By: Fred Gooch, Operations Counsel/SVP Compliance
On July 7, 2021, Fannie Mae and Freddie Mac (the Government-Sponsored Enterprises GSEs) announced they updated their uniform legal instruments (the 2021 instruments). Although the announcement indicated that lenders could use the new instruments immediately, these new documents must be utilized for loans delivered to the GSEs with note dates on or after January 1, 2023. These new instruments are replacing the existing instruments that have been utilized by the GSEs (with updates) since 2001 (the 2001 instruments). Most mortgage loan transactions in the United States utilize these uniform notes and security instruments, and even those that do not are often closed on forms based on these uniform instruments. Such is the case with notes and security instruments used to close FHA loans. FHA does not publish their own set of legal instruments to be used in transactions they insure, but they do provide guidance on modifications that should be made to the GSE uniform instruments to adapt them for FHA use.
Lenders and mortgage document providers are now faced with an interesting question. Should they Stay with the current FHA documents based on the 2001 instruments and corresponding instructions or Go and modify their FHA notes and security instruments to conform with the new GSE 2021 instruments? To date FHA has not issued guidance on this question. This issue faced by lenders is reminiscent of the question famously posed by The Clash in “Should I Stay or Should I Go?”:
Should I stay or should I go now?
Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know
Should I stay or should I go?
Legal Requirements for FHA Notes and Mortgages:
There are no provisions in the U.S. Code dealing with legal instruments for FHA loans, but the Code of Federal Regulations does provide some regulatory instruction:
“(i) The mortgage shall be in a form meeting the requirements of the Commissioner. The Commissioner may prescribe complete mortgage instruments. For each case in which the Commissioner does not prescribe complete mortgage instruments, the Commissioner (A) shall require specific language in the mortgage which shall be uniform for every mortgage, and (B) may also prescribe the language or substance of additional provisions for all mortgages as well as the language or substance of additional provisions for use only in particular jurisdictions or for particular programs.
(ii) Each mortgage shall also contain any provisions necessary to create a valid and enforceable secured debt under the laws of the jurisdiction in which the property is located.” 24 CFR 201.17(a)(2).
The FHA Single-Family Handbook provides further instruction:
“The Mortgagee must develop or obtain a separate Mortgage and Note that conforms generally to the Freddie Mac and Fannie Mae forms in both form and content, but that includes the specific modification required by FHA set forth in the applicable Model Note and Mortgage.” FHA Single-Family Handbook 4000.1(b)(ii).
The FHA publishes the Model Note and Mortgage as well as instructions on their website for the creation of notes and mortgages for use in FHA insured transactions. The instructions and models were most recently revised in 2015 and are based on the 2001 versions of the GSE uniform instruments. They provide specific instructions on how to modify the 2001 instruments for FHA use.
The instructions provide the following guidance:
“The FHA Model Forward Mortgage is modeled generally on the Freddie Mac and Fannie Mae (hereinafter Government Sponsored Enterprises or GSEs) security instrument Uniform Covenants. FHA has identified several provisions in the GSE Uniform Covenants that are inconsistent with either FHA requirements or policy, and has modified the Model Forward Mortgage accordingly…
To the extent that any variance between the GSE Uniform Covenants and FHA Model Forward Mortgage is not identified as an FHA-Specific Modification, the Mortgagee may exercise discretion in adopting the change. To the extent that any variance is identified as an FHA-Specific Modification, however, the Mortgagee should adopt the change or use substantially similar language. Any future changes to the provisions of the GSE Uniform Covenants that are not currently identified as FHA-Specific Modifications may be incorporated in a manner that remains consistent with all relevant statutes and regulations.
With respect to the GSE Non-Uniform Covenants, the Mortgagee should refer to the relevant jurisdiction-specific Non-Uniform Covenants and incorporate them into the mortgage. The Mortgagee should also make any required conforming revisions (e.g. internal paragraph references).” Instructions for Model Forward Mortgages – May, 2015. https://www.hud.gov/sites/documents/MODELFWD_MTG5-2015.PDF.
Examples of Specific Problems:
Problems arise when attempting to implement these models and instructions designed specifically for the 2001 GSE instruments and applying them to the new 2021 revised uniform instruments. For example, under the heading “Mortgage Insurance” the instructions require the “Removal of GSE Uniform Covenants Section 10.” In the 2001 versions of the instruments Section 10 is the section dealing with mortgage insurance, but in the 2021 versions Section 10 does not deal with mortgage insurance but pertains to assignment of rents. In the revised 2021 instruments mortgage insurance is covered in Section 11. In this circumstance it can be reasoned that Section 11 should be deleted instead of Section 10 because such deletion would cause significant problems, but other implementation decisions may not be so straightforward.
Another example is the FHA instruction for “Removal of the final sentence of GSE Uniform Covenants Section 4.” The sentence in question in the 2001 uniform instruments states: “Lender may require Borrower to pay a one‑time charge for a real estate tax verification and/or reporting service used by Lender in connection with this Loan.” In the 2021 versions, the last sentence of Section 4 states: “Within 10 days after the date on which that notice is given, Borrower must satisfy the lien or take one or more of the Required Actions.” This is the second to last sentence in Section 4 in the 2001 instruments, so it is highly unlikely that FHA intends to have this sentence removed. The 2021 uniform instruments do have a similar clause that is now located in Section 15(a).
