M. Servicing 2

The Ginnie Mae I MBS Program

A mortgage-backed securities program in which individual servicers issue securities and pass principal and interest payments directly to the securities holders, whether or not the mortgagor makes monthly payments. All mortgages in a GNMA I program must have the same fixed interest rate. The exception is securities backed by manufactured homes which may have different interest rates within the pool.

The Ginnie Mae II MBS Program

A mortgage-backed securities program in which pools of loans from several lenders may be combined into a single issue of securities. A central paying agent passes principal and interest payments directly to the securities holders. Loans in the GNMA II Program can have multiple interest rates, adjustable interest rates, and buydown interest rates. Pools may be formed by a single issuer or by multiple issuers, and all interest is paid to Ginnie Mae's current remitting agent, who in turn pays the individual security holder. Ginnie Mae requires servicers to reconcile custodial accounts on a monthly basis.

Trial Balance Report

A report that gives the status of each mortgage in a servicer's portfolio.

Adjusted bank balance statement

A statement that shows the ending balance after in-transit deposits and disbursements, plus any adjustments, are taken into consideration.

Actual/Actual

Actual Interest Collected and Actual Principal Collected This monthly remittance option requires the servicer to send investors the actual interest (net of servicing fees) and the actual principal collected from borrowers. Simply put, what the borrower actually sends in, the servicer forwards to the investor. In an actual/actual reporting method, an investor who owns a group of loans receives actual collections received from the borrower minus the service fee agreed upon in the sale of the loans to the investor. The service fee can vary by loan or by contract. Servicing fees are typically .25%, .375%, or .5% of the outstanding principal balance of the loan, although they can run significantly higher based on the portfolio of loans being serviced.

Reporting Methods

Actual/Actual Scheduled/Actual Scheduled/Scheduled

Which is NOT a reporting method used in mortgage lending?

Actual/scheduled

Monthly Account Statement

Addresses the collection and remittance activity for the prior cycle. Additionally separates the non-exception items from the exception items and breaks down the exception items based on what is expected to be remitted to Freddie Mac over the next month.

Ginne Mae - Special Considerations

All pools must be reviewed once a year with adjustments made to keep pools in balance. For audit purposes, each servicer should perform the following three additional calculations at the pool level. Monthly reconciliation of principal aids in reconciling a pool's loan principal to the security balance. This calculation takes the following into account: Principal balance Plus repaid principal Plus prepaid principal on paid in full loans Less delinquent principal Less schedule principal Plus last liquidation principal Plus or minus any adjustments Plus interest in advance loans These items are totaled and compared to the total reported balance. Monthly minimum cash required aids in reconciling and determining the custodial cash required. Daily cash reconciliation of collection/disbursements provides the servicer the principal and interest custodial balance and advance by pool.

Reporting Cutoff Date

This date is established by the issuer as the basis for its monthly accounting cycle. The issuer must establish a reporting cutoff date between the 25th of the month and the first day of the following month, inclusive, which must be applied consistently from month-to-month for all pools.

P&I custodial account

is a bank account that the servicer establishes to hold principal and interest funds, collected from borrowers, in trust for the investor. The principal and interest may come from any of the following sources: Monthly mortgage payments Prepayment Advances as contractually required Recovery of P&I advances previously made Other unscheduled principal receipts

A tax and insurance (T&I) account

is a separate account established to keep all escrow-related funds. Other funds such as unapplied, buydown, restricted escrow, and HUD funds, may also be held in the T&I custodial account.

clearing account

is a zero balance account that is balanced to zero on a daily, weekly, or monthly basis. Clearing accounts are used by corporations to eliminate excess balances in separate accounts and maintain greater control over disbursements. The volume of activity and the complexity of items processed determine how often the clearing account is reconciled.

A T&I (or escrow) custodial account

is also a bank account. The servicer establishes it to hold funds collected from borrowers to pay for taxes, hazard, and homeowners insurance.

Daily cash reconciliation collection/disbursements

provides the servicer with the principal and interest custodial bank balance and advance balance by pool. Special remittances made to Fannie Mae are funds other than principal and interest collections that are due to Fannie Mae for a specific relationship to the mortgage. Some examples of additional monies due to Fannie Mae are: Sales or redemption proceeds from acquired properties Repurchase or loss reimbursement proceeds Insurance premium refunds Rental payments Escrow balances for foreclosed properties Hazard insurance recoveries, etc.

