junior lien, and
 satisfies all other eligibility
conditions (or Fannie Mae’s
authorized variances to them).
If the borrower is unable to pay off
the junior lien and does not make
the balloon payment by the balloon
maturity date, (or by the date
specified in a forbearance
agreement that allows the payment
to be made after the balloon maturity
date), the servicer must initiate
foreclosure. However, the servicer’s
loss mitigation staff must consider a
loss mitigation alternative in lieu of a
foreclosure of the balloon mortgage
loan.
When the title report indicates that the real estate taxes for the current tax
period are delinquent (although they do not yet appear in the land records as a
lien against the property), the servicer must determine if the taxes have been
paid.
If the servicer does not maintain an escrow deposit account for the mortgage
loan, it must check with the borrower to verify whether the taxes have been
paid and, if not, advise him or her to pay them immediately.
The following table provides Fannie Mae’s requirements for approval of a
refinance for a mortgage loan with delinquent property taxes.
 Conditions for Refinance When Property Taxes Are
Delinquent
The delinquent taxes must immediately be brought current.
 When a borrower is unable to pay the delinquent property
taxes, the servicer must decide whether to pay the
delinquent taxes on the borrower's behalf in order to
proceed with the refinance.
 When a borrower is able to pay the delinquent property
taxes, the servicer must obtain proof of payment.
NOTE: A plan that obligates the borrower to pay the
delinquent taxes by making periodic payments to the taxing
authority is not acceptable evidence that the delinquent
taxes have been paid.

An escrow deposit account must be established from which

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all future real estate taxes must be paid.

The following table provides additional instructions depending on whether the
servicer is willing to advance funds to pay the delinquent taxes on the
borrower’s behalf.
If the servicer chooses… Then the servicer…
to advance the funds to pay the establish a repayment plan
delinquent taxes through which the borrower can
repay the advance before
approving the refinance provided
that all other eligibility conditions
(or Fannie Mae’s authorized
variances to them are satisfied).
not to advance the funds to pay  determine whether an
the delinquent taxes appropriate workout plan can
be considered in lieu of a
foreclosure of the balloon
mortgage loan, and
 initiate foreclosure proceedings
if the balloon payment is not
received by the balloon
maturity date (or by the date
specified in a forbearance
agreement that allows the
payment to be made after the
balloon maturity date).

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This Section contains the following Topics:

2.3, Processing an
Approved Refinance  2.3-01, Preparing the Refinance Package for Delivery to the
Transaction Borrower
 2.3-02, Establishing the Terms of the New Refinance Mortgage
Loan
 2.3-03, Obtaining Title Insurance Coverage

2.3-01, Preparing the The instruction letter the servicer sends with the refinance package must
Refinance Package for include all of the information described in the following table.
Delivery to the
Borrower (11/12/2014)  Instruction Letter Contents
All terms of the new refinance mortgage loan.
A disclosure that all scheduled monthly payment(s) that come
due before the effective date of the refinancing must be paid,
without becoming 30 days late, in order for the refinancing to
be finalized.
Specific instructions about the completion and execution of
the legal documents required to complete the refinancing.
NOTE: If the borrower must appear in person to sign the
documents, the servicer must indicate the date, time, and
address at which the borrower must appear.

The date by which the borrower must return the executed

legal documents and funds for the transaction costs, along
with the address to which the documents and funds must be
sent, if the transaction is being completed through the mail.
An itemized breakdown of the transaction costs. The servicer
also should indicate the forms of payment that will be
accepted (personal check, cashier's check, certified check,
etc.).
An explanation of the actions that must take place after the
servicer receives the executed documents and the payment
for the transaction costs from the borrower.
An explanation of the consequences of the borrower's failure
to return the executed documents and funds for the
transaction costs on time, or for failing to appear at the
closing if the servicer requires the borrower's personal
appearance. The servicer should also advise the borrower of
the process for notifying the servicer if he or she decides not
to go through with the refinancing.
The telephone number of the department in the servicer's
organization that the borrower can call with questions about
the refinancing package.

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Any additional instructions for approval under an authorized

variance/allowable exception.

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2.3-02, Establishing When the borrower qualifies for refinancing, the servicer must not make
the Terms of the New changes to the mortgage loan terms or the language in the mortgage loan
Refinance Mortgage instruments without the borrower’s consent. The only exception to this is if the
Loan (11/12/2014) changes are required by law or are needed to make a legal duty to the borrower
effective.
The servicer must also inform the borrower that he or she has the right to agree
to or reject any proposed changes for which borrower consent is required.
The new refinance mortgage loan must satisfy the terms and conditions listed in
the following table.

