July 1999

The New FNMA/FHLMC Documents

Greatland Corporation


The following is an article from the June 1999 Mortgage Banking Newsletter authored by Howard Lax of Mason, Steinhardt, Jacobs, Perlman & Pesick, P.C. We print it here with permission and hope it is of interest to you. You may contact Howard Lax at hlax@concentric.net or at (248)358-2090 to comment on this article or to receive the Mortgage Banking Newsletter.

On April 9, 1999, Fannie Mae and Freddie Mac published new notes, mortgages, and mortgage riders for all of their first lien single-family loan programs. The majority of the changes to the revised documents are designed (1) to clarify provisions in these documents; (2) to accommodate changes in laws and market conditions (such as changes in escrow account limits, and flood insurance requirements, and inclusion of a reference to earthquake insurance); (3) to aid collection of a loan and enforcement of the loan documents; and (4) to reduce litigation against lenders and loan servicers. You (and your legal counsel) must review your company’s custom note addendums, mortgage riders, and other loan documents to determine whether modifications are needed to conform your custom forms to the new Fannie Mae/Freddie Mac mortgage documents.

The new implementation date for use of the revised forms is July 1, 2000. Lenders may begin using the new documents sooner; however, you may not mix the old and new notes, mortgages, and riders when documenting the loan. Please note, technical changes have been made to some of the documents since they were first published. Fannie Mae and Freddie Mac have posted the documents and any changes to the documents on their web sites.

The following is a summary of the principal differences between the old and new multi-state fixed rate note and the Michigan mortgage.







Payments must be in the form of cash, check, or money order.


Silent regarding date payments are applied and whether daily interest is collected.

Payments are applied as of the scheduled due date. Hence, the lender cannot collect daily interest.


Prepayment permitted at any time.

Prepayments are not permitted if scheduled payments are delinquent. Prepayments can be applied to pay accrued interest before principal. If a lender attaches a prepayment fee addendum to the Note, a clause should be included to allow the lender to deduct the prepayment fee from the prepayment before applying the prepayment to accrued interest, and finally to principal.



The Note clarifies that the thirty (30) day period for curing a default begins upon mailing or upon delivery by other means.


The due on sale clause is not enforceable if exercise is prohibited by federal law as of the date of the security agreement.

The due on sale clause is not enforceable if exercise is prohibited by federal law. The reference to the date of the security agreement is deleted.



A new definitions section is added to the mortgage. The definitions section includes the list of riders that previously appeared at the end of the mortgage document. New definitions include "Loan," "Applicable Law," "Community Association Dues, Fees, and Assessments," "Electronic Funds Transfer," "Miscellaneous Proceeds," "Periodic Payment," and "Successor in Interest of Borrower."





The Mortgage did not specify the type of funds needed to pay the loan. Some borrowers attempted to pay loans with checks drawn on non-government chartered "financial institutions" under a theory that their "institution" and the checks issued under its authority had as much legal standing as a check issued by a bank backed by Federal Reserve Notes.

The old Mortgage did not allow suspense accounts for partial payments. When a bad check for a partial payment was accepted at a lock box, and the lender returned good funds to the borrower, the lender could not increase the principal balance by the amount of good funds given to the borrower.


Payments must be made in U.S. Currency. A lender may require "wet funds" for future payments if the borrower submits an NSF check. The lender may hold partial payments in a suspense account without waiving any rights.




Partial payments may remain unapplied, without paying interest to the borrower, until the loan is current. If borrower does not bring the loan current within a reasonable time, the lender may apply the suspended funds as a partial prepayment or return the funds to the borrower. The lender may suspend only that portion of the payment which represents a partial payment of principal and interest. The portion of the payment for the escrow account should not be placed in a suspense account.


Prepayment charges are paid first, escrow items second, interest third, principal fourth, and late charges last.

Regular payments are applied to pay interest, then principal, then escrow items, and finally late charges.


There is no provision for escrowing homeowner association assessments, even though this practice is common in some states.

The Mortgage gives the lender a security interest in funds in the escrow account, and allows the lender to setoff the escrow account against accrued interest and principal owed to the lender.

Escrows are permitted for "other items," such as homeowner association dues, that may have priority over the Mortgage.


Escrow funds are not pledged as additional security and there is no contractual right of setoff.

The terms of a waiver of the required escrow account are delineated.

The Mortgage incorporates many of the provisions of Section 17 of Regulation X.



Borrowers may pay a one time charge for tax verification or reporting.

Borrowers are obligated to discharge any lien which has priority over the mortgage if a court action to discharge the lien is not pursued diligently or the borrower defaults on a payment plan to resolve the lien.
















The lender may purchase hazard insurance to protect the lender's interest in the property if the borrower fails to do so. Some borrowers sued lenders for contract and FDCPA violations if a forced placed policy included coverages that exceeded "protection of the property," or if the policy did not insure the borrower's interest.

