Why These Rules Exist
Fannie Mae created these restrictions to prevent lenders from gaming the system and manipulating prepayment patterns in mortgage-backed securities (MBS) pools. When lenders engage in prohibited practices, it can artificially inflate prepayment speeds and disrupt the expected cash flows that investors rely on.
The rules also protect borrowers from predatory refinancing schemes where lenders might encourage unnecessary refinances or structure deals to circumvent Fannie Mae's pricing and risk controls.
What Lenders Cannot Do
The most common violation involves targeting. Your lender cannot specifically market refinance offers to you because your current loan is owned by Fannie Mae. They must treat all borrowers the same way, regardless of who owns their existing mortgage.
Say you have a Fannie Mae loan at 6% interest and rates drop to 4%. Your current servicer cannot send you a special refinance offer just because they know Fannie Mae owns your loan. They can market to all borrowers in your area, but they cannot create separate campaigns targeting Fannie Mae borrowers specifically.
Lenders also cannot deliver loans to Fannie Mae that are already in the refinancing pipeline. If your lender originates a loan on Monday and starts processing your refinance application on Tuesday, they cannot sell that Monday loan to Fannie Mae.
Prearranged Refinancing Agreements
These rules get strict when it comes to prearranged deals. Your lender cannot promise you special terms for a future refinance as an incentive to take out your current loan.
For example, a lender cannot tell you: "Take this 5% loan today, and we'll guarantee you can refinance at cost in six months if rates drop." That type of arrangement shortens the expected life of the loan and disrupts Fannie Mae's pricing models.
The one exception requires a special negotiated contract with Fannie Mae. If your lender believes they might have such an arrangement, they must contact their Fannie Mae account team before delivering the loan.
The 30-Day Cash-Out Rule
This rule prevents borrowers and lenders from circumventing Fannie Mae's cash-out refinance pricing. You cannot do a cash-out refinance and then immediately do a limited cash-out refinance on the same property within 30 days.
Here's why this matters: Cash-out refinances carry higher rates and fees because they're riskier. Limited cash-out refinances get better pricing. The 30-day rule prevents you from doing a cash-out refi to get money, then quickly doing a limited cash-out refi to get the better rate.
If you completed a cash-out refinance on January 15th, you cannot apply for a limited cash-out refinance on the same property until at least February 15th.
Payment Advancement Schemes
Fannie Mae prohibits arrangements where lenders advance several mortgage payments on your behalf and then refinance the loan once those payments are made. These schemes artificially season loans and manipulate their payment history.
For instance, a lender cannot offer to make your next six mortgage payments and then refinance your loan after those payments post. This practice creates an artificial payment history that doesn't reflect your actual ability to make payments.
Conditional Tenders of Payment
A conditional tender of payment is essentially an offer to pay off a loan under certain conditions, often used as an alternative to traditional refinancing. Fannie Mae generally prohibits these arrangements.
The rule is simple: Fannie Mae only recognizes a refinance when the original mortgage debt is satisfied and the lien is released. Conditional tenders that leave the original lien in place while creating new financing arrangements are not acceptable.
There are two narrow exceptions: negotiated transactions involving seasoned portfolio loans that have been modified, and certain New York transactions that use consolidation, extension, and modification agreements under state law.
Consequences for Violations
If Fannie Mae discovers prohibited practices during their post-purchase reviews, they will require the lender to repurchase the loan. For loans that pay off within 120 days of purchase, Fannie Mae may also demand reimbursement of any premiums or buyup proceeds they paid.
Multiple violations can trigger broader enforcement actions against the lender, potentially affecting their ability to do business with Fannie Mae.
What This Means for Borrowers
These rules generally work in your favor by preventing predatory practices and ensuring fair treatment. However, they might limit some refinancing options or require longer waiting periods between certain types of refinances.
If your lender suggests any arrangement that seems to circumvent normal refinancing procedures, be cautious. Legitimate refinances should follow standard processes with proper documentation and appropriate waiting periods between transactions.
The rules also mean you might not receive targeted refinance offers from your current servicer, even when rates drop significantly. This doesn't prevent you from initiating a refinance yourself or shopping with other lenders.