 New Refinance Mortgage Loan Terms and Conditions

If the servicer grants the borrower a temporary forbearance
period in which to pay off the original balloon mortgage loan
or to finalize a refinancing, the effective date for the
refinancing must be:
 the balloon maturity date,
 the first day of any of the six months preceding the balloon
maturity date, or
 the first day of the month following the balloon maturity
date.
The principal amount of the new mortgage loan must not
exceed the UPB of the outstanding balloon loan (on the
effective date of the refinance), plus accrued interest
(calculated at the interest rate of the balloon). The accrued
interest should cover the period from the LPI date for the
balloon mortgage loan up to, but not including, the effective
date of the refinancing.
The interest rate of the new refinance mortgage loan must not
be more than 500 basis points (5%) higher than the interest
rate of the original balloon mortgage loan. Should the interest
rate the servicer calculates for the new refinance mortgage
loan be more than 5% higher than the interest rate of the
original balloon mortgage loan, the servicer must re-
underwrite the borrower to determine that he or she satisfies
Fannie Mae’s current underwriting guidelines.
The monthly payments must be due on the first day of each
month, with the first payment due on the first day of the month
following the effective date of the refinancing.
A single original of the applicable legal documents for the
refinancing must be executed by all living borrowers,
endorsers, guarantors, sureties, grantors, and other parties
who signed the original balloon note and/or security
instrument. See Selling Guide B8-2-01 Special Purpose
Security Instruments and B8-3-01 Notes for Conventional

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Mortgages for additional details.

The new mortgage loan must continue to be covered by
conventional mortgage insurance if the original balloon
mortgage loan was insured, unless the coverage:
 has been terminated or cancelled, or
 can be cancelled in connection with the refinancing, under
Fannie Mae's applicable mortgage insurance termination
or cancellation provisions.
The security property must continue to be covered by
property insurance, and, if applicable, flood insurance that
satisfies Fannie Mae’s requirements.
A “co-grantor,” or any party who did not sign the original
balloon documents, but who currently has an interest in the
property, must sign documentation that subjects his or her
interest in the property to the lien that secures the new
refinance mortgage loan, even if he or she will not be
assuming liability for the debt as a “borrower.”

When the servicer receives the executed documents from the borrower, the
servicer must first verify that
 all borrowers signed their names exactly as they were typed on the
documents,
 all borrowers indicated the date of their signatures, and
 a notary public notarized and properly completed the
acknowledgment section of the document that will be recorded.

2.3-03, Obtaining Title As part of the conditional refinance, the servicer must obtain a new title
Insurance Coverage insurance policy or an endorsement to the existing policy that verifies the
(11/12/2014) mortgage lien is a first priority lien.
The title policy or endorsement must comply with Fannie Mae’s standard
coverage requirements and be issued by a title insurance company that meets
Fannie Mae’s requirements for acceptable title insurers, which are discussed in
the Selling Guide B7-2-02, Title Insurer Requirements, and B7-2-04, Special
Title Insurance Coverage Requirements. When multiple methods for providing
the required coverage are available, the servicer must always use the least
expensive method.

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2.4, Delivery and This Section contains the following Topics:

Documentation  2.4-01, Documenting the Refinanced Balloon Mortgage Loan
Requirements for
Balloon Mortgage  2.4-02, Loan Delivery Documents
Loans Refinanced at  2.4-03, Delivery Options for Balloon Mortgage Loans Refinanced at
Maturity Maturity

2.4-01, Documenting The following table describes the servicer’s options for documenting the
the Refinanced refinanced balloon mortgage loan.
Balloon Mortgage
Methods for Documenting the Refinancing of a
Loan (11/12/2014) Balloon Mortgage Loan
Option 1 Execute a new fixed-rate note, and execute and record
a new mortgage or deed of trust.
Option 2 Execute and record a Balloon Mortgage Refinancing
Instrument (Form 3269). This form combines a new
fixed-rate note and a refinance of the existing balloon
mortgage loan (or deed of trust) into a single document.
If the servicer uses this form to document the
refinancing of a balloon mortgage loan, it must
 acknowledge its acceptance on the last page
of the document, in the area marked
“Accepted by Lender,”
 forward the original executed document and
the applicable recordation fees to the
appropriate land records office, and
 establish follow-up procedures to ensure that
the land records office returns the original
recorded document.
If the servicer encounters difficulties in recording the
document because it is a novel form of documentation
for a refinancing transaction, it must notify its Fannie
Mae Servicing (see Servicing Guide F-4-03, List of
Contacts).
When the servicer receives a recorded Form 3269 back
from the land records office, it must endorse the
document “in blank” if it delivered the new refinance
mortgage note to Fannie Mae for purchase or
securitization. The servicer must prepare the
endorsement in accordance with the requirements for
endorsing mortgage notes that appear in the Selling
Guide, B8-3-04, Note Endorsement. The servicer must
then submit the original recorded document to Fannie
Mae or the applicable document custodian, and retain a

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copy of the recorded document in the individual loan file.

