All Fannie Mae Single-Family Mortgage Servicers and Sellers

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1 Date: September 19, 2005 To: All Fannie Mae Single-Family Mortgage Servicers and Sellers Subject: LL01-05: Hurricane Katrina The widespread devastation caused by Hurricane Katrina has resulted in great tragedy and hardship for thousands of homeowners. Servicers are doing an outstanding job responding quickly and effectively to help their borrowers. We recognize that in the case of this particular disaster, compassion, sensitivity, good judgment, and common sense must be used to determine how a policy should best be applied. Our servicing policy covering Assistance in Natural Disasters is set forth in Part III, Chapter 11 and Special Relief Measures, Part VII, Chapter 3 of the Single-Family Servicing Guide. We have been in frequent contact with servicers to make sure they have the appropriate guidance required to best serve borrowers that need assistance. Over the past three weeks, our Servicing Consultants and Portfolio Managers have been working with servicers to assist in mortgagor outreach, damage assessment, and the interpretation of our natural disaster policies. On the whole and based on our discussions to date with our servicers, we believe our natural disaster policy set forth in the Servicing Guide (which applies to all natural disasters) is performing well, by providing servicers with sufficient guidance to apply the relief provisions that are appropriate in this instance. Given the magnitude of the damage caused by Hurricane Katrina, the number of families impacted, and the evacuations of so many homeowners, our servicers have efficiently applied our special relief measures set forth in the Servicing Guide to these borrowers. We fully support our servicers efforts and, to assist them further, we are taking this opportunity to clarify and underscore certain key aspects of our natural disaster policy because we recognize that our servicers, who are on the front lines, frequently need to make on-the-spot decisions. We also are updating our guidance for lenders that are selling or securitizing mortgages secured by properties located in areas impacted by the hurricane. Servicing Policies Special Relief Measures. Servicers have asked us whether they can grant forbearance to borrowers, recognizing the likely hardship faced by borrowers in counties in Alabama, Louisiana, and Mississippi that the Federal Emergency Management Agency (FEMA) has designated as eligible for Individual Assistance ( FEMA Disaster Areas ). While our

2 -2- Servicing Guide requires that servicers make individual case-by-case evaluations as to the appropriate relief measures, our Servicing Guide also provides that if the servicer has any doubt about the effect of the disaster on the condition of a property or the borrower s employment or income status, it should refrain from taking adverse action against the borrower until it can determine the true status, and then make its final decision on the appropriate course of action based on its findings. We expect that servicers will be able to determine the true status within 90 days following the date of the Katrina disaster declarations (August 29, 2005, for Alabama, Louisiana, and Mississippi). When it is likely that the borrower s property has been damaged or his/her income has been affected by the disaster, the Servicing Guide requires servicers to consider the location of the property in relation to the FEMA Disaster Areas, the payment status of the mortgage prior to the disaster, and any information that is available about the mortgage property or the borrower s circumstances. While we expect that most borrowers in the FEMA Disaster Areas will qualify under our Servicing Guide for some form of relief, we expect servicers to apply reasonable judgment when following the established procedures in the Servicing Guide. When forbearance is granted, servicers must try to contact borrowers to determine what additional steps can be taken to tailor solutions that address the particular circumstances faced by each borrower. Our Servicing Guide provides for forbearance terms as long as 18 months, and (in natural disaster cases like Hurricane Katrina) Fannie Mae approval is not required for longer periods if needed. However, we want to remind servicers that we require them to repurchase MBS Pool mortgages that are delinquent as to 24 installments (see Servicing Guide, Part I, Section ). We also want to remind our servicers that while a loan is in an MBS Pool, its interest rate cannot be reduced, unpaid principal cannot be forgiven, nor can its maturity date be extended. Servicers that are granting forbearance based on their knowledge that borrowers in particular areas within the FEMA Disaster Areas are likely to need the help may wish to suspend automated drafting of payments and also may wish to reverse drafts or return the September payment. The reversing or returning of payments is acceptable to Fannie Mae for loans that are not in MBS Pools 1, if the servicer s assessment of individual circumstances and the restrictions established by the Servicing Guide indicate that forbearance is appropriate, particularly when requested by the borrower. Late Charges. For many years, we have encouraged servicers to consider waiving any late payment charges when a missed payment is likely the result of hardship due to a natural disaster (see Servicing Guide, Part III, Chapter 11, Section 1101). Every servicer we have spoken to with mortgages in the area impacted by Hurricane Katrina already has decided to do so. We expect that all servicers of Fannie Mae mortgages will provide this relief to these borrowers. Reporting Delinquencies. We remind servicers that they must not report a delinquency to the credit repositories if the missed payment is likely attributable to the hardship caused by the hurricane, until such time as the Servicer is able to confirm otherwise. 1 Due to MBS Trust Indenture restrictions, payments already collected and held for the benefit of MBS investors cannot be returned.

