Engagement of Counsel Letter and Default …



INSTRUCTIONS

ENGAGEMENT OF COUNSEL LETTER AND DEFAULT HANDLING CHECKLIST

Fannie Mae and the Lender are to jointly decide on outside trial counsel to handle the foreclosure. Such counsel should have substantial experience and high competence in multifamily or commercial cases involving receivership actions, foreclosures, and lender liability claims. If the loan goes into bankruptcy, depending on the bankruptcy expertise of trial counsel, outside trial counsel may also be retained as bankruptcy counsel.

A substantial portion of the engagement letter is devoted to explaining the DUS relationship, Fannie Mae procedures for defaulted loans, and the operating parameters for outside counsel. There are several paragraphs that are marked to show that they may not be applicable in certain jurisdictions. Please delete these paragraphs on a case-by-case basis, as applicable.

Page 4 contains a conflict of interest paragraph that must be completed prior to sending the letter. The provision determines in advance who counsel will represent in the event of a conflict or potential conflict of interest between the Lender and Fannie Mae. In order to make this determination, the Delinquency Task Force has created the following guidelines. If the outside trial counsel is someone (or some firm) that the Lender has an ongoing relationship with, then counsel should continue to represent the Lender in the case of a conflict. If the outside trial counsel is someone (or some firm) that Fannie Mae has an ongoing relationship with, then counsel should continue to represent Fannie Mae in the case of a conflict. In instances where neither party has engaged local counsel in that jurisdiction or local counsel previously engaged does not have the requisite expertise or is otherwise conflicted out, then Fannie Mae and the Lender will jointly determine in advance who the outside counsel will represent in the event of a future conflict of interest. Only in rare circumstances should the parties pick the last option --that both Fannie Mae and the Lender will seek other counsel--and this option must be approved by the Property Regional Office's regional counsel.

IF THE LENDER OR FANNIE MAE HAS BEEN SUED BY THE BORROWER THE LENDER AND FANNIE MAE SHALL NOT RETAIN JOINT COUNSEL WITHOUT FIRST OBTAINING FANNIE MAE'S OFFICE OF GENERAL COUNSEL'S APPROVAL.

Fannie Mae Regional Counsel (or an attorney in the Regional Counsel Division if Regional Counsel has so delegated) should execute the letter on behalf of Fannie Mae.

A Default Handling Checklist/Outside Counsel Engagement and Performance Checklist is attached to the joint engagement of counsel letter. It is imperative that the Lender, the Fannie Mae multifamily representative, the Fannie Mae inside counsel and outside counsel meet or have a conference call immediately upon engagement to discuss the DUS relationship, the facts/peculiarities of the loan in question, the applicable law, and to strategize about a course of action. Please discuss each of the topics on the checklist and feel free to add others as needed. It has been the experience of a number of people that holding these discussions at the outset saves time and money in the future and ensures that all participants have the same expectations and understandings.

[ENGAGEMENT OF COUNSEL LETTER]

CONFIDENTIAL

ATTORNEY/CLIENT AND WORK PRODUCT PRIVILEGED -

PREPARED IN ANTICIPATION OF LITIGATION

[Date]

[Law Firm]

[Address]

[Attn: ______________, Esq.]

Re: [Name of project; project address]

[Name of Lender ("Lender")]

Dear ______________:

The purpose of this letter is to confirm your employment by Federal National Mortgage Association ("Fannie Mae") to represent Fannie Mae's interests in the foreclosure of the mortgage pertaining to the referenced property as well as to set forth the policies and procedures applicable to such representation under the Fannie Mae Delegated Underwriting and Servicing ("DUS") product line.

Enclosed are copies of the relevant legal documents for the subject mortgage loan as listed on Exhibit A, attached hereto. If you need any more legal documents, please contact the Lender. Items not included are noted on the checklist and will be forwarded to you under separate cover. The Lender maintains all the original legal documents except that Fannie Mae keeps the original note and any letters of credit; however, Fannie Mae generally has copies of all legal documents. Current financial information concerning this loan can be obtained from the Lender.

A. Background Information

1. Fannie Mae.

Fannie Mae is a private shareholder-owned corporation chartered by the U. S. Congress (12 USC 1716 et seq.). Fannie Mae should be described in legal pleadings as "a corporation organized and existing under the laws of the United States"and should be referred to in pleadings as "Fannie Mae" and not "FNMA". By its federal charter, Fannie Mae is exempt from state registration laws and both state and local taxes. The term "Fannie Mae" is an assumed business name adopted by the corporation. Fannie Mae is not a government agency. It is a corporation chartered by Congress and imbued with the public purpose of providing financing for residential housing through the purchase of mortgages originated by primary lenders.