Option 3 If the secured property is located in New York, execute
and record Fannie Mae’s Consolidation, Extension, and
Modification Agreement (Form 3172).
NOTE: The servicer must ensure that the use of this
document for the refinancing of a balloon mortgage is
enforceable and consistent with customary practice in
that state.

NOTE: The servicer must not under any circumstances use Fannie Mae’s
Loan Modification Agreement (Form 3179) to document the conditional
refinancing of a balloon mortgage loan.

2.4-02, Loan Delivery Fannie Mae’s standard delivery documentation requirements apply to new
Documents refinance mortgage loans. See Selling Guide E-2–02, Required Custodial
(11/12/2014) Documents, for additional information.
The servicer must include all of the documents identified in the following table in
the individual mortgage loan file for a matured balloon mortgage loan.

 Documentation to Be Kept in the Balloon Mortgage Loan

File
Copies of all notifications sent to the borrower about the
balloon maturity and the conditional refinance option.
Correspondence received from the borrower.
Documents used to process or execute a refinancing of the
balloon mortgage loan, including disclosures, letters, or other
notices sent to the borrower.
The title report and evidence of title insurance.
Documentation used to verify a borrower's eligibility.
Evidence of the applicable net yield that is used to calculate
the borrower's new interest rate.
Evidence of the continuation of mortgage insurance
coverage, if applicable.

2.4-03, Delivery If the servicer decides to deliver the new refinance mortgage loan to Fannie
Options for Balloon Mae, it must do so within 60 days of the effective date of the refinancing, but
Mortgage Loans must not refinance the mortgage loan until six or fewer months before the
Refinanced at Maturity balloon maturity date. For additional information related to the delivery and
(11/12/2014) pricing of refinanced balloon mortgage loans, see Selling Guide B2-1.3-04,
Refinanced Balloon Mortgages.

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Chapter 3, Performing Final Accounting and Reporting for a Balloon Mortgage

Loan

In this Chapter

This Chapter contains the following Sections:

 3.1, Remitting and Reporting Payoff Proceeds

 3.2, Processing Alternatives to Mature Balloon Mortgage Loan
Refinance Transactions

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3.1, Remitting and This Section contains the following Topics:

Reporting Payoff  3.1-01, Collecting the Balloon Payment, Accrued Interest, and
Proceeds Unpaid Late Charges When the Borrower Exercises the
Refinance Option
 3.1-02, Determining and Collecting Allowable Transaction Costs
 3.1-03, Removing the Balloon Mortgage Loan from Fannie Mae’s
Accounting Records

3.1-01, Collecting the The final accounting for a matured balloon mortgage loan entails
Balloon Payment,
Accrued Interest, and  remitting the proceeds received to satisfy the balloon mortgage
Unpaid Late Charges loan (when they are received from the borrower or from the
(11/12/2014) proceeds of a refinancing),
 advancing funds for the balloon payment (as required by the
applicable remittance type), if the mortgage loan is not paid off or
refinanced on or before the balloon maturity date, and
 reporting a removal transaction through the Fannie Mae investor
reporting system when the mortgage loan is either paid off or
refinanced or otherwise removed from an MBS pool.

The specific procedures for the servicer’s final accounting differ based on
 whether the borrower elects to exercise the refinance option or to
otherwise pay off the balloon mortgage loan,
 the type of option exercised,
 whether a refinancing or payoff of the mortgage loan occurs
before, on, or after the balloon maturity date; and
 the remittance type for the mortgage loan.

For specific remitting instructions, the servicer must follow the procedures for
Remitting Payoff Proceeds that can be found in Fannie Mae’s Investor
Reporting Manual.

The balloon payment (including accrued interest and any unpaid late charges)
must be made on or before the balloon maturity date, unless the servicer
agrees to a forbearance period. If the mortgage loan is in an MBS pool issued
on or after June 1, 2007, the forbearance period cannot be extended beyond
the balloon maturity date. See also 3.2-03 Granting the Borrower Temporary
Forbearance to Allow Them to Make the Balloon Payment Post-Maturity for
additional information.
Funds for the balloon payment generally must be remitted to Fannie Mae
under its standard procedures for remitting payoffs for mortgage loans that
have the same remittance type as the balloon mortgage loan.

