Amends these Guides: Selling and Servicing. Reissuance of the Instructions for the Fannie Mae Single- Family MBS Master Trust Agreement

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1 Announcement 07-03R2 (Reissue) August 17, 2007 (Announcement was originally issued on March 1, 2007 and reissued on March 16, 2007) Amends these Guides: Selling and Servicing Reissuance of the Instructions for the Fannie Mae Single- Family MBS Master Trust Agreement Introduction In Announcement 06-27, dated December 29, 2006, Fannie Mae announced the introduction of a new Single-Family MBS Master Trust Agreement (the Trust Agreement ) that will be used for both fixed and adjustable-rate MBS pools. Also included in Announcement were servicing clarifications and requirements for MBS mortgage loans that will generally apply to all mortgage loans in a Fannie Mae MBS, regardless of whether the security is based on the current Fixed-Rate or ARM Trust Indenture (either or both, the Trust Indenture ) or the new Trust Agreement. Announcement 07-03, originally issued on March 1, 2007, provided for an effective date for the Trust Agreement and effective dates for the related selling and servicing enhancements. This Announcement (07-03R2) is a reissuance of the original Announcement and provides for additional clarifications and instruction of the selling and servicing requirements, and makes corrections to Attachments 1 3 of the original Announcement. This Announcement supersedes Announcement issued on December 29, 2006; Announcement issued on March 1, 2007; and Announcement (Reissue) issued on March 16, 2007 in their entirety. New text that has been incorporated into this Announcement is identified by a bar on the right-hand margin. Attachments 1-3 replace the Attachments 1-3 issued on March 16, Trust Agreement Effective Date We are pleased to announce that the effective date for the Trust Agreement was June 1, All MBS issued on or after June 1, 2007, is pooled under the Trust Agreement. Announcement 07-03R2 Page 1

2 A Trust Indenture or Trust Agreement is the legal document that contains the terms and conditions of an MBS trust and describes the roles of various parties. Our Trust Indenture has been in use for about 25 years and relies on the Servicing Guide for key servicing requirements. Accordingly, we have been working on a comprehensive review of our MBS documents and related servicing requirements. In general, the new Trust Agreement retains the basic approach of the Trust Indenture. Servicers will service MBS mortgage loans to Fannie Mae specifications, which delegate certain administrative decisions to the servicer. The new Trust Agreement accomplishes several objectives: It incorporates key servicing requirements; It more clearly describes Fannie Mae s roles as issuer, master servicer, guarantor, and trustee; It clarifies the servicer s role as the Direct Servicer; and Overall, it better reflects current market practices. The executed Trust Agreement is available on Selling and Servicing Requirements We are clarifying certain Selling- and Servicing-related policies to ensure that all mortgage loans in MBS pools are serviced in a consistent manner. This Announcement addresses the following changes and clarifications: Eligible Custodial Depositories Funds in Custodial Accounts Consolidated Drafting Accounts Mortgage Loans Purchased for Cash and Subsequently Pooled Full Payoffs Forbearance Repayment Plans Disaster Relief Foreclosure Mortgage Loans Delinquent for 24 Consecutive Months Claim Settlements for MBS Regular Servicing Option Pool Mortgages Delinquency Status and Reason Codes Due-on-Transfer Clauses ARM Notes with Provision to Change the Minimum or Maximum Interest Rate or the Mortgage Margin Following an Assumption Mortgage Loan Modifications Mandatory Repurchase of Certain MBS Pool Mortgage Loans Roles of Fannie Mae and Servicers Announcement 07-03R2 Page 2

3 Eligible Custodial Depositories Servicing Guide Part IX: Custodial and Remittance Accounting; Chapter 1, Custodial Accounting; Section 103, Eligible Custodial Depositories. Principal and interest (P&I) payments received by our servicers in connection with mortgage loans in our MBS are held for the benefit of the MBS investors; funds collected by the servicer for payment of taxes and insurance premiums belong to the borrower until payment is made. These funds are not assets of Fannie Mae or the servicer. Consequently, Fannie Mae requires that these custodial funds be held in financial institutions that meet certain requirements, that servicers deposit custodial funds in custodial accounts immediately upon receipt, and that these funds not be commingled with the servicer s own funds or those of any other investor. We have revised our requirements for custodial depositories effective June 1, 2007, as noted below. MBS custodial accounts may be held in a Federal Reserve Bank, a Federal Home Loan Bank, or another depository institution provided that such other depository institution meets the following requirements: 1. The accounts must be insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund; 2. The depository institution must be rated as well capitalized by its federal or state regulator; and 3. The depository institution must have a financial rating that meets at least one of the following criteria: Institutions with assets of $30 billion or more must have either: a. a short-term issuer rating by Standard & Poor s Inc. (S&P) of A-3 (or better), or if no short-term issuer rating is available by S&P, a long-term issuer rating of BBB- (or better) by S&P; or b. a short-term bank deposit rating by Moody s Investors Service (Moody s) of P-3 (or better), or if no short-term bank deposit rating is available by Moody s, a long-term bank deposit rating of Baa3 (or better) by Moody s. Institutions with assets of less than $30 billion must have a financial rating of either: a. 125 (or better) by IDC Financial Publishing, Inc. (IDC) or b. C+ (or better) by Lace Financial Corporation (LACE). If a depository institution satisfies the standards in (1) and (2) and has a rating that meets or exceeds at least one of the applicable ratings specified in (3) above, it will be an eligible depository even if it is rated by another organization below the minimum level specified in (3). These custodial depository requirements apply whenever a servicer is servicing mortgages for Fannie Mae that include scheduled/scheduled (whether scheduled/scheduled MBS Announcement 07-03R2 Page 3