2. The DUS Lender.

The Lender is a _________________________ [corporation/partnership] primarily engaged in the business of mortgage banking [or other accurate description of the Lender]. In that respect, the Lender originates mortgage loans on multifamily apartment projects for sale to investors in the secondary mortgage market. Fannie Mae is such a secondary market investor. Upon sale of such mortgages, the Lender services such mortgages for a servicing fee in accordance with the Fannie Mae Contract and the DUS Guide (described below). As such servicer, the Lender is responsible for, among other things, collecting and remitting payments from the borrower, furnishing loan documents and other loan level information in its possession to you during the delinquency resolution process, and sharing with Fannie Mae in any loss arising out of the defaulted loan in accordance with a loss sharing formula specified in the Loss Sharing Agreement. You should take particular note of the fact that the DUS relationship is solely between the Lender and Fannie Mae (the Borrower is not a third party beneficiary of the DUS relationship) and such DUS relationship is separate and distinct from the borrower's relationship with Fannie Mae. The DUS relationship between the Lender and Fannie Mae is governed by the documents set forth below in paragraph B. The borrower's relationship with Fannie Mae is governed by the loan documents. Pursuant to the DUS documents set forth below, if the borrower does not make its loan payments then the Lender is obligated to make delinquency and servicing advances, within certain parameters, to Fannie Mae with respect to the loan. Such advances do not excuse, waive, or in any way affect the amount owed to Fannie Mae by the borrower under its loan documents.

B. The DUS Relationship

The relationship between Fannie Mae and the Lender under DUS is defined and controlled by the following related legal agreements:

1. The Contract.

The Mortgage Selling and Servicing Contract, as amended by the DUS Addendum (collectively "the Contract"), establishes the Lender as an approved originator and seller of mortgages under DUS, and provides the terms and conditions governing DUS mortgage sales to Fannie Mae. It also establishes the Lender as an approved servicer of mortgages under DUS, provides the terms and conditions governing DUS mortgage servicing, and establishes certain rights and remedies of Fannie Mae and the Lender under DUS.

2. The DUS Guide.

The DUS Guide is a comprehensive statement of the procedures and requirements Fannie Mae has established for the DUS product line. The DUS Guide is incorporated into the Contract, and is, therefore, a binding legal agreement between Fannie Mae and the Lender.

3. The Loss Sharing Agreement.

A DUS Loss Sharing Agreement covers each mortgage loan the Lender delivers to Fannie Mae for purchase under DUS. The Loss Sharing Agreement sets forth the loss sharing arrangement between Fannie Mae and the Lender regarding any losses on a specific mortgage loan and provides that Fannie Mae may increase the Lender's loss sharing risk level in the event the Lender defaults in underwriting, selling or servicing the mortgage.

4. The Reserve Agreement.

The DUS Reserve Agreement is executed by the Lender, Fannie Mae and the Custodian. The Reserve Agreement sets forth the terms and conditions for maintaining the lender reserve that secures the Lender's loss sharing obligations under DUS.

Borrower is not a party to, obligated under, or beneficiary of any of the foregoing documents.

C. The Relationship with Litigation/Foreclosure Counsel

1. Lines of Communication.

You are being retained solely by Fannie Mae. All strategic and policy decisions will be made solely by Fannie Mae. Your primary point of contact for the day-to-day administration of this matter and for information concerning the loan or the property will be Fannie Mae. You are to send copies of all correspondence and pleadings to the Fannie Mae in-house counsel and Fannie Mae Multifamily representative assigned to this matter. In addition, the Lender who will share with Fannie Mae in the ultimate loss on this mortgage loan and who remains the servicer of the mortgage loan, should be kept informed of all major decisions and sent copies of all court filings and other correspondence regarding the mortgage loan. In order to start off the relationship properly and discuss our expectations, we find it beneficial to have a meeting [conference call] of all parties involved, as soon as possible. At the meeting [conference call] we will review and discuss the items on the attached checklist. We will go into further detail on the relationship between Fannie Mae and the Lender, the types of information and decisions Fannie Mae and/or the Lender should be apprised of, the dual track approach to delinquency resolution, the specifics about this mortgage loan, and the strategies to be employed in the delinquency resolution. We are available for a meeting [conference call] at __________________________________________ on _________________________________________________________________. This initial meeting [conference call] is very important to ensuring that the subsequent resolution of this loan delinquency occurs in an efficient and effective manner.