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3.1-02, Determining Transaction costs for borrowers who are approved for refinancing using one
and Collecting or more authorized variances to the eligibility conditions depend on whether
Allowable Transaction the borrower is considered an “eligible” borrower or an “ineligible” borrower.
Costs (11/12/2014) The following table provides additional information for transaction costs.

Transaction Cost Notes

Accrued but unpaid On the effective date of the refinancing,
interest the borrower will owe accrued interest on
the mortgage loan.
 The interest covers the period from
the LPI date up to, but not including,
the effective date of refinancing.
 If the balloon mortgage loan has a
conditional refinance option, the
borrower can choose to
o pay some or all of the accrued
interest directly, or
o have some or all of the
accrued interest added to the
UPB of the new refinance
mortgage loan.
Late charges On the effective date of the refinancing,
the borrower will owe any unpaid late
charges for the balloon mortgage loan.
 If the borrower cannot afford to pay
late charges directly, the servicer
must still finalize the refinance
transaction.
 The servicer is authorized to continue
to reflect these charges in its records
as a due and payable item for the new
refinance mortgage loan.
 If the borrower subsequently fails to
pay the past-due late charges, but the
past-due late charges are the only
delinquency, the servicer cannot
initiate foreclosure proceedings on the
new refinance mortgage loan.
Escrow accruals On the effective date of the refinancing,
the borrower will owe escrow accruals for
the mortgage loan.
 The accruals cover the period from
the LPI date to the effective date of
refinancing.
 The funds must be deposited into an

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escrow deposit account.

 The servicer is authorized to keep the
borrower’s existing escrow deposit
account in place for the new refinance
mortgage loan (if permitted by
applicable law).
Processing fees and title If the balloon mortgage was closed on
policy charges Fannie Mae’s standard balloon mortgage
loan documents, the servicer
 may charge an eligible borrower a
$250 processing fee for an approved
transaction, or
 may charge an ineligible borrower a
$350 processing fee to compensate
for the additional work involved with
approving the borrower under Fannie
Mae’s authorized variances process.
Both eligible and ineligible borrowers
may be charged for the costs of updating
the title insurance coverage, including:
 a title report, and either;
 an endorsement to existing title
insurance policy, or
 a new title insurance policy.

NOTE: When multiple methods for

providing required title insurance
coverage are available, the servicer
must use the least expensive method.

If the balloon mortgage documents were revised at origination to allow for

“reasonable fees and costs associated with exercising the refinance option,”
the servicer is authorized to charge an eligible borrower those fees and
charges specifically covered in the documents. If the fees and charges are
not itemized, the servicer can charge only those “reasonable” fees and
charges that are customarily charged in the jurisdiction for the particular type
of transaction. The following table describes such costs.
Cost Notes
Recordation costs The servicer may charge an eligible
borrower for recordation costs only if the
language in the balloon mortgage loan
documents was changed at origination to
allow the servicer to charge “reasonable
fees and costs” or “specific itemized
costs, including recordation costs” in
connection with the refinancing of a

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balloon mortgage.
If the borrower is ineligible, the servicer
is authorized to charge the borrower for
any necessary recordation costs,
including those for the recordation of a
subordination agreement.
Flood insurance When the servicer must obtain a flood
zone certification to determine if flood
insurance is required for the new
refinance mortgage loan, the servicer
may be able to charge the borrower for
 the certification, and
 the flood insurance premium, if
required.
To determine if such costs can be
charged to the borrower, the servicer
must consult Section 526 or the National
Flood Insurance Reform Act of 1984.
See 42 USC, Sections 4012(a) and (h).
Investment property LLPA The borrower who uses a property as an
investment property must be approved
using one of Fannie Mae’s authorized
variances. To offset the increased risk of
an investment property, the servicer is
authorized to charge this ineligible
borrower a 1.5% LLPA. This LLPA is
calculated against the original unpaid
balance of a new refinance mortgage
loan.

3.1-03, Removing the To remove a refinanced balloon mortgage loan from Fannie Mae’s accounting
Balloon Mortgage Loan records, the servicer must report an Action Code 60 through the Fannie Mae
from Fannie Mae’s investor reporting system by the second business day of the month following
Accounting Records the effective date of the refinancing and using the effective date of refinancing
(11/12/2014) as the related Action Date.
Also see the Investor Reporting Manual for more information.

