9401.8: Bankruptcy cramdowns (04/11/18)

Owned by Kacey Olson
Nov 24, 2018
4 min read

© Freddie Mac Single-Family Seller Servicer Guide

When a Borrower files bankruptcy and the value of the property has declined to a value less than the amount owed on the Mortgage, a federal bankruptcy judge may, in some instances, order a division of the bankruptcy claim.

Under this process, the court divides the Mortgage debt into two claims: a secured claim in the amount of the current appraised value of the property and an unsecured claim for the remaining balance of the debt.

All of, or a portion of, the remaining unsecured claim balance is forgiven upon completion of the court-ordered repayment plan. This is known as a cramdown. Such cramdowns are not permitted on Mortgages secured by the Primary Residence of a Borrower who has filed a Chapter 13 bankruptcy.

(a) Notifying Freddie Mac of a proposed bankruptcy cramdown If the Servicer receives a proposed reorganization plan that includes a bankruptcy cramdown, the Servicer must advise its counsel to file an objection to the reorganization plan. In doing so, the Servicer must direct its counsel to assert that the plan may not modify the original Security Instrument and Note by means of a bankruptcy cramdown. Additionally, the Servicer must complete and send a copy of Form 1155, Bankruptcy Cramdown Pre-Confirmation Proposal of Settlement Terms, to notify Freddie Mac (see Directory 5) of the proposed plan within one Business Day of receiving the plan. Freddie Mac will review Form 1155 that the Servicer submits and make a decision to approve or make a counter-offer to the terms of the proposed plan. In some instances, Freddie Mac may request additional information in its review. Further, the Servicer must also notify Freddie Mac in the event of a scheduled Bankruptcy Cramdown by reporting a default action code of 35 (Bankruptcy Cramdown Scheduled).The Servicer must ensure that all terms of the plan are updated and correctly stated on each amendment, if applicable. If the reorganization plan includes a bankruptcy cramdown that is not in compliance with Chapter 9204, the Servicer must object and Freddie Mac will not agree to the terms of the reorganization plan. If the Servicer agrees to a reorganization plan without Freddie Mac's written approval, Freddie Mac reserves the right to exercise any remedies provided by the Guide and the other Purchase Documents. Refer to Chapter 3602 regarding repurchases, repurchase alternatives and other remedies.

(b) Notifying Freddie Mac of a confirmed bankruptcy cramdown If a reorganization plan has been confirmed, the Servicer must notify Freddie Mac of the confirmed plan within one Business Day of receiving the plan. In doing so, the Servicer must transmit the final terms of a confirmed bankruptcy cramdown to Freddie Mac via the "Court Mandated Modification" screen in Workout Prospector. By completing the "Court Mandated Modification" screen in Workout Prospector and submitting the final terms for settlement of a bankruptcy cramdown modification, the Servicer represents and warrants to Freddie Mac that it has completed the data entry in accordance with the instructions set forth in the Workout Prospector Users' Guide and that all information set forth on the "Court Mandated Modification" screen is accurate and in accordance with the terms of the confirmed plan. In submitting the plan terms via the "Court Mandated Modification" screen, the Servicer represents and warrants, among other things that:

  • The "Current UPB (pre-modification)" and the DDLPI entered on the "Court Mandated Modification" screen matches the UPB and DDLPI reported to Freddie Mac at the time of confirmation of the reorganization plan
  • The data entered on the "Court Mandated Modification" screen matches the final terms of the confirmed bankruptcy cramdown
  • The property value is either the BPO or appraisal, depending on what was required by the court

Once the data entered onto the "Court Mandated Modification" screen has been submitted to Freddie Mac, Servicers should monitor the Modification Pending Update report, accessible via the "Modifications" tile of the Servicer's Servicer Performance Profile (SPP) (see Exhibit 88, Servicing Tools). All Mortgages that are scheduled to be processed in Freddie Mac's systems will appear on this report in the SPP.

In addition, Freddie Mac will notify Servicers that the modification has been processed in Freddie Mac's systems via the Modification Status Overview report in the SPP. If a Servicer attempts to report a monthly loan-level transaction on a Mortgage based on the modified terms prior to the modification being processed in Freddie Mac's systems, the Servicer will not be able to successfully complete the transaction.

The Servicer must also ensure that proper EDR requirements are followed by reporting the code 69 (Bankruptcy Plan Confirmed) once the reorganization plan has been confirmed. Refer to Exhibit 82, Electronic Default Reporting Transmission Code List, for more information regarding EDR reporting requirements.

The Servicer is further required to notify Freddie Mac (see Directory 5), within one Business Day, if the Borrower becomes at least 30 days delinquent on a payment under the reorganization plan, or has otherwise breached the terms of the plan, the Servicer must indicate the type of default and include the Servicer's recommendation as to how to proceed. If the Borrower misses his or her second payment under the plan, unless otherwise instructed by Freddie Mac, the Servicer must instruct counsel to file for relief from the automatic stay.