2. Trial Counsel Requirements.

Fannie Mae expects that its trial counsel will have substantial experience and high competence in multifamily or commercial cases involving receivership actions, foreclosures, lender liability claims, and relief from bankruptcy stays in Chapter 11 cases. Without prior agreement, trial counsel may not delegate key legal functions (such as court appearances) to a junior member of the firm. Although we seek aggressive representation, trial counsel should preserve our options for pursuing reasonably acceptable stipulations.

3. Key Contacts.

a. For Fannie Mae:

Multifamily Representative:

_____________________ ( ) _______________

Telecopy # ( ) ___________________________

In-house counsel:

_____________________ ( ) _______________

Telecopy # ( ) ___________________________

b. For Lender:

_____________________ ( ) _______________

Telecopy # ( ) ___________________________

_____________________ ( ) _______________

Telecopy # ( ) ___________________________

D. Litigation Policies and Procedures

1. Initial Default Response.

When a DUS loan is seriously in default, legal procedures will normally be commenced through the issuance of a letter by you, to the borrowers and management agent, that accelerates the loan and makes a demand for the rental proceeds under the assignment of rents clause in the mortgage. Trial counsel will normally be asked immediately to commence a receivership action, followed as soon as possible by a non-judicial foreclosure. At times, we may not have a management company to recommend as receiver, and trial counsel will be asked to recommend a management company for that purpose. Trial counsel may also be expected to represent us in any existing or forthcoming bankruptcy, but we reserve the right to retain different bankruptcy counsel and will expect total cooperation in that regard from your firm. In the event you receive notice of the filing of a bankruptcy petition in connection with this matter, please confirm your representation with Fannie Mae in-house counsel before commencing any representation on such bankruptcy matter. It is also important for you to know that if the borrower is cooperative and remits its net operating income (pursuant to a budget we have agreed upon with the borrower) to the Lender, then Fannie Mae will often concurrently pursue workout negotiations with the borrower. Workout negotiations are discussed in Paragraph D9 of this letter.

2. Receivership Bonds. [Not applicable in some jurisdictions.]

In order to avoid delay in obtaining an appointment of a receiver, trial counsel should immediately begin coordinating arrangements to obtain any necessary receivership bond. These arrangements should be concluded in advance so that the receiver may take possession immediately after being appointed. If Fannie Mae must submit an application or provide its corporate financial statements, please direct these requests to the assigned multifamily representative. If the cost of the bonds is negotiable, we expect your assistance in obtaining a bond at a competitive price.

3. Controlling the Rents.

Fannie Mae takes the position that, upon receipt of the acceleration/rent demand letter described above, the borrower and its agents must act as Fannie Mae's trustees in handling rental proceeds. They therefore become personally liable for any failure to comply with the letter. Trial counsel will, within practical limits, be expected to press claims of this type.

Fannie Mae places great emphasis upon obtaining control of the rents and management of the project as soon as possible. Therefore, immediately after receiving the case, we expect trial counsel to prepare and file the necessary complaint and get the earliest possible hearing date for appointing a receiver. In some cases this may be preceded by a TRO hearing to freeze disbursement of any rents without prior Fannie Mae consent.

If the project is in bankruptcy when referred to trial counsel, trial counsel is expected to begin immediate negotiations for a stipulated cash collateral order. However, if it appears that the debtors will not be reasonably cooperative, trial counsel should immediately file a complaint in the bankruptcy court and obtain a prompt hearing for a cash collateral order. A motion for relief from the stay will also be filed at an appropriate time.

4. Net Operating Income.

Receivership or cash collateral orders on DUS loans must clearly and specifically define those expenses that may be paid without prior Fannie Mae and Lender approval, as well as any that require such prior approval (such as for capital improvements or extensive repairs). The order must require monthly payments and detailed reports to be sent to the Lender and Fannie Mae.

Once an order of receivership or a cash collateral order has been entered by the court, we expect full and complete compliance with the terms of the order by the borrower and the management company. If there is any serious degree of noncompliance, we will immediately notify trial counsel to bring any action necessary to enforce the order, including a request for a citation for contempt.