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3.2, Processing This Section contains the following Topics:

Alternatives to Mature  3.2-01, When the Balloon Payment Is Not Received by the
Balloon Mortgage Loan Balloon Maturity Date
Refinance Transactions
 3.2-02, Determining Why the Balloon Payment Was Not Made
 3.2-03, Granting the Borrower Temporary Forbearance to Allow
Them to Make the Balloon Payment Post-Maturity

3.2-01, When the The following table describes the actions the servicer must take when the
Balloon Payment Is balloon payment is not received by the balloon maturity date, and varies
Not Received by the based on mortgage loan type.
Balloon Maturity Date
If the mortgage loan is… Then the servicer must…
(11/12/2014)
in an MBS pool  advance the balloon payment (P&I),
 remit it to Fannie Mae as a scheduled
payment on the applicable remittance
date for the month in which the
balloon maturity date occurs,
 submit a Loan Activity Report (LAR)
with Action Code 60 in the format
applicable for scheduled/scheduled
mortgage loans, and
 reflect the application of the balloon
payment in the security balance
reported for the balloon maturity
month.
a portfolio mortgage loan  advance scheduled interest until the
mortgage loan is paid off, refinanced,
or modified, (only if the loan is a
scheduled/actual remittance type);
and
 submit a LAR with an Action Code 60
in the format applicable for the
remittance type of the balloon
mortgage loan.

NOTE: The servicer must always determine whether a workout plan can
be developed to cure the default before initiating foreclosure proceedings.

3.2-02, Determining If a borrower does not elect to exercise the conditional refinance option for a
Why the Balloon balloon mortgage loan for any reason, he or she must pay off the mortgage
Payment Was Not loan by sending the servicer the amount of the required balloon payment on or
Made (11/12/2014) before the balloon maturity date. The servicer must make every effort to
contact the borrower during the first five business days after the balloon
maturity date to determine why the balloon payment was not made.

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The following table describes the additional actions the servicer must
complete by the tenth business day following the balloon maturity date.

If the servicer… Then the servicer must…

continues to receive regular hold the funds as unapplied and
monthly mortgage payments from notify the borrower that the full
the borrower balloon payment is due.
is not able to contact the determine whether a workout plan
borrower, or finds that the can be developed to cure the
borrower is unwilling to make the default, or initiate foreclosure
balloon payment proceedings.
determines that the borrower grant temporary forbearance,
intends to make the balloon agree to accept the balloon
payments payment and treat it as a
mortgage loan payoff.
finds that the borrower is unable grant temporary forbearance to
to make the balloon payment, but enable the borrower to complete
is eligible for a refinance, or can the refinance transaction.
be approved using Fannie Mae's
NOTE: The refinancing can be
allowable exceptions
made effective as of the
balloon maturity date as long
as the transaction can be
completed by the end of the
balloon maturity month.

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3.2-03, Granting the The servicer must not agree to extend a forbearance period offer to the
Borrower Temporary borrower to pay off or to refinance the mortgage loan beyond the balloon
Forbearance to Allow maturity date if the mortgage loan is in an MBS pool issued on or after June 1,
Them to Make the 2007.
Balloon Payment Post- Otherwise, the servicer is authorized to grant the borrower a forbearance (not
Maturity (11/12/2014) to exceed 90 days), without obtaining Fannie Mae’s prior approval, in the
following circumstances:
 the borrower provides proof of an executed sales contract to
show the property has been sold and is scheduled for settlement,
 the borrower provides proof of an unconditional loan commitment
to show other financing has been secured, or
 the servicer's other follow-up efforts have confirmed the need for
forbearance.

For a mortgage loan in an MBS pool issued before June 1, 2007, the
forbearance period must end no later than 90 days after the original balloon
maturity date. The servicer and the borrower must execute a written
forbearance agreement that includes all of the provisions cited in the following
table.

 The forbearance agreement provisions must include…

The granting of a forbearance that will enable the borrower to
either
 pay the full amount required to satisfy the balloon
mortgage loan, or
 complete the refinancing, even though the maturity
date has passed.
The accrual of interest on the balloon payment at the interest
rate of the balloon mortgage loan for the period from the date
of the borrower’s LPI up to, but not including:
 the date the balloon mortgage loan is paid off, or
 the effective date of the refinancing; if the
conditional refinance option is exercised.
An acknowledgment that the servicer is authorized to initiate
foreclosure proceedings immediately upon expiration of the
forbearance period if the refinancing has not been completed
or the full amount required to satisfy the balloon mortgage
loan has not been received.

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