4 or scheduled/scheduled Cash) remittance types (or when the servicer is servicing scheduled/scheduled and any other remittance types). A servicer servicing scheduled/scheduled mortgage loans that has custodial funds in a depository institution that does not meet our eligible custodial depository requirements will have to move the custodial funds to an eligible depository institution. The time period during which the servicer must transfer the accounts to a Federal Reserve Bank, a Federal Home Loan Bank or an acceptably rated depository institution will vary depending on our assessment of the risk, but in no event may the transfer be made more than 120 days after the date on which the rating that does not meet the minimum ratings requirement is first published. However, if the institution receives an acceptable rating during this 120-day period we may permit the servicer to retain the accounts at the existing depository. Once we require that a servicer move custodial funds from a depository that fails our ratings requirements, that institution will not be an eligible depository for Fannie Mae custodial funds until it has maintained an acceptable rating for at least four consecutive quarters after failing. A servicer that is only servicing mortgage loans for Fannie Mae with either actual/actual or scheduled/actual remittance types (or both) must keep its custodial accounts in a Federal Reserve Bank, a Federal Home Loan Bank, or a depository institution that satisfies the standards in (1) and (2) above, and has a financial rating of either: a. 75 (or better) by IDC or b. C (or better) by LACE. To determine the continued eligibility of a depository institution, a servicer must monitor these ratings based on the frequency used by the ratings agency for publishing and updating rating changes. As always, we may require that funds be transferred out of a depository institution even if the institution satisfies our financial rating criteria or more quickly than indicated above if we decide that it is in our best interests or the interests of MBS investors to do so. Funds in Custodial Accounts Servicing Guide Part IX: Custodial and Remittance Accounting; Chapter 1, Custodial Accounting; Section 101, Custodial Bank Accounts; Section , P&I Accounts; Section , T&I Accounts; Section , Interest-Bearing Accounts; Section , Subservicer Custodial Accounts; and Section 102, Clearing Accounts. Servicers are required to hold payments of principal and interest on all mortgage loans serviced for Fannie Mae in custodial accounts prior to remittance to Fannie Mae. Investment of P&I custodial funds is not permitted. We are reminding all servicers that: A servicer must maintain separate custodial accounts for P&I funds for each remittance type under which the servicer reports. Funds in these accounts may not be commingled with the servicer s general corporate funds or with funds held by the servicer for any other investors, although all Fannie Mae MBS P&I funds for a specific remittance type may be held in a common account, regardless of the number of MBS pools to which the funds pertain. This ensures that P&I funds for mortgage loans in MBS pools are not Announcement 07-03R2 Page 4

5 commingled with P&I funds for our portfolio mortgage loans or with other funds that the servicer collects; Taxes and insurance (T&I) escrow funds for all remittance types for Fannie Mae mortgage loans may be commingled in the same custodial account, although a servicer may establish separate accounts for T&I payments for each remittance type if it chooses to do so. Funds in these accounts may not be commingled with the servicer s general corporate funds or with funds held by the servicer for other investors; P&I and T&I funds cannot be commingled in the same custodial account, regardless of the remittance type; A servicer must deposit all funds related to P&I payments, such as prepayments, repurchases, and liquidations for an MBS mortgage loan into a P&I custodial account as quickly as possible, but no later than one business day after they are received; Any funds received that are not yet allocable to P&I payments and are not T&I funds must be held in a T&I custodial account prior to passing such funds through as payments on the loan. For example, good faith payments in a work-out that previously would have been held in suspense or unapplied funds must be held in a T&I custodial account pending application to the borrower s debt; Any excess servicing fee that has been securitized must be deposited in an MBS P&I custodial account as quickly as possible, but no later than one business day after they are received. Consolidated Drafting Accounts Servicing Guide Part IX: Custodial and Remittance Accounting; Chapter 1, Custodial Accounting; Section 105: Establishing Drafting Arrangements. We currently permit a servicer with multiple P&I custodial accounts to use a consolidated drafting account in order to facilitate operational efficiencies. However, effective January 1, 2008, a servicer using a consolidated drafting account that includes Scheduled/Scheduled MBS pool mortgage loans will need to designate a separate account as its drafting account for that remittance type only. This means that all monies due for the Scheduled/Scheduled MBS pool mortgage loan remittance type must be moved from the various MBS P&I custodial accounts (if the servicer has chosen to use multiple custodial accounts) to a single designated MBS pool consolidated drafting account prior to the date we draft the account. This Scheduled/Scheduled MBS P&I custodial drafting account may be used as its drafting account for mortgage loans with this remittance type only. A servicer may designate a separate consolidated drafting account for all other remittance types (Scheduled/Scheduled Portfolio, Scheduled/Actual, or Actual/Actual). If a servicer establishes or designates an existing P&I custodial account as a special drafting account, the servicer must advise us of the special drafting account by submitting a Letter of Authorization for P&I Custodial Account (Form 1013). Additionally, to designate a drafting arrangement for a consolidated drafting account, the servicer must fulfill all requirements related to establishing drafting arrangements, including the execution of the Authorization Announcement 07-03R2 Page 5