5. Appraisal and Environmental Hazard Assessment.

Fannie Mae prefers that trial counsel retain the environmental consultant and the appraiser for the project and there are established procedures to accomplish this. Please contact the Fannie Mae regarding these procedures. Fannie Mae shall promptly reimburse you for the appraisal and the environmental study.

6. Foreclosure Postponements.

Quite often, foreclosure sales will be postponed due to an impending workout agreement or a Chapter 11 bankruptcy. Therefore, you should not hold a foreclosure sale without specifically clearing the sale with the Lender and Fannie Mae counsel. If Fannie Mae instructs you to postpone the sale, you will be given a new sale date. Whenever a sale is postponed, all parties must be notified in writing of the new date, place, and time of the sale. Trial counsel should review the deed of trust [mortgage] for any restrictions on the number or period of time of postponements.

7. Credit Bids, Reinstatements, Payoff.

Fannie Mae will normally credit bid the full indebtedness owed by the borrower, consisting of the unpaid principal balance, accrued interest, negative amortization, default interest, late charges, legal and trustee fees and costs, advances, and in some cases prepayment or yield maintenance charges. [Note: some of these amounts may not be allowed in all jurisdictions.] Trial counsel should obtain these various line items and the total figure in writing from the Lender in advance of the sale date, together with per diem rates. Send a copy to the Fannie Mae multifamily representative and in-house counsel. Fannie Mae must be contacted prior to the sale to confirm the bid amount and to confirm instructions on holding or postponing the sale. Please also contact the Lender for payoff and reinstatement amounts. Again, please note that the credit bid amount, payoff or reinstatement amount is what is owed by the borrower under its loan documents and does not include any delinquency or servicing advances that may have been made by the Lender in connection with the loan.

8. Foreclosure Trustee. [Not applicable in some jurisdictions.]

We prefer to use an experienced and competent attorney as a substitute trustee under the deed of trust wherever possible, because such work is normally billed hourly. This should save money and offer other advantages. When choosing a title company as trustee, we expect trial counsel to negotiate the best fee possible from a company that will provide prompt and high quality service. Rates for trustee fees vary considerably, and we are interested in obtaining good service at the best possible price. You should negotiate with at least two providers of trustee services. The Fannie Mae in-house counsel will furnish you with a schedule of approved trustee fees upon request.

9. Workout Negotiations.

Negotiations for workouts of delinquencies are handled by Fannie Mae and the Lender. Normally, trial counsel is not asked to participate in these negotiations because they primarily concern business considerations. However, you should be aware that such negotiations can be going on at any time. We will notify you of any substantial breakthrough or probable agreement, and may engage you to draft a workout or forbearance agreement.

10. [Insert one-action rule paragraph if applicable to your jurisdiction.]

E. Billing Policies

In general, we do not favor being billed by more than one attorney for conferences with other attorneys in the firm to develop strategy or discuss issues in the case. Fortunately, these cases are normally not complex enough to require extensive conferences. We recognize, however, that such strategy meetings may at times be necessary on highly critical points, in which case we will pay for the time of only one attorney. We also expect that your hourly fees for attorney services include reasonable levels of word processing and other routine support services, and we do not expect to be charged separately for this support. Certain additional charges, such as staff overtime and "automated litigation support" will be accepted only if we expressly agree to them in advance.

As to costs, we will pay only actual out-of-pocket costs paid to a third party vendor. The only exception to that is in-house costs of photocopy work not exceeding twenty cents per copy and telecopier charges not to exceed one dollar per page. Bills must indicate that such charges are prepared on this basis. If we are to be billed for computer generated research, a copy of the print-out must be received by us on or before receipt of the bill.

We will compensate for time spent in transit. If travel time is devoted to working for one or more clients in addition to the work related to this project, we should be billed only for the proportionate time. As with travel time, if travel itself is undertaken for more than one client, we ask that you charge us only our proportionate share of the disbursement. Unless agreed to in advance, time away from home or the office which is not in transit or spent performing legal services will not be compensated. Fannie Mae will reimburse only for coach class travel unless unusual circumstances justify otherwise. We will reimburse for reasonable hotel and meal costs.

Your billing format should indicate, for each unit of service charged to us, (i) the identity and hourly rate of the attorney or legal assistant, (ii) a brief but informative description of the service provided, (iii) the time spent (the minimum unit of time charged to us may not exceed twelve minutes), (iv) the total dollar amount for that segment of service, and (v) a cumulative total of all billings on the subject case.