In these examples it is possible to adapt the instructions and make changes that probably mirror the intent behind the 2015 instructions as applied to the 2021 revised uniform instruments, but it is not clear exactly how FHA would desire these changes to be implemented. These examples illustrate only of a few of many similar problems with adapting the current instructions to the new 2021 uniform instruments. With so many decisions to be made when the provisions do not align, lenders and other mortgage document technology providers most certainly will make decisions that will render the notes and mortgages delivered to FHA slightly or materially different.
The Argument to Go Adapt the New Instruments:
Lenders and mortgage document providers are now faced with a difficult problem. Should they stay with the current FHA instruments based on the 2001 GSE uniform instruments, or should they attempt to adapt the instructions and modify their documents to align with the revised 2021 GSE versions? The best argument for adaptation is based on the instructions in the FHA Handbook. It states: “The Mortgagee must develop or obtain a separate Mortgage and Note that conforms generally to the Freddie Mac and Fannie Mae forms in both form and content…” FHA Single-Family Handbook 4000.1(b)(ii). On January 1, 2023, the 2001 Freddie Mac and Fannie Mae uniform instruments will be discontinued and the only GSE approved and maintained forms will be the 2021 versions. Therefore, in order to use a note and mortgage that “conforms generally to the Freddie Mac and Fannie Mae forms” the revised 2021 instruments need to be utilized as the basis for those forms (as they will be the only ones approved by the GSEs). Even though there are difficulties in adapting the current instructions to the 2021 instruments, it can be done, and a lender or document provider could probably make the adaptations in a way that would meet current FHA requirements.
The instructions from FHA contemplate changes to the uniform covenants in the security instruments. “Any future changes to the provisions of the GSE Uniform Covenants that are not currently identified as FHA-Specific Modifications may be incorporated in a manner that remains consistent with all relevant statutes and regulations.” This statement indicates that changes “may” be incorporated if the changes are consistent with the relevant requirements. The next question is whether the revised instruments are considered “changes” for which modifications are permissible or whether they are considered a completely new instrument for which there would be no applicable guidance. There is no answer to how FHA might view this issue.
The Argument to Stay with Current Documents:
There are also arguments for why lenders should wait to make updates and continue to use the existing FHA instruments until the FHA issues guidance on adapting the 2021 GSE uniform instruments.
The Code of Federal Regulations requires the “mortgage to be in a form meeting the requirements of the Commissioner.” The guidance in the Handbook only requires a note and mortgage that “conforms generally to the Freddie Mac and Fannie Mae forms in both form and content.” However, the instructions that are published on the website with the model note and mortgage clearly relate specifically to the 2001 instruments. As of this date, there has been no indication from the Commissioner that the 2021 uniform instruments meet the requirements. In the absence of specific instructions from the Commissioner relating to the 2021 instruments, it could be concluded that the 2001 instruments should continue to be used until more guidance is provided.
The CFR also states that the Commissioner “may prescribe complete instruments” but in cases where the Commissioner “does not prescribe complete instruments, the Commissioner shall require specific language in the mortgage which shall be uniform for every mortgage.” 24 CFR 201.17(a)(2). The Commissioner has never issued complete mortgage instruments and the current requirements and instructions issued by the Commissioner are specific to the 2001 GSE uniform instruments. To date, the Commissioner has not released any “specific language” requirements that are tailored to the 2021 instruments. As is shown in the examples above, this leaves lenders and providers to make their own decisions on how to adapt the instructions to the 2021 instruments and it will most likely lead to instruments and language that is not “uniform for every mortgage” as required by the regulation.
A counterargument would be that the Commissioner has not issued any guidance because they believe it is unnecessary as the instructions can be utilized to make the necessary modifications to the 2021 instruments. This argument is not persuasive because if a lender or provider follows the instructions literally, the result would be an FHA mortgage that clearly violates FHA rules, regulations, and policy.
The instructions also state “Notwithstanding any of the foregoing, the Mortgagee bears ultimate responsibility for ensuring that the security instrument is a valid, enforceable first lien in compliance with all relevant state and federal laws and requirements, including, but not limited to FHA regulations and published requirements.” This places an undue burden on the mortgagee to decipher what FHA’s intent would be in interpreting and applying the old instructions to the new instruments; in most cases the changes can be logically determined, but the risk of any problem is solely on the shoulders of the mortgagee, making adaptation of the new 2021 instruments a risky path to take. There are also several new provisions in the 2021 instruments, mostly related to electronic mortgages, that have not been specifically approved by FHA, so it is left to the lender or provider to determine if the new provisions are consistent with FHA requirements. Ultimately the mortgage/lender/provider has to determine what FHA’s intent would be in adapting the current instructions and they bear all the risk if something is not adapted consistent with FHA’s current interpretations.
As of now, Docutech is not planning on releasing adapted versions of the 2021 GSE uniform instruments for FHA use. We will continue to utilize the current FHA instruments based on the 2001 GSE instruments, as we feel this approach is the most conservative and introduces the least amount of risk for our clients. We have reached out to FHA for guidance and have not yet received direction on this matter. We are also working with industry trade groups and other partners to encourage FHA to issue guidance to clear up this issue. We are working though what changes we would make to the FHA notes and mortgages in the event we receive guidance from the FHA to proceed with adaptation. This approach will allow us to move very quickly in the event there is more information released from FHA. We encourage our clients and partners to join in reaching out to their contacts at FHA for clarification and to encourage them to publish guidance to resolve these questions. Hopefully the FHA will “come on and let [us] know. Should [we] stay or should [we] go?”