6 for Automatic Transfer of Funds (Form 1072). The servicer may not deposit into the consolidated drafting accounts funds that are collected on behalf of other investors. Now, and in the future, all consolidated drafting accounts must meet our requirements for custodial accounts. Prior to January 1, 2008, a servicer using a consolidated drafting account which commingles funds for more than one type of principal and interest remittance (whether Scheduled/Scheduled MBS, Scheduled/Scheduled Portfolio, Scheduled/Actual, and/or Actual/Actual) must ensure that the funds placed into the consolidated drafting account are deposited no earlier than the business day prior to the day the funds will be drafted from the account. Servicers using a consolidated drafting account which commingles funds for multiple types of principal and interest remittance types must establish the one consolidated drafting account for the Scheduled/Scheduled MBS pool mortgage remittance type we are requiring before the January 1, 2008, effective date. Mortgage Loans Purchased for Cash and Subsequently Pooled ( Pooled from Portfolio ) Selling and Servicing Guides Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section 202, Servicer s Basic Duties and Responsibilities. Servicing Guide Part VII: Delinquent Mortgages; Chapter 5, Loss Mitigation Alternatives; Section , Modifying Government Mortgages; and Section , Modifying Conventional Mortgages. From time to time, we securitize mortgage loans that we purchased for our investment portfolio (cash deliveries). All mortgage loans that have been (or may be in the future) sold to us for cash and subsequently securitized into MBS pools (referred to herein as Pooled from Portfolio or PFP mortgage loans) have to be serviced as MBS mortgage loans. This requirement does not change a servicer s existing reporting and remitting requirements for these mortgage loans nor does it change the custodial depository requirements for the applicable remittance type under which these mortgage loans are serviced. To provide servicers with the tools they need to comply with this requirement, in December 2006, we began notifying servicers of all mortgage loans that they are currently servicing for Fannie Mae that were delivered for cash and that were subsequently pooled into an MBS. We continue to provide this notification and we have asked servicers to use their best efforts to code all of these mortgages in their records as MBS mortgage loans as soon as possible and service them in accordance with the provisions of the Servicing Guide applicable to MBS mortgage loans. In the initial release of Announcement 07-03, we stated that effective June 1, 2007 all servicers with these mortgage loans must have a process in place to code all of these mortgage loans in their records as MBS and must service these mortgage loans in accordance with the provisions of the Servicing Guide applicable to MBS mortgage loans. In addition, as of May 1, 2007, Fannie Mae posted the listing of mortgage loans that the servicer is currently servicing for Fannie Mae that were delivered for cash and that were subsequently pooled into an MBS through the Servicer s Reconciliation Facility (SURF) for the servicer to download. SURF is a Web-based loan-level information application available on Announcement 07-03R2 Page 6

7 Through SURF, there will be three PFP-related reports. These reports have been revised and are available for a servicer to download: PFP New Issues (Mortgage loans being serviced as cash mortgage loans that have been recently pooled into MBS) This report will be available by the third calendar day of the month (Attachment 1). PFP Reclassified (mortgage loans reclassified into Fannie Mae s portfolio - removed from an MBS pool) - This report will be available by the 28th calendar day of the month (Attachment 2). PFP Book (All active PFP mortgage loans that a servicer is servicing for Fannie Mae) This report will be available on the last business day of each month and will represent a new PFP Book that incorporates all the month s activity (e.g., PFP mortgage loans that are in newly-issued MBS pools will be added; reclassified or transferred PFP mortgage loans will be deleted; and PFP mortgage loans transferred into a servicer s servicing portfolio will be identified.) (Attachment 3). In order to ensure compliance with our requirements regarding MBS mortgage loans, we revoked all prior delegations of authority with respect to completing loan modifications for these mortgage loans in December A servicer of a Fannie Mae mortgage loan that has been pooled from portfolio must submit all loan modification requests to us through the Home Saver Solutions Network (HSSN) for consideration before executing the workout option. We will ensure that the mortgage loan is appropriately removed from the MBS pool (if the loan meets the applicable criteria for removal from the MBS pool) before providing our approval. We intend to delegate authority with respect to loan modification actions after loans are removed from MBS pools for these mortgage loans beginning in September 2007 and, at that time, previously delegated servicers will be issued revised delegation of authority letters. Full Payoffs Servicing Guide Part VI: Loan Removals or Reclassifications; Chapter 1, Payments-in-Full; Section , Scheduled/Scheduled Remittance Types. The Servicing Guide provides that when a full payoff (or receipt of funds from the borrower) takes place on the first business day of a month, the mortgage loan can be considered as being paid off either as of the last day of the previous month, since that is the date through which the borrower will be charged interest, or in the month in which payment is received. We are changing this requirement to ensure consistent treatment of the processing of payoffs for all scheduled/scheduled remittance type mortgage loans that a servicer is servicing for Fannie Mae as a servicer or subservicer. Each servicer must elect whether it will consider any full payoff received on the first business day of a month as though it was received in the prior calendar month (rather than on the day of actual receipt) or whether it will consider any full payoff received on the first business day of a month as being received in the calendar month in which receipt actually occurs. If a servicer elects to pass through Announcement 07-03R2 Page 7