References
For the official guidelines, see B2-1.3-04: Prohibited Refinancing Practices in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B2-1.3-04, Prohibited Refinancing Practices (08/04/2021)
Sellers/servicers may not:
specifically target Fannie Mae borrowers for offers to refinance;
treat loans they hold in their own portfolios and those sold to another investor or Fannie Mae as separate classes of loans for purposes of promoting refinancing.
Sellers/servicers may not, as a means of making a loan eligible for repurchase from an MBS pool (for future refinancing), encourage a borrower to refrain from making loan payments.
Prearranged Refinancing Agreements
Sellers/servicers may not deliver a loan to Fannie Mae that is in the process of being refinanced. Fannie Mae considers the delivery of a seasoned loan that is in the process of being refinanced as a form of targeting, and is therefore unacceptable, even if no agreement for future refinancing was entered into at the time of origination. The seller/servicer must have in place procedures to ensure that it does not deliver to Fannie Mae any loan that it is in the process of refinancing or acquiring from, or funding for, a third-party originator.
Similarly, a seller/servicer may not deliver a loan to Fannie Mae if the seller/servicer (or any affiliate or third-party originator) and the borrower have entered into an arrangement:
for special terms (such as reduced fees) for a future refinance of the loan - unless the seller/servicer obtains a negotiated contract from Fannie Mae that allows delivery of the loan in spite of its shortened prepayment expectation. If the seller/servicer believes that there might be such a refinance agreement, the seller/servicer should contact its Fannie Mae customer account team to determine whether the loan is eligible for delivery.
to complete a refinance transaction that circumvents Fannie Mae's cash-out refinance policies and pricing. A transaction is not eligible as a limited cash-out refinance if the borrower completed a cash-out refinance transaction with a note date 30 days or less prior to the application date of a new refinance secured by the same property.
Agreements to Advance Borrower Payments
Refinancing arrangements that call for the seller/servicer to advance a number of payments on the borrower’s behalf and then to refinance the mortgage once the agreed-upon payments have been advanced are not permitted.
Fannie Mae also restricts refinancing practices that affect prepayment patterns. Fannie Mae analyzes MBS pools that have high levels of prepayments. If such analysis raises concerns about a seller/servicer’s practices, Fannie Mae may review the seller/servicer’s origination and refinancing activities to ensure compliance with our requirements. With respect to any mortgage loan that pays off within 120 days from the whole loan purchase date or the MBS issue date, Fannie Mae in its sole discretion may require reimbursements by the seller/servicer for any premium paid or buyup proceeds paid in connection with the purchase of the mortgage loan. (For mortgage loans repurchased by a seller/servicer, Fannie Mae may require reimbursement in its sole discretion, without regard to the 120-day limitation.) See C1-1-01, Execution Options and C3-3-02, Accessing Buyup and Buydown Ratios and Calculating Payments or Charges for specific requirements.
Conditional Tenders of Payment
Conditional tenders of payment are not an acceptable alternative to refinancing for Fannie Mae loans, regardless of whether they relate to a loan being serviced for Fannie Mae or to a loan that is being delivered to it. Fannie Mae does not consider a refinancing to have occurred unless the mortgage debt is satisfied and the lien against the property is released. The only exceptions to this are
negotiated transactions involving seasoned loans held in a seller/servicer’s portfolio that have been modified since they were originated; and
transactions involving loans secured by properties in New York that are originated under the statutory provisions that permit refinanced loan to be documented by a consolidation, extension, and modification agreement.
If the transaction that permits the refinance to be documented by a consolidation, extension and modification agreement is related to an eMortgage, the seller/servicer must follow the applicable procedures in the Servicing Guide.
The seller/servicer must not
use conditional tenders of payment as a refinancing alternative, or
honor requests it receives for conditional tenders of payment for any loan that it services for Fannie Mae.
The seller/servicer that offers conditional tenders of payment as a refinancing alternative must not deliver any refinanced loan to Fannie Mae unless it is documented by a new note and a new loan, unless it is one of the previously mentioned authorized exceptions.
If Fannie Mae’s post-purchase underwriting performance review of a refinanced loan reveals that the conditional tender of payment procedure was used as an alternative to refinancing the loan, Fannie Mae will require the seller/servicer to repurchase the loan in question and, if multiple occurrences of this practice are identified, Fannie Mae may take other appropriate action against the seller/servicer.
