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For the first time since 1990, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation have totally revised the uniform mortgage and deed of trust and have made less extensive changes to the note form. Use of the new forms is optional at this time, but becomes mandatory July 1, 2000. We recommended implementation as soon as possible. The new form is the result of the work of representatives of the mortgage banking industry and representatives of Fannie Mae and Freddie Mac and was begun in large part as a result of industry class action litigation in which plaintiffs' counsel sought to highlight the differences between the language in the mortgage and actual servicing practices in areas such as escrow accounting, private mortgage insurance, and the placement of forced-order insurance. You should be aware, however, that even the new form is not 100% lender-friendly and where feasible (i.e. taking into account such matters as secondary market considerations), you should consider using a modified form.

The new instruments bear taking the time to read carefully. Some of the significant changes are briefly discussed below:

Payment Medium: The mortgage now specifies explicitly that payments are due in US funds. It further states that if a mortgagor tenders an NSF check, the lender may require that future payments be made in cash, money order, certified or cashier's check drawn on an FDIC-insured institution, or electronic funds transfer. The new mortgage gives the lender explicit authority to hold insufficient payments in suspense until additional funds are tendered to apply as full payments and allows the lender to apply suspense funds to the principal of the loan immediately prior to foreclosure.

Payment Application: Under the new mortgage, the hierarchy of payment application has changed from (1) prepayment penalties, (2) escrow charges, (3) interest, (4) principal, and (5) late charges to (1) interest, (2) principal, and (3) escrow charges, with any additional amounts received applied first to late charges, second to any other amounts due under the mortgage, and third to additional principal reductions. This change may require programming changes to servicing systems in order to reconcile the mortgage and the servicer's actual practice. In the case of a delinquent loan, the new mortgage says that payments received from the borrower should be applied to the delinquent PI&E payments if enough money has been received to pay all of the delinquent payments in full. Only if there is an excess of funds received from the mortgagor over the amount of delinquent PI&E payments due may late charges also be applied.

Escrow Accounting: The new mortgage now states that the lender may require that the borrower pay into escrow the amount of any association dues or assessments that the lender may require and allows the lender to escrow and disburse them if the lender so chooses. This is important in states that have superlien statutes for condominium dues.

Homeowners Insurance: Earthquake insurance has been added as a hazard for which the lender may require insurance. The new mortgage gives the lender the right to specify deductible levels acceptable to it. The language concerning the forced placement of hazard insurance has been modified to clarify the fact that the lender's forced place insurance might cost more and provide different coverages than the insurance the mortgagor previously had in place. There is new language stating that any insurance coverage placed on the mortgaged property by the borrower, even if not explicitly required by the mortgagee, must still include a standard mortgagee clause naming the mortgagee.

Private Mortgage Insurance: In the event that mortgage insurance coverage lapses, the new mortgage allows the mortgagee to require the mortgagor to continue making monthly premium payments and to deposit those payments into a non-refundable, non-interest bearing loss reserve account to be held by the mortgagee for the life of the loan. The mortgagee may keep the funds even after the loan is paid in full.

Charging Miscellaneous Servicing Fees: The new mortgage provides that the absence of specific authority in the mortgage for any specific fee charged by a mortgagee to a mortgagor is not to be construed as prohibiting the mortgagee from charging that fee. This language attempts to address the practice of charging fees such as fax fees, hazard insurance substitution fees, and other service charges by providing that just because the mortgage does not explicitly allow the fee to be charged does not mean that it cannot be charged.

Litigation Between Mortgagor and Mortgagee: Under the new mortgage, if one party wants to sue the other over a breach of the mortgage, even if only as a member of a class rather than individually, the person allegedly in breach must be notified of the breach and be given a reasonable period of time to correct the breach. In the case of a breach caused by the mortgagor's failure to pay any amounts due, the notice of default and right to reinstatement provisions of the mortgage control. This provision obviously is intended to address class action litigation and make it more difficult.

Payoffs: While the old mortgage required the mortgagee to release the mortgage upon payment in full and prohibited charging the mortgagor for preparing, executing or recording the discharge document, the new mortgage allows such a charge provided that it is paid over to a third party for services rendered and provided that state law allows charging such a fee. In a number of states, state law prohibits charging the mortgagor anything for discharging the mortgage.

As you can see, the new mortgage impacts the servicing of mortgage loans closed on the new form. It is imperative that you to review internal processes and procedures to make certain that your practices are consistent with the new mortgage. Failure to do so increases your risk of lawsuits.