8 first business day payoffs as though received in the prior calendar month, it must continue to do so for all scheduled/scheduled remittance type mortgage loans serviced for Fannie Mae. Once such an election is made, the servicer must continue to follow the method selected for all loans of that remittance type. The only exception to this rule is that if a servicer elects to use the actual date of receipt to determine the pass-through date, it may continue that practice or it may later make a one-time election to consider such first business day payoffs as being received on the last day of the preceding calendar month. Payoffs on any mortgage loans that are subject to a servicing transfer will be serviced in accordance with the practice of the applicable transferee servicer for processing payoffs received on the first business day of a month. A subservicer will be required to handle first business day of the month payoffs in accordance with the subservicer s election, rather than that of the servicer. This requirement will apply to all scheduled/scheduled MBS and scheduled/scheduled cash remittance type mortgage loans that a servicer is servicing for Fannie Mae now and in the future. On or before June 1, 2007, all servicers will be required to notify us of their first day of the month payoff election. A servicer must submit its election by to the following address: firstbusinessday_payoffelection@fanniemae.com. This address should also be used for those servicers who initially elect to treat any full payoff received on the first business day of a month as being received in the calendar month in which receipt actually occurs and subsequently make a one-time election to consider such first business day payoffs as being received on the last business day of the preceding calendar month. In its e- mail notification, a servicer must indicate its first of the month payoff election and provide the five digit seller/servicer number(s) for each scheduled/scheduled MBS and scheduled/scheduled Cash remittance type mortgage loans that it is servicing for Fannie Mae as a master servicer or subservicer (if applicable). We will be updating the Lender Record Information (Fannie Mae Form 582) to require annual certification that a servicer complies with its first day of the month payoff election. If a servicer later begins to service loans on a scheduled/scheduled remittance type not currently serviced by the servicer, the servicer must promptly file a first business day of the month payoff election. Forbearance Servicing Guide Part III: General Servicing Functions; Chapter 8, Balloon Mortgage Maturity; Section , Temporary Forbearance; and Part VII: Delinquent Mortgages; Chapter 3, Special Relief Measures; Section 302, Special Forbearance. All mortgage loans in MBS pools may be granted forbearance (a temporary suspension or reduction in borrower payments) for no more than four consecutive months (but in no event past the last scheduled payment date of the mortgage loan). We will no longer use the term special forbearance. For a mortgage loan to remain in an MBS pool after four consecutive months of forbearance, the mortgage loan must have become current or the servicer must report a Delinquency Status Code in HSSN to indicate that the loan status has appropriately changed during or at the end of the four-month forbearance period (e.g., Code 12 - a repayment plan, Code - 31 in probate, Code 32 - under military indulgence under the provisions of the Servicemembers Civil Relief Act or applicable state law, Code 43 - referred Announcement 07-03R2 Page 8

9 to foreclosure, or Codes 59, 65, 66, and 67 - in bankruptcy), or that the servicer is working with the borrower on a loss mitigation relief option (e.g., Code 17 - preforeclosure sale, Code 26 - refinance, Code 27 - assumption, Code 28 - mortgage modification - but the mortgage loan must be removed from the MBS pool before the modification is executed, Code 44 - awaiting the completion of a deed-in-lieu), or the servicer has commenced or resumed collection activities leading to foreclosure proceedings after the forbearance (e.g., Code 42 delinquent no action). A mortgage loan that continues to have a forbearance code indicating that the loan is in forbearance for five consecutive months or without a delinquency status code in the fifth month after the mortgage loan was reported in forbearance for four consecutive months will be removed from the MBS pool. Beginning on June 11, 2007 and continuing on approximately the 11th calendar day of each month, Fannie Mae has been posting on HSSN a listing of the MBS mortgage loans that have been reported to us with a delinquency status code of 09 forbearance - for four consecutive months and that we intend to reclassify. Through HSSN, the servicer is required to deselect those mortgage loans that are current or will be reported with a delinquency status code indicating that the loan is no longer in forbearance based on the real-time information that the servicer has for the mortgage loan. The servicer must make the deselection by the 16 th day of the month in which it is notified. Fannie Mae will remove from an MBS pool all PFP mortgage loans that are not deselected for a permitted reason by the monthly reclass date which occurs on or about the 18th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a PFP mortgage loan by reviewing the PFP Reclass report posted on SURF. Fannie Mae will remove from an MBS pool all other scheduled/scheduled MBS mortgage loans that are not deselected for a permitted reason by the stated, monthly reclass date, as defined in the annual Asset Development Management Reporting and Remitting Calendar. The scheduled/scheduled MBS reclass date occurs on or about the 25th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a loan by reviewing the Purchase Advice that is posted on SURF. All MBS mortgage loans (regular servicing and special servicing option mortgage loans) removed from MBS pools will become actual/actual remittance type mortgages that we will hold in our portfolio, identifying them by the Fannie Mae loan number, the servicer s loan number, and the property address. A servicer remains responsible for the recourse obligation on a regular servicing option mortgage that is removed from the pool and held in our portfolio. Additionally, a servicer must repurchase a regular servicing option mortgage that we hold in our portfolio before the servicer agrees to a modification that would affect the term, interest rate, unpaid principal balance, or other major characteristic of the mortgage loan. The posting on HSSN on June 11, 2007 was made to facilitate a servicer becoming familiar with the new reclassification module on HSSN. Fannie Mae will actually begin reclassifying mortgage loans in July based on the information provided to servicers on July 11. Announcement 07-03R2 Page 9

