Freddie Mac Guidelines: ARM-to-Fixed Conversion Documents

What Is a Seller-Owned Converted Mortgage

A seller-owned converted mortgage starts as an adjustable-rate mortgage with a conversion option built in. The borrower exercises this option to convert to a fixed rate, and the lender then sells the converted loan to Fannie Mae.

This happens when you originally took out an ARM that included a convertible feature. Maybe you got a 5/1 ARM in 2019 with the right to convert to a fixed rate during a specific window. You decided to convert in 2023 when rates looked favorable, and now your lender wants to sell that converted loan.

The conversion creates documentation challenges. Fannie Mae needs to verify that both the original ARM and the conversion process followed acceptable standards.

Required Documentation Package

Your lender must assemble three core pieces of documentation for Fannie Mae review.

First comes the original security instrument and convertible adjustable rate rider. These are the documents you signed when you first got the ARM. They establish the lien on your property and include the conversion provisions.

Second is a document that proves the conversion happened. This might be Freddie Mac Form 3180 (the Multistate Agreement to Convert) or another conversion document that contains the same essential provisions. This document must be recorded if recording is necessary to maintain first lien position.

Third is either your original convertible ARM note with the conversion document attached, or a completely new fixed-rate note. If your lender creates a new note, it must use the standard Fannie Mae/Freddie Mac fixed-rate note form.

When Original Documents Meet Standards

If your original ARM used standard Fannie Mae or Freddie Mac uniform instruments, the documentation process is straightforward. Your lender simply needs to verify the documents were the correct versions for your state and note date.

The original security instrument should be the Fannie Mae/Freddie Mac uniform security instrument that was current when you signed your loan. The convertible ARM rider should be either the Fannie Mae or Freddie Mac version that was paired with that security instrument.

Your original convertible ARM note should be the standard Fannie Mae or Freddie Mac uniform convertible ARM note that was current on your note date.

When Original Documents Are Nonstandard

Many lenders used their own custom documents instead of the uniform instruments. Fannie Mae will accept these nonstandard documents if they contain provisions comparable to the standard forms.

For the security instrument, your lender must verify that the nonstandard document includes key protections. These cover default and foreclosure rights, hazard insurance and condemnation procedures, restrictions on waiving homestead rights, lien priority matters, payment and escrow obligations, and bankruptcy provisions.

For the convertible ARM note, the lender reviews provisions around late fees, payment terms, and borrower rights. The late payment fee cannot exceed state law limits or Fannie Mae maximums. The note cannot allow skipped payments or grace periods for partial payments. It cannot waive homestead, dower, or similar marital rights.

Say you got your ARM from a credit union that used its own note form. Your current lender must compare that credit union note against the standard Fannie Mae convertible ARM note from the same time period. If the credit union note has comparable borrower protections and payment terms, it passes the test.

Construction and Renovation Loan Complications

If your original loan was a construction-to-permanent or renovation mortgage, the documentation gets more complex. You actually went through two conversions.

First, your construction loan converted to a permanent mortgage when construction finished. This conversion must have followed the requirements in Fannie Mae's construction lending guidelines [[Chapter 4602]].

Second, your permanent ARM converted to a fixed-rate mortgage when you exercised the conversion option. This second conversion must follow the requirements in this section.

The construction-to-permanent conversion must happen before the ARM-to-fixed conversion. You cannot convert from ARM to fixed rate while still in the construction phase.

Your lender needs documentation showing both conversions occurred properly and in the correct sequence.

Common Documentation Problems

Missing or incomplete conversion documents create the biggest problems. Some lenders execute the conversion but fail to record the conversion document when recording is required for lien priority. This can jeopardize the first lien position that Fannie Mae requires.

Timing issues also cause trouble. If you converted during a period when your lender was using outdated forms, the documentation might not meet current standards. Your lender must verify they used the correct forms for the actual conversion date, not necessarily the most current forms available today.

Version mismatches between the original ARM documents create another headache. Maybe your security instrument was the 2010 version but your convertible rider was from 2012. These inconsistencies require careful review to ensure all provisions work together properly.

For construction loans, incomplete documentation of the construction-to-permanent conversion can derail the entire process. If the construction phase conversion was not properly documented under [[Chapter 4602]], the subsequent ARM-to-fixed conversion cannot proceed.

Why These Rules Exist

Fannie Mae's documentation requirements protect both the borrower and the investor who ultimately owns the loan. The original ARM documents establish the basic loan terms and security interest. The conversion documents modify those terms in a specific, limited way.

Without proper documentation, questions could arise about what interest rate applies, when payments are due, or what happens in default. These uncertainties create risk for everyone involved.

The requirement for comparable provisions in nonstandard documents ensures borrowers get the same basic protections regardless of which lender originated their ARM. A credit union's custom note form might look different from the standard Fannie Mae note, but it must provide similar borrower safeguards.

Recording requirements protect lien priority. If the conversion document is not recorded when state law requires recording, another creditor might claim superior rights to the property.

References

For the official guidelines, see 4402.3: Uniform Instruments and nonstandard documents for Seller-Owned Converted Mortgages in the Fannie Mae Selling Guide.