3 -3- Foreclosure and Collection Activities. Our standard disaster relief provisions require servicers to discontinue any legal action until they can review any effect the disaster may have had on the condition of the property or the borrower s employment or income status (see Servicing Guide, Part III, Section ). It is our understanding that many of our servicers have temporarily suspended foreclosure and collection activities for all borrowers with mortgages in the FEMA Disaster Areas. We fully support such decisions and expect all servicers to do so, until such time as the servicer has had an opportunity to evaluate the impact of Hurricane Katrina on individual borrower circumstances. Delinquent Advances. When a servicer grants relief provisions, it remains responsible for making delinquency advances to us if the mortgage is accounted for as a scheduled/actual or scheduled/scheduled remittance type. We have servicers who have a concentration of mortgages in their servicing portfolios in the Gulf Coast area, who are experiencing financial hardship, and who may need assistance making the advances. We are providing that help. Any servicer in this or a similar situation should contact its Servicing Consultant or Customer Account Manager. Hazard and Flood Insurance. We are revising the requirement for servicers to cancel the hazard (and flood, if applicable) insurance policy within 14 days after the foreclosure sale for properties located in the FEMA Disaster Areas. Insurance policies should not be canceled unless a post foreclosure property inspection has been completed and it is determined that the property has no claimable damage. Servicers also are reminded of their responsibility for ensuring that insurance we require is maintained in a way that will protect at all times our interest in the mortgages serviced on behalf of Fannie Mae. Selling Requirements Many lenders have contacted us to request specific guidance on how to proceed with mortgages secured by properties located in areas impacted by Hurricane Katrina that they had intended to sell to us. We have made every effort to establish a policy that balances our desire to provide as much assistance as possible to lenders and homeowners in the affected areas against our responsibility to act in a fiscally prudent manner. Based on the extent of the damage from Hurricane Katrina, there will be instances of property damage that will affect the acceptability of some properties as security for mortgages that lenders planned to sell to us (or that have been delivered to us since the hurricane but not yet purchased or securitized). Our Mortgage Selling and Servicing Contract requires a lender to warrant for each mortgage it delivers to Fannie Mae that the property is not damaged by fire, wind, or other cause of loss and that there are no proceedings pending for the partial or total condemnation of the property. The lender also warrants that the mortgage conforms to all applicable requirements in our Selling Guide, including the requirement that the mortgage is an acceptable investment. Finally, the lender represents and warrants that it knows of nothing involving the mortgage or the property that can reasonably be expected to cause the mortgage to become delinquent or adversely affect the mortgage s value or marketability.

4 -4- Lenders must be able to make these warranties for all mortgages, including those secured by properties impacted by Hurricane Katrina. Therefore, we expect lenders to take prudent and reasonable actions to determine whether the condition of the property may have materially changed since the effective date of the appraisal report. Lenders should use the following criteria when determining if the mortgage can be sold or delivered to Fannie Mae: If the condition of the property is acceptable, we will rely on the value conclusion the appraiser reached prior to Hurricane Katrina. We will not require a property with minor damage that is covered by insurance and does not affect the livability, soundness, or structural integrity of the property to be repaired before the lender delivers the mortgage to us. (For example, if the property has damaged exterior siding that is in place and protecting the structure, which could be significant from the standpoint of cost but not necessarily a threat to the structural integrity or livability of the property, then we would consider that property to be livable.) The lender must ensure that professional estimates of the repair costs are obtained and that sufficient insurance proceeds are held for the borrower s benefit to guarantee the completion of the repairs. If the damage is significant, but appropriate measures have been taken to secure the property to prevent further damage, the damage is covered by insurance, and the damage does not affect the livability, soundness, or structural integrity of the property, the lender may deliver the mortgage to us before the repairs are complete. (For example, if the roof has missing shingles or there is a hole in the roof and it is temporarily repaired or secured by plywood or a tarp, then the mortgage may be delivered to us.) The lender must ensure that professional estimates of the repair costs are obtained and that sufficient insurance proceeds are held for the borrower s benefit to guarantee the completion of the repairs. If the property was damaged and the damage is uninsured or affects the livability, soundness, or structural integrity of the property, the property must be repaired before the mortgage is delivered to us. * * * * * * Everyday, we and our lending partners learn more about the impact that Hurricane Katrina had in the Gulf Coast area and the repercussions for the families and communities that we serve. Each day also brings more questions, including some that we or our customers have never faced before. We will work through the issues and questions with our customers and provide feedback and guidance in a timely manner. To expedite the sharing of information and provide policy guidance more quickly, we soon will be posting underwriting and servicing information specifically related to Hurricane Katrina on our Fannie Mae Web sites.

5 -5- Servicers and lenders should contact their Servicing Consultant or Customer Account Manager or call our National Servicing Organization s Customer Care Center at (enter special code 7222 for Hurricane Katrina-related questions) if they have any questions about this Lender Letter. Pamela S. Johnson Senior Vice President