10 Repayment Plans Servicing Guide Part III: General Servicing; Chapter 1, Mortgage Payments; Section , Repayment Plans; and Part VII: Delinquent Mortgages; Chapter 3, Special Relief Measures; Section 303, Repayment Plan. Repayment plans on all MBS mortgage loans will have to provide for all delinquent or past due payments of principal and interest to be brought current within a period of not more than 18 months from the first day of the month in which the adjusted payment schedule begins (including any month in which no repayment amount is to be paid). We are also reminding servicers that when the delinquency involves fewer than three monthly payments, repayment plans may be oral agreements. However, the servicer should document (and keep in the mortgage files it maintains for Fannie Mae) the terms of the agreement with the borrower. Formal written agreements are required if the delinquency is three months or longer. Each agreement should clearly state the amount and due date of each payment, and the date by which the total delinquency is scheduled to be cured. While we anticipate that mortgage loans with repayment plans with terms of 18 months will be rare, we are instituting procedures to ensure that no repayment plan will be reported to us for periods in excess of 18 months. Beginning on June 11, 2007 and continuing on approximately the 11th calendar day of each month, Fannie Mae has been posting on HSSN a listing of the MBS mortgage loans that have been reported to us with a delinquency status code of 12 repayment plan - for 18 consecutive months and which we intend to reclassify in the month of notification. Through HSSN, the servicer is required to deselect those loans that will become current or will be reported with a delinquency status code indicating that the loan is no longer under a repayment plan. The servicer must make the deselection by the 16th day of the month in which it is notified. Fannie Mae will remove from an MBS pool all PFP mortgage loans that are not deselected for a permitted reason by the monthly reclass date which occurs on or about the 18th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a PFP mortgage loan by reviewing the PFP Reclass report posted on SURF. Fannie Mae will remove from an MBS pool all other scheduled/scheduled MBS mortgage loans that are not deselected for a permitted reason by the stated monthly reclass date, as defined in the annual Asset Development Management Reporting and Remitting Calendar. The scheduled/scheduled MBS reclass date occurs on or about the 25th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a loan by reviewing the Purchase Advice that is posted on SURF. All MBS mortgage loans (regular servicing and special servicing option mortgage loans) removed from MBS pools will become actual/actual remittance type mortgages that we will hold in our portfolio, identifying them by the Fannie Mae loan number, the servicer s loan number, and the property address. A servicer remains responsible for the recourse obligation on a regular servicing option mortgage that is removed from the pool and held in our portfolio. Additionally, a servicer must repurchase a regular servicing option mortgage that we hold in our portfolio before the servicer agrees to a modification that would affect Announcement 07-03R2 Page 10

11 the term, interest rate, unpaid principal balance, or other major characteristic of the mortgage loan. The posting on HSSN on June 11, 2007 was made to facilitate a servicer becoming familiar with the new repayment plan module on HSSN. Fannie Mae will actually begin reclassifying mortgage loans in July based on the information provided to servicers on July 11. Disaster Relief Servicing Guide Part III: General Servicing Functions; Chapter 11, Assistance for Natural Disasters; Section 1101, Evaluating the Damage; and Section 1102, Special Relief Measures. Under the Trust Agreement, Fannie Mae will have the option to remove mortgage loans from MBS pools at any time, regardless of their delinquency status, if the property has been damaged by a disaster, terrorist attack, or other natural or manmade catastrophe not caused by the borrower, which may cause a reduction in value of the mortgage property of at least five percent. A servicer will be able to submit individual requests through HSSN for us to consider removal of a mortgage loan from an MBS pool to facilitate a loss mitigation workout. Fannie Mae will provide guidance and direction on a case-by-case basis when a disaster impacts multiple mortgage loans that we own or securitize. The option to remove mortgage loans out of MBS pools at any time, regardless of their delinquency status, if the property has been damaged by a disaster, terrorist attack, or other natural or manmade catastrophe not caused by the borrower which causes a reduction in value of at least five percent, will not apply to mortgage loans pooled under the current Trust Indenture (MBS issued before June 1, 2007). Foreclosure Servicing Guide Part VIII: Foreclosures, Conveyances, and Claims; Chapter 1, Foreclosures; Section , Conventional and RHS First Mortgages. The Servicing Guide requires foreclosure to begin for most loans within 105 days of delinquency, but permits postponements to facilitate loss mitigation. It does not provide a specific outside date by which foreclosure must begin. Fannie Mae will now require that all delinquent mortgage loans in MBS pools must be referred for foreclosure no later than the 210th day after the mortgage loan becomes delinquent or as soon thereafter as applicable law permits. Foreclosure is considered to have begun on the date when the servicer refers the matter to the foreclosure attorney or trustee. The servicer must maintain a record of the date of the referral in the mortgage loan file. We will institute the following procedures to ensure that all delinquent mortgage loans in MBS pools are referred for foreclosure proceedings no later than the 210th day after commencement of delinquency or as soon thereafter as applicable law permits. Beginning on June 11, 2007 and continuing on approximately the 11th calendar day of each month, Fannie Mae will post a listing on HSSN of all MBS mortgage loans that have been delinquent during Announcement 07-03R2 Page 11