All of your billings, together with the bills from any separate trustee or title company, should be sent to Fannie Mae for approval and payment, with a copy of all such billings sent to the Lender. A trial counsel who also acts as trustee should itemize and bill for trustee services separately from legal services.

Billings which do not comply with the above policies will be returned to you for correction prior to payment. Bills should be submitted promptly at the end of each month. Billings which meet these requirements will be promptly processed.

We hope that you find the above information useful in representing Fannie Mae. Please call us if you have any questions.

Sincerely yours,

FEDERAL NATIONAL MORTGAGE ASSOCIATION

By: ______________________________

Name: ______________________________

Title: Vice President, Regional Counsel

Exhibit "A"

Project Name: ______________________________

1. Multifamily Note and Addendum

2. Multifamily Deed of Trust and Rider

3. Assignment of Deed of Trust

4. Assignment of Rents

5. Assignment of Assignment of Rents

6. UCC-1 with Assignment

7. Title Insurance Policy

8. Survey

9. ______________________________

10. ______________________________

DEFAULT HANDLING CHECKLIST

OUTSIDE COUNSEL

ENGAGEMENT AND PERFORMANCE EXPECTATIONS

PROPERTY NAME: ____________________________ LOAN #: _________________

CITY, STATE: ________________________________ # UNITS: _________________

ORIG LOAN AMT: $_______________ DATE SOLD TO FANNIE MAE: ___________

LENDER: _______________________________ DUS LOSS LEVEL:__________________

OUTSIDE COUNSEL CONTACT: _______________________________________________

FIRM NAME: ________________________________________________________________

ADDRESS: ___________________________________________________________________

CITY, STATE, ZIP: ___________________________________________________________

PHONE NUMBER: ____________________________________________________________

FAX NUMBER: _______________________________________________________________

COMMENTS: _________________________________________________________________

______________________________________________________________________________

OC/LENDER/Fannie Mae Conference Call/Meeting Scheduled __________________

Time: __________ Location: ____________________________________________________

1. Discuss DUS Relationship:

-Fannie Mae/Lender relationship __________________

-Fannie Mae and Lender/Borrower relationship __________________

2. Discuss Need to Know:

-general court persuasion (Pro Debtor/Pro Lender) __________________

-advertising requirements/timeframe __________________

-foreclosure process/timing __________________

-local law requirements /downside of

delaying/rescheduling of foreclosure sale __________________

-perfection of our interest in rental income __________________

-assignment of rents __________________

-revocation of borrower's license to collect rents __________________

-receiver appointment __________________

-one action rule __________________

-deed-in-lieu __________________

-mortgagee-in-possession __________________

-bankruptcy implications/expectations __________________

-worst case scenario __________________

-estimated legal fees & expenses __________________

3. Discuss Need to Procure:

-title check/title policy [Counsel] __________________

-UCC check [Counsel] __________________

-environmental assessment [Lender/Fannie Mae] __________________

-leases [Lender/Counsel] __________________

-appraisal [Fannie Mae/Counsel/Lender] __________________

4. Discuss Fannie Mae's Position After Review Of:

-leases __________________

-Repair Escrow Agreement __________________

-Replacement Reserves Escrow Agreement __________________

-Achievement Escrow Agreement __________________

-Drawing and application of LOC proceeds __________________

-other Escrow Agreements __________________

-regulatory agreement or other land use restriction __________________

5. Discuss:

-Dual Track Approach (pursue foreclosure

and concurrently) __________________

-Pre-negotiation Letter Agreement __________________

-Dated: __________________

-Fully Executed?: __________________

6. Discuss Expectations Regarding:

-legal services provided to Fannie Mae __________________

-Role of Lender and type of information to be

provided to or by the Lender __________________

7. Facts:

-date of first default __________________

-enumerate defaults __________________

-interest rate on note __________________

-default rate __________________

-late charges __________________

-UPB __________________

-escrow shortages __________________

-base or maximum loan? __________________

-if maximum, application of letter of credit? __________________

-waivers to borrower at origination? __________________

8. Scheduled Meetings/Conference Calls:

-dates/times __________________

-monthly written status reports __________________

9. Specific Jurisdictional Requirements:

-______________________________ __________________

10. Miscellaneous:

-transfer and recordation taxes __________________

-lender pays scheduled payments vs. actual upb __________________

-lender accounting of scheduled and actual payment

records. Note: Use actual payment records for

foreclosure. __________________

11. Other:

_________________________________________________ __________________

_________________________________________________ __________________

_________________________________________________ __________________

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