Monthly minimum cash required

shows the amount of monies that should be in the custodial account as of the investor's cutoff date. The makeup of the monies is dependent on the reporting method (e.g. actual/actual) and timing of remittance, P&I, and payoffs.

How many days of interest will Fannie Mae receive if the scheduled/actual loan is paid on the 10th of the month?

15 days. Fannie Mae receives 15 days of interest for every paid in full loan for a scheduled/actual loan type.

Reconciliation of Ginnie Mae's custodial account must be completed within how many days of the servicer's cutoff date?

30

Non-Sufficient Funds - Principal & Interest (P&I) Advance or General Ledger (GL) Accounts

A P&I advance or GL account is created when the custodial P&I account balance is not sufficient to pay the investor with a scheduled/actual or a scheduled/scheduled reporting method. The difference is advanced to keep the account from being overdrawn and can later be recovered when additional payments are deposited to the account. Fannie Mae, Freddie Mac, and some private investors allow the servicer to use other prepaid funds to offset all or part of the corporate advances. Ginnie Mae allows prepaid funds to be used but has further a stipulation that the prepaid funds must be re-deposited into the account prior to any corporate advances being paid. The following could cause reconciling differences in P&I advance accounts: P&I advance balances are not reconciled when acquiring or selling loan from/to another servicer There are unidentified deposits into, or disbursements from, the general ledger or P&I custodial account

Personnel in the Reconciliation Process

A large servicing shop may have a department set up just to reconcile accounts, whereas a smaller servicing shop may only have a few employees who perform bank reconciliation functions and conduct any reporting and remitting to investors. However the reconciliation function is set up, there are two basic roles in the reconciliation process: The bank reconciliation specialist performs the actual reconciliation. He or she prepares and/or reviews reconciliations for general ledger accounts, clearing accounts, and custodial accounts, and ensures the timely and accurate preparation of the reconciliation. The investor reporting specialist acts as a liaison between the servicer and the investor and is responsible for analyzing the monthly accounting data and reporting and making any remittances to investors in accordance with investor's guidelines. This function also: Performs complete analysis of cash reconciliations to verify the movement of funds received to investor custodial accounts. Analyzes and resolves any discrepancies between investor and servicer reports in a timely and accurate manner. Maintains control and updates the various investors' changes to these guidelines and within the industry.

Seller/Servicer Remittance Analysis

A monthly report of the remittances FHLMC has received, the amounts posted as due, and the daily cumulative balances throughout the cycle.

EDI

Allows servicers to create a file containing all monthly loan-level reporting detail to be transmitted to the respective large investor. Investors: Fannie Mae Freddie MacGinnie Mae

MORNET

Allows the servicer to transmit pool information and to correct pool information by approved lenders. Investors: Fannie Mae

Scheduled/Actual

Amortized Interest and Actual Principal Collected The scheduled/actual monthly remittance option requires the servicer to give the investor the scheduled net (net of service fee) or pass-through interest due from the borrower regardless of the actual interest and principal collected from the borrower. The net or pass-through interest remitted is based on the calculated interest that would be collected on the current principal balance, regardless of the loan's due date. It is not necessarily the "scheduled" interest as if the loan were current. For delinquent loans, the difference between the true "scheduled" interest (collected at reinstatement) and the calculated interest is an expense to the servicer. For prepaid loans, the scheduled interest is not sent to the investor until the loan's "payment due date".

Scheduled/Scheduled

Amortized Interest and Amortized Principal This remittance option requires the servicer to give the investor the scheduled interest and the scheduled principal due, whether or not funds are collected from the borrower. Delinquent scheduled payments are remitted in the month they are due and the shortage is advanced by the servicer. Prepaid payments are held and not remitted until they are scheduled to be due.

Account reconciliation process

An account reconciliation generally looks something like this: Step 1. The bank statement arrives from the accounting department. The statement cutoff date should correspond to the investor's cutoff date. Step 2. The servicer validates the daily debits and credits associated with the daily loan level transactions against the actual deposits and disbursements on the bank statements. Step 3. Depending on the bank, there may be one or two days of deposits or disbursements in-transit that the servicer needs to identify as outstanding items. Step 4. The servicer researches all missing deposits, disbursements, and unidentified debits and/or credits to the bank account, includes proper documentation for each item, and takes appropriate action to clear any items that require such action. Step 5. The servicer uses the adjusted bank balance in reconciling the custodial accounts.