12 a period of 180 consecutive days, are at least four consecutive monthly payments (or 8 consecutive biweekly payments) past due, and were reported to Fannie Mae with no delinquency status code, or an invalid status code (e.g., status code of 00, or 99), or a code of 29 Charge-off, or a code of 42 Delinquent, No Action. Upon our posting of this listing, a servicer must review the report and correct any errors by the next reporting cycle. Any delinquent MBS mortgage loan that has been delinquent during a period of 210 consecutive days, is at least four consecutive monthly payments (or 8 consecutive biweekly payments) past due, and is reported to Fannie Mae with no delinquency status code, or an invalid status code (e.g., status code of 00 or 99), or a code of 29 Charge-off, or a code of 42 Delinquent, No Action will be removed from the MBS pool. Fannie Mae will remove from an MBS pool all PFP mortgage loans that are not deselected for a permitted reason by the monthly reclass date which occurs on or about the 18th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a PFP mortgage loan by reviewing the PFP Reclass report posted on SURF. Fannie Mae will remove from an MBS pool all other MBS scheduled/scheduled mortgage loans that are not deselected by the stated monthly reclass date, as defined in the annual Asset Development Management Reporting and Remitting Calendar. The MBS scheduled/scheduled reclass date occurs on or about the 25th calendar day of the month. Servicers can confirm that Fannie Mae has reclassed a loan by reviewing the Purchase Advice that is posted on SURF. All MBS mortgage loans (regular servicing and special servicing option mortgage loans) removed from MBS pools will become actual/actual remittance type mortgages that we will hold in our portfolio, identifying them by Fannie Mae loan number, the servicer s loan number, and the property address. A servicer remains responsible for the recourse obligation on a regular servicing option mortgage that is removed from the pool and held in our portfolio. Additionally, a servicer must repurchase a regular servicing option mortgage that we hold in our portfolio before the servicer agrees to a modification that would affect the term, interest rate, unpaid principal balance, or other major characteristic of the mortgage loan. The posting on HSSN on June 11, 2007 will be made to facilitate a servicer becoming familiar with the new foreclosure module on HSSN. Fannie Mae will actually begin reclassifying mortgage loans in July based on the information provided to servicers on July 11. Mortgage Loans Delinquent for 24 Consecutive Months Selling and Servicing Guides Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section 208, Repurchase or Mortgage Substitution Requirements; and Section , Lender s (Servicer s) Mandatory Repurchase of Certain MBS Pool Mortgages. Selling Guide Part II: Delivery Options; Chapter 2, MBS Pool Deliveries; Section 201, Servicing Options. Servicers are reminded that they must repurchase from an MBS pool any mortgage that has 24 consecutive payments past due. This repurchase requirement applies to all delinquent Announcement 07-03R2 Page 12

13 MBS pool mortgages, regardless of the servicing option or recourse arrangement under which they were purchased or securitized. A special servicing option delinquent MBS pool mortgage normally will be removed from its MBS pool much earlier pursuant to our procedures for automatic reclassification of delinquent MBS mortgage loans to our portfolio. If a special servicing option delinquent MBS pool mortgage becomes 24 consecutive payments past due, Fannie Mae will automatically reclassify the delinquent MBS mortgage loans to our portfolio. In order to facilitate timely removal of regular servicing option delinquent MBS pool mortgages that have 24 consecutive payments past due, beginning in June 2007, we provided to each servicer an advance listing through HSSN of all regular servicing option delinquent MBS pool mortgages that have 22 consecutive payments past due. Regular servicing option mortgages that were removed from the MBS pools to avert a forbearance, repayment plan, or foreclosure time line violation that become 22 consecutive payments past due have also be included in this advance listing. Because the servicer will no longer be obligated to make delinquency advances after the reclassification, if the reclassed loan is under a regular servicing option, the servicer is obligated to repurchase the loan. This downloadable report on HSSN will be available by the 11 th calendar day of each month. The servicer must repurchase any regular servicing option mortgage loan that has 24 consecutive payments past due, and the repurchase must be reported to Fannie Mae as activity occurring in the month that contains the due date of the 24th consecutive past-due payment. (Note that under the Fannie Mae/Freddie Mac uniform first mortgage security instruments a payment is past due if not paid by close of business on the stated due date, which is normally the first day of the month.) A servicer may be subject to additional costs and fees assessed by Fannie Mae for any mortgage loan that has 24 consecutive past due payments that is not repurchased timely. Claim Settlements for MBS Regular Servicing Option Pool Mortgages Servicing Guide Part VIII: Foreclosures, Conveyances, and Claims; Chapter 2, Conveyances and Claims; Section 211, Claim Settlements for MBS Regular Servicing Option Pool Mortgages. We are revising our requirements for claim settlements for regular servicing option pool mortgages to require that a servicer must repurchase a regular servicing option pool mortgage loan from the MBS pool within 60 days after the foreclosure sale date rather than when it receives the foreclosure claim settlement or, if the mortgage was uninsured, once it disposes of the property. This requirement was effective June 1, 2007 and is applicable to all regular servicing option MBS pool mortgages whether pooled under the Trust Indenture or the Trust Agreement. Announcement 07-03R2 Page 13

