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C3-5-04, Pooling ARMs with a Conversion Option (05/01/2019)

This topic provides information on pooling ARMs with conversion options, including

ARM Conversion Options

If a borrower chooses to convert an adjustable-rate mortgage that includes an option to convert to a fixed-rate mortgage, the lender must repurchase the mortgage from the MBS pool before interest begins accruing at the new fixed rate. Lenders may choose from two options for disposing of the converted mortgage after it has been repurchased from the pool:

  • take-out option

  • market rate option

If the take-out post-conversion option was selected when the convertible ARM was delivered, the servicer must redeliver the converted mortgage to Fannie Mae as a whole loan or as part of a fixed-rate MBS (A/A remittance type only).

The take-out option is not available on mortgages that have lender-purchased mortgage insurance or were originated under an ARM plan that permits conversion to a fixed interest rate only on specified interest rate adjustment dates.

The conversion option selected for each convertible ARM delivered to Fannie Mae must be identified by the appropriate special feature code:

  • SFC 037 Convertible ARM — Take-Out Option, or

  • SFC 038 Convertible ARM — Market Rate Option.

In order to receive a par price on a redelivered converted mortgage, the lender must obtain a take-out mandatory delivery commitment (Converted ARM Resale Commitment) by the 16th day of the month in which the conversion was requested.

If the market rate option was chosen, the servicer is not required to redeliver the mortgage to Fannie Mae, although it may choose to redeliver the mortgage as a whole loan (A/A, S/A or S/S remittance types) or as part of a fixed-rate MBS. It may deliver the loan under any existing standard fixed-rate whole loan or MBS commitment that it has outstanding, as long as Fannie Mae’s original acceptance of the mortgage was not conditional on the lender providing some type of special recourse or credit enhancement.

Redelivering a Converted ARM that Originally Required Recourse or Credit Enhancement

If Fannie Mae originally required recourse or credit enhancement on an ARM that includes an option to convert to a fixed-rate mortgage, and the conditions that led to its requirement still exist, then lenders will not be able to use a standard commitment to redeliver the converted mortgage to Fannie Mae. Instead, lenders must

  • obtain a new negotiated contract (which may or may not require recourse or credit enhancement) or

  • include the converted mortgage as part of a delivery under an outstanding negotiated contract that has acceptable recourse or credit enhancement.

If the conditions that led to Fannie Mae requiring recourse or credit enhancement no longer exist, and Fannie Mae determines that the recourse or credit enhancement is no longer necessary, lenders may redeliver the converted mortgage under

  • a standard whole loan commitment, or

  • a standard MBS commitment.

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements Issue Date
Announcement SEL-2019-04 May 01, 2019