A tug of war often ensued over insurance proceeds where the borrower wanted to disburse the proceeds, or the borrower wanted to make the repairs and keep the proceeds.

The lender may require earthquake insurance.

The lender may object to excessive insurance deductible clauses.

The lender can charge the borrower for life-of-loan flood zone certification, whether it is a one time charge or a charge each time re-mapping occurs. The borrower is responsible for paying FEMA's fees if the borrower requests a flood zone determination from FEMA.

The lender is under no obligation to purchase any type or amount of insurance. A forced placed policy may or may not protect the borrower, and it may provide more or less insurance than the previous policy. The lender may force place a hazard insurance policy that only protects the lender's interests.




Insurance proceeds may be held by the lender until repairs have been inspected for completion. The lender may disburse proceeds in draws as work progresses. Insurance proceeds cannot be used to pay public adjusters or other third parties.

The mortgage clarifies that if the borrower does not respond to a proposed settlement between the lender and the insurance company, the borrower assigns all rights to insurance proceeds to the lender.


Negative covenants not to commit waste.

Positive covenant to maintain the property as well as negative covenant not to commit waste



The lender has the right to protect its collateral if the borrower abandons the property. Several examples of actions to protect the property are specified in the Mortgage. The lender has no liability for taking actions or for failing to take actions authorized by the Mortgage. Borrower must comply with all provisions of the ground lease if the Mortgage covers a leasehold. If the borrower acquires title to the property, the leasehold and fee title are not merged unless the lender agrees in writing.


If mortgage insurance is required but is no longer available, the borrower will pay one-half of the annual mortgage insurance premiums to the lender each month.

If mortgage insurance is required but not available, the borrower will pay the same amount as the premium for the prior mortgage insurance into a reserve account held by the lender. No interest must be paid on the reserve fund established by the lender. Mortgage insurance will be terminated when agreed to by the lender or when required by law. Payment of Mortgage insurance premiums or their equivalent does not impact the borrower's obligations to pay interest at the Note rate.



Commencement of forfeiture proceedings or any other civil or criminal action that may result in a material impairment of lender's interest in the property is a default. Any damages paid for impairment of the lender's interest in the property are the property of the lender. All miscellaneous proceeds not applied to restoration of the property are applied in the order provided in Paragraph 2.



Forbearance by lender in accepting payments from third parties or successors in interest of the borrower, or acceptance of partial payments, does not waive the lender's rights.



The borrower is not released upon assumption unless the lender agrees to release the borrower in writing.



The lender is prohibited from charging fees that are expressly prohibited by the Mortgage. The lender is free to charge any other fee permitted (or not prohibited) by law that is agreed to by the borrower.


The borrower was required to give notice to the lender by first class mail. Sometimes notice would be written on a check, or provided in a manner not likely to be discovered by the lender.

The borrower is required to notify the lender of any change in address. Any notice given to the lender is not deemed received until given by procedures specified by the lender, unless applicable law requires a different procedure.



Applicable law, if silent, does not prohibit agreements between the borrower and lender. Rules of construction are inserted regarding gender and number. The word "may" gives sole discretion without any obligation to take any action.


The borrower is given a conformed copy of the Note and Mortgage.

The borrower is given an actual copy of the Note and Mortgage.



"Interest in the Property" is defined to include land contracts and escrow arrangements.


Borrower is required to pay all expenses incurred in enforcing the Mortgage to reinstate the Mortgage.

Costs that must be paid to reinstate the Mortgage include appraisal fees and any other fees incurred to protect the lender's interest in the property and rights under the Mortgage. The borrower must pay the lender with "wet funds" to reinstate the Mortgage


All obligations of the lender under the Mortgage were transferred to the note holder.

The Mortgage clarifies that the purchaser of a Note may be different than the loan servicer, and the purchaser of the Note may not assume obligations imposed on the servicer. The borrower and lender may not bring any judicial action, either individually or as a class action, alleging a breach of the security instrument until the party bringing the action has notified the other party of the breach and offered a reasonable period of time after giving notice to cure the problem. The maximum period allowed by law to cure a problem is deemed to be reasonable for purposes of the Mortgage. Notice of acceleration and the thirty (30) day right to cure in Paragraph 22, and a thirty (30) day notice to pay in the event of a sale of an interest in the property, are deemed to satisfy the notice and curative period required by the Mortgage.



Borrower is prohibited from creating a condition that can cause or contribute to a remedial action to remove environmental hazards. Borrower cannot create an environmental condition that adversely affects the value of the property. Borrower must notify lender of any hazardous condition that might exist which might require a clean up or might reduce the value of the property. The lender is not obligated to commence an environmental remediation.






The lender is required to prepare and file a discharge of Mortgage without charge to the borrower.

Lender may charge the borrower a fee for releasing the Mortgage, but only if allowed by law and only if the fee is paid to a third party for services rendered. Note: Michigan law does not allow a release fee.

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©1999 Greatland Corporation