14 Delinquency Status and Reason Codes Servicing Guide Part VII: Delinquent Mortgages; Chapter 6, Delinquency Status Reporting; Section 601, Delinquency Status and Reason for Delinquency Codes; Section 602, Reporting Monthly Mortgage Status; and Section 603, Transmitting Status Information. A servicer must report the specific delinquency status code that best describes the latest action it has taken to cure a delinquency or, if that action failed, to liquidate the mortgage. We expect that delinquency status codes will only be reported on delinquent mortgage loans (except, for example, for mortgage loans that are current but the borrower has filed bankruptcy). Additionally, a servicer must report the specific reason for delinquency code that best describes the primary reason for a delinquency. We expect that a reason for delinquency code will only be reported on a delinquent mortgage loan. In addition to a delinquency status code, we are now requiring servicers to report to us the effective date of the delinquency status that is being reported to us (i.e., the month in which loan payments first become subject to a forbearance or repayment plan). Beginning with the September 2007 reporting month, a servicer will be required to report the effective date on all new delinquency status codes reported to Fannie Mae. Servicers are encouraged to report these effective dates earlier if possible. Attachment 4 includes the data elements and file layout for reporting the effective dates of delinquency status codes. Starting on June 4, 2007 and on approximately the third calendar day of each month thereafter, Fannie Mae provides a delinquency status and reason for delinquency status codes exception report. This report will provide information on invalid and illogical reporting of delinquency status and reason codes. There is a summary report and a detail report. The summary report summarizes the types of exceptions for a particular servicer. The detail report provides the loan level details for the various exceptions. A servicer must use the report to provide the correct delinquency status and reason codes. Corrections must be made through HSSN and must be made by the 10th calendar day of the month in which the exception report was issued. Fannie Mae will provide an updated final exception report on the 11th calendar day of the month as well as a summary of what was reported during the month. The servicer should use these reports to facilitate reconciliation to the information on its systems. Servicers are reminded that our loss mitigation reporting system, HSSN, must be utilized to submit delinquency and loss mitigation information to Fannie Mae. Accurate and timely data entry of delinquency status codes in HSSN enables both servicers and Fannie Mae to communicate more effectively on all loans that are in various stages of loss mitigation. HSSN provides reporting that allows servicers to view delinquency exceptions, statistics and loan-level case status, thus allowing for monitoring of MBS loans for compliance with the Trust Indenture or Trust Agreement, as applicable. Announcement 07-03R2 Page 14

15 Due-on-Transfer Clauses Servicing Guide Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section , Servicer s Optional Repurchase of Certain MBS Pool Mortgages; and Part III: General Servicing Functions; Chapter 4, Transfers of Ownership. Servicers are reminded that they must enforce the due-on-transfer clause when the mortgage documents include a due-on-transfer clause and the servicer has knowledge that a mortgaged property has been or is about to be conveyed by the borrower in violation thereof, and none of the permitted transfer or other exceptions contained in the Servicing Guide applies. An example of a due-on-transfer violation is when a borrower sells or transfers a property to an unrelated third party without prior approval of the servicer. ARM Notes with Provision to Change the Minimum or Maximum Interest Rate or the Mortgage Margin Following an Assumption Selling Guide Part VII: Mortgage Eligibility; Chapter 1, Conventional Mortgages; Section , Disclosures. Servicing Guide Part III: General Servicing Functions; Chapter 4, Transfers of Ownership; Section 408, Conventional Mortgages with Due-on-Sale Provision. MBS pools issued on or after August 1, 2007, cannot contain ARM mortgage loans with provisions that allow or require the servicer/lender to change the minimum or maximum interest rate or the mortgage margin following an assumption, unless those provisions are waived prior to pooling such mortgage loans. If such a unilateral waiver is legally precluded (because the note provision would be beneficial to the borrower and therefore requires borrower consent to waive), then we will require evidence of a prior, duly written and executed bilateral waiver between the lender and the related borrower before allowing the mortgage loan to be pooled. Mortgage Loan Modifications Servicing Guide Part VII: Delinquent Mortgages; Chapter 5, Loss Mitigation Alternatives; Section , Modifying Conventional Mortgages. We will continue to require the servicer of a mortgage that is part of a regular servicing option MBS pool or part of a shared-risk special servicing option MBS pool for which the servicer s shared risk liability has not expired not to modify the mortgage as long as it remains in the MBS pool. Performing MBS mortgages are ineligible for repurchase for the purpose of modifying the mortgage. Servicers are reminded that all loan modifications must be in writing on the appropriate form and signed by both the servicer and the borrower(s) in order to be effective. Servicers are also reminded that while a mortgage loan is in an MBS pool, they must not agree (sign or date a written agreement) to any modification that would affect the term, interest rate, Announcement 07-03R2 Page 15

