In order to help Fannie Mae preserve capital by reducing net funding costs and thereby reduce the amount of additional draws from the U.S. Department of the Treasury, on February 10, 2010, Fannie Mae announced that it intends to increase significantly its purchases of delinquent loans — loans that are delinquent as to four or more full consecutive monthly payments — from its single-family MBS trusts. The following Q&A provides an answer to the key question inquired by market researchers and investors in regards to the announcement.
What are the operational mechanics used by servicers to remove a qualified MBS 4+ delinquent loan from an MBS trust?
The delinquent loan removals or reclassifications will generally comply with the provisions set forth in Fannie Mae's trust documents and published servicing guidelines.
At a high level, on approximately the 14th business day of each month, Fannie Mae instructs servicers which qualifying delinquent loans to remove from specific pools.
Reclassifications generally occur by the last business day of the month. In both Fannie Mae's systems and through servicers' operational processes, once the loan has been removed from the pool, the loan's payment cycle is changed from a scheduled/scheduled to an actual/actual cycle. If the servicer is unable to reclassify the loan from the servicer's system in the initial given month, the loan follows an exception process by which the loan will be addressed in the next month.
Prior to the removal of the loan from the MBS pool, the servicer would remit scheduled principal and scheduled interest. However, after the loan is removed from the MBS pool, the servicer will remit actual principal and actual interest.
For investors, it is important to note that a prepayment of the loan is reflected in the month immediately following removal. Fannie Mae publishes the Factors File on the 4th business day of the month and the principal and interest remittance to certificateholders is made on the 25th day of the month. If the 25th day is not a business day, payment will be made on the next business day. The following timeline summarizes the reclassification process at a high level.
Last revised: 03/04/10