General Information
Fannie Mae accepts delivery of fixed-rate mortgages that were converted from ARMs either by a legally executed modification agreement or under the provisions of the mortgage instrument.
Although the ARM does not have to have been originated on Fannie Mae uniform instruments or in accordance with Fannie Mae eligibility requirements for ARMs, the new fixed-rate mortgage that results from the conversion must meet Fannie Mae’s general eligibility and underwriting requirements for newly originated fixed-rate mortgages.
Converted ARMs Removed from ARM MBS Pools
This topic describes the circumstances under which a converted ARM that is removed from an ARM MBS pool as the result of its conversion to a fixed-rate mortgages may be redelivered to Fannie Mae.
If the mortgage is more than 12 months old at the time of the redelivery, and the lender specified a “market rate” post-conversion disposition option when the MBS pool was delivered to Fannie Mae, the mortgage must meet the same eligibility criteria as other converted ARMs (as discussed in “Eligibility Requirements for Converted ARMs” later in this topic).
If the lender specified a take-out post-conversion disposition option when the MBS pool was delivered to Fannie Mae, the lender does not need to requalify the borrower or verify that the mortgage satisfies Fannie Mae eligibility criteria.
Borrower Requalification Considerations for Fixed-Rate Mortgages Converted from ARMs and Redelivered Under “Market Rate” Post-Conversion Options
To qualify a borrower, lenders may use the original in-file documentation to evaluate the borrower’s financial ability, as long as the borrower is able to qualify for the mortgage based on either of the following:
- The mortgage interest rate in effect following the conversion and Fannie Mae’s current underwriting guidelines for a conventional fixed-rate mortgage, or
The mortgage interest rate in effect for the ARM when it was originated and the underwriting guidelines Fannie Mae used for ARMs at that time.
If the lender is unable to qualify a borrower under the previous options, the lender must requalify the borrower under Fannie Mae’s standard guidelines, including
- obtaining a new loan application,
- obtaining up-to-date credit reports,
- obtaining new employment and income verifications using the acceptable documentation,
- evaluating the borrower’s financial ability based on
- the mortgage interest rate in effect for the converted mortgage, and
- Fannie Mae’s current underwriting guidelines for a conventional fixed-rate mortgage.
Eligibility Requirements for Converted ARMs
The following specific eligibility requirements apply to converted ARMs that are delivered as either whole loans or MBS pool deliveries under the “market rate” post-conversion disposition option that were removed from an ARM MBS pool as the result of the conversion:
Requirements
- The ARM must have been at least 12 months old when the conversion occurred.
The converted mortgage must meet all of the eligibility criteria specified for mortgages that are more than one year old, unless Fannie Mae has specified that those criteria do not apply.
Note: The age of the mortgage is calculated from the date the ARM was originated. These specific eligibility criteria appear in B2-1.4-02, Mortgage Loan Eligibility.
- The mortgage loan must be current at the time of delivery
Note: To minimize processing delays, Fannie Mae considers a mortgage current if no more than 45 days have elapsed since the last paid installment date.
- The total of all interest rate increases or payment adjustments (including any combination of scheduled ARM interest rate changes and the increases scheduled under an interest rate buydown plan) that occurred after the ARM was originated must not have exceeded 2% (for the interest rate adjustment) or 15% (for the payment adjustment) if the lender qualifies the borrower on the basis of the mortgage interest rate that was in effect for the ARM when it was originated and the ARM underwriting guidelines Fannie Mae used at that time.
The modified mortgage must provide for a fixed-interest rate, level monthly payments, and amortization within the term of the original mortgage.
The title insurance policy or any endorsements to it are not impaired because of the option to convert to a fixed-rate mortgage or the actual conversion.
If the original title policy did not include the ARM endorsements currently required, the lender must indemnify Fannie Mae (as described in A2-1-03, Indemnification for Losses) against Fannie Mae losses that arise out of future title disputes related to the years in which the mortgage was an ARM.
The original loan amount of the ARM did not exceed Fannie Mae's current maximum mortgage amount limitation at the time Fannie Mae originally securitized the mortgage in an ARM MBS pool.
The greater of the original mortgage amount (at origination of the ARM, pre-conversion) or the current unpaid principal balance must be used to determine that the modified mortgage meets Fannie Mae requirements for maximum mortgage amount, LTV ratios, mortgage insurance coverage, and title insurance.
EXCEPTION: For the delivery of a converted ARM that Fannie Mae initially securitized in an ARM MBS pool,
- if Fannie Mae’s loan limits decreased between the time Fannie Mae initially securitized the ARM and the time the converted mortgage is redelivered to Fannie Mae after it is removed from the pool, the mortgage will still be acceptable to Fannie Mae even if the original mortgage balance exceeds the maximum mortgage amount that is in effect at the time of the redelivery.
BACKGROUND
This recognizes and acknowledges, respectively, the fact that
- the loan satisfied Fannie Mae requirements when it was securitized, and
the redelivery is a function of an administrative requirement Fannie Mae imposed for mortgage-backed security transactions, rather than the delivery of a different mortgage.
The LTV, CLTV, and HCLTV ratios at the time of conversion must not exceed the maximum allowable limits for fixed-rate mortgages, see the Standard ARM Plan Matrix.
If the ARM had negatively amortized, the LTV ratio (and the CLTV ratio and the HCLTV ratio) requirement must be satisfied as a result of
- Subsequent normal amortization
- The application of funds contributed by the borrower, or
- An increase in the value of the property.
Note: Increase in property value must be supported by a current appraisal.
Delivery Requirements and Security Instruments for ARMs Converted to Fixed-Rate Mortgages
Lenders must identify each converted ARM that was repurchased from an MBS pool because the conversion to fixed-rate option was exercised and subsequently redelivered to Fannie Mae as a whole loan delivery of a fixed-rate mortgage with SFC 036.
Lenders must include in the delivery package a Loan Modification Agreement (Form 3179) as evidence of the conversion to a fixed-rate mortgage
Note: A different (but substantially equivalent) modification agreement is also acceptable, as long as it includes an enforceable due-on-sale clause.
Modification Agreement Requirements
- Lenders must determine whether a modification agreement has to be recorded in each particular jurisdiction in order to preserve the lien position of the mortgage.
If recordation is required, lenders must submit the recorded instrument when it delivers the mortgage for purchase or securitization.
Lenders must obtain a title bring-down through the date of the recordation.
Mortgage Documents for Fixed-Rate Conversion Option
Execution of Fannie Mae’s standard riders or addenda that provide the terms for conversion to a fixed-rate mortgage or any other conversion option instrument is not required if:
- a convertibility provision was included in the adjustable-rate note, or
the lender previously agreed to a conversion modification despite the fact that the loan documents did not give the borrower an option to convert. In this instance, lenders must provide a modification agreement to document the conversion and obtain a title bring-down through the date of the recordation.
See Riders & Addenda for current standard riders or addenda.