16 unpaid principal balance, or other major characteristic of the mortgage loan. Further, loans may be removed from an MBS pool only under very limited, specified circumstances, such as after any delinquency of four payments past due. Loan modification may be a loss mitigation alternative for a loan in default, but may not occur until after the loan has been removed from the MBS pool in accordance with our requirements. The servicer must ensure that its communications with the borrower clearly convey that the loan modification will not be binding, enforceable, or effective unless and until the borrower delivers the executed loan modification agreement and any required payments to the servicer and the servicer signs the loan modification agreement. This applies to all mortgage loans in MBS pools, including all mortgage loans purchased for our portfolio that we subsequently securitize. It applies to mortgages pooled pursuant to the new Trust Agreement. A mortgage loan in an MBS pool can only be modified after it has been removed from the MBS pool. Servicers are also reminded that mortgage loan modifications must be signed by an authorized representative of the servicer and must reflect the actual date of signature by the servicer s representative. Signature by the servicer s authorized representative must not occur until after the mortgage loan has been removed from the MBS pool and either reclassified as a Fannie Mae portfolio mortgage or repurchased by the servicer. Although a servicer may not agree (sign or date a written agreement) to a mortgage loan modification with a borrower prior to the mortgage loan being removed from the MBS pool, the servicer can begin the process leading up to a mortgage loan modification prior to the removal of the mortgage loan from the MBS pool. For example, during the period prior to the removal of a mortgage loan from an MBS pool, a servicer may analyze the borrower s suitability for a mortgage loan modification and may negotiate with the borrower regarding the terms of a mortgage loan modification. A related issue is the acceptance of payments from borrowers in anticipation of a mortgage loan modification being approved after the removal of the mortgage loan from an MBS pool. In accordance with Part III: Section of the Servicing Guide, and, if permitted by the applicable loan documents, servicers may accept and hold as unapplied funds (held in a T&I custodial account) amounts deposited pending a proposed mortgage loan modification that is in negotiation and anticipated to be approved after removal of the mortgage loan from an MBS pool. Once the request for a mortgage loan modification is approved, the appropriate entry is made on Fannie Mae systems and the servicer has signed and dated the loan modification, the servicer immediately should apply any amounts held as unapplied funds as one or more scheduled payments and remit the funds to us. If the request is not approved, the servicer immediately should apply the unapplied funds to any scheduled installments that are due and should contact the borrower to determine what should be done with any remaining funds. Servicers must have appropriate policies, procedures, and controls to ensure compliance with our requirements regarding mortgage loan modifications. Announcement 07-03R2 Page 16

17 Mandatory Repurchase of Certain MBS Pool Mortgage Loans Selling and Servicing Guides Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section 208, Repurchase or Mortgage Substitution Requirements. Under certain circumstances, Fannie Mae will be required to repurchase a mortgage (or our participation interest in it) from the pool. A servicer should notify Fannie Mae when the servicer is aware of any of the following: When a court or governmental regulator determines that Fannie Mae was not authorized to acquire the loan or a court or agency requires that the loan be repurchased; Upon notice that any of the following events will occur or at least before it does: (i) the borrower exercises an option to convert from an ARM to a fixed interest rate; (ii) the borrower exercises an option to change from one index to another; (iii) the borrower exercises a conditional modification option; and (iv) if the maximum or minimum interest rate or the margin used in calculating the rate changes as a result of a loan assumption; As soon as practicable, if any governmental agency or court requires a transfer of the property securing a loan (other than to a co-borrower or in connection with a divorce or other transfer excepted from due-on-sale enforcement); or If the loan becomes and remains delinquent (without regard to any grace period or cure period) for twenty-four consecutive months (not including forbearance or repayment plan periods); or If any mortgage insurer, or the FHA or VA requires transfer of the loan or the property to it in order to obtain the benefits of the insurance or guaranty, or requires a longer period of time in addressing certain loss mitigation activities. Roles of Fannie Mae and Servicers Servicing Guide Part I: Lender Relationships; Chapter 2, Contractual Relationship; Section 202, Servicer s Basic Duties and Responsibilities. The Trust Agreement clarifies the relationships between Fannie Mae and servicers of MBS mortgage loans, essentially documenting the basic relationship under the Trust Indenture. Under the Trust Agreement or the Trust Indenture, mortgage loans and the proceeds of those loans are held by Fannie Mae as trustee for the benefit of the MBS Trusts and their beneficial owners, the MBS investors; the servicer is responsible for servicing MBS loans for the MBS Trusts that own the loans. Fannie Mae also is the master servicer for the MBS Trusts, and, in that capacity, contracts with the servicer as the direct servicer and has the responsibility for assuring that servicing is performed in accordance with the Trust Agreement or the Trust Indenture, as applicable. Announcement 07-03R2 Page 17