Escrow Advance Account

An escrow advance account is created when a bill is paid on behalf of the mortgagor because his or her escrow balance doesn't have sufficient funds to cover the outstanding bill. The servicer advances the difference between what is paid and the escrow balance within the account. Based on Real Estate Settlement Procedure Act (RESPA) regulations, the servicer can no longer use one mortgagor's escrow monies in the T&I custodial account to offset a shortage incurred by another mortgagor's shortfall. The servicer must total all loan level escrow advance balances and compare this to the activity and balance within the escrow advance general ledger to reconcile this account, a process referred to as aggregate escrow analysis. Any differences should be identified and corrected with the servicer's guidelines. The following items could cause reconciling differences: Escrow advance balances are not reconciled when acquiring, transferring, or selling loans from/to another servicer Loan level adjustments are made without a corresponding debit or credit to the account Improper funding of escrow advances during the normal course of business

P&I Reconciliation Worksheet

Principal and Interest Custodial Account Reconciliation Worksheet Form 59 Divided into three sections: Adjusted Bank Balance. This section adjusts the P&I custodial bank account as of the 15th of the month. Total Liability. This section adjusts net current amount due to Freddie Mac for delinquent and prepaid payments collected, but not remitted. Total Variance. This section identifies the amount of the variance between the adjusted bank balance and adjusted liability. Freddie Mac does a custodial account review (CAR) on a random basis and without notification. This may be done once a year and requires the servicer to send information (completed form 59 and 59E and other data) to Freddie Mac for a specific reporting cycle.

Bank Reconciliation Concepts

Bank reconciliation is an essential step in confirming the accuracy of financial data among the various parties. A successful reconciliation ensures that the servicer's financial records correspond with the investor's records and the bank's records.

SERVICING GATEWAY

Converts mortgage information to follow investor requirements for administrative reporting, delivery of loans, pricing and commitments, investor accounting, and default reporting. Investor: Freddie Mac

Freddie Mac Requirements

Created in 1970, the Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac, has quickly risen as one of the largest investors. Freddie Mac purchases loans under actual/actual, scheduled/actual, or scheduled/scheduled reporting methods. Freddie Mac requires servicers to reconcile custodial accounts on a monthly basis. Let's review how the servicer reconciles custodial accounts with Freddie Mac.

Custodial Accounts

Custodial accounts are often demand deposit accounts Demand Deposit Account (DDA)Similar to an individual checking account except the depositor, in this case the servicer, may use the balances to reduce the cost of their warehouse line funds with the bank or institution (compensating balances). In this type of account, deposited funds can be withdrawn at any time without any notice to the depository institution. maintained by a servicer into which principal and interest payments or escrow funds are deposited. There are two main types of custodial accounts: Principal and Interest (P&I) custodial accounts Tax and Insurance (T&I) custodial accounts

Form 472 (Schedule 3)

Reconciliation of Shortage/Surplus - Form 472 (Schedule 3) Used to document discrepancies in reconciling items identified on Schedules 1 and 2 and provide information on other reconciling items that have an effect on the shortage/surplus balance. (FNMA Investor Reporting Guide 1-02) Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Detailed Adjustment Report

Details of all adjustments made by Freddie Mac. Used to analyze cash differences.

Software applications commonly used

EDI SERVICING GATEWAY MORNET SURF GinnieNET LASER

Escrow Reconciliation Worksheet

Escrow Custodial Account Reconciliation Worksheet Form 59E Divided into three sections: Adjusted Bank Balance. Adjusts the T&I custodial bank account as of the 15th of each month. Total Liability. Adjusts escrow trial balance to adjusted escrow balance. Total Variance. This section identifies the amount of the variance between the adjusted bank balance and adjusted liability. Freddie Mac does a custodial account review (CAR) on a random basis and without notification. This may be done once a year and requires the servicer to send information (completed form 59 and 59E and other data) to Freddie Mac for a specific reporting cycle.

Which of the following steps is completed first when performing an annual escrow analysis?

Establish the criteria for the analysis

A clearing account is a zero balance account that should be balanced quarterly.

False

Reconciliations for private investor custodial accounts are generally done once a year.

False

Fannie Mae Requirements

Fannie Mae was established by Congress in the wake of the Great Depression to expand the flow of mortgage money by creating a secondary market for mortgages. Today it is the nation's largest investor in mortgage loans. Fannie Mae purchases loans under actual/actual, scheduled/actual, or scheduled/scheduled reporting methods and requires servicers to reconcile custodial accounts on a monthly basis. The servicer has various options in remitting funds and must complete the required forms when reconciling loans with Fannie Mae. Let's review the Fannie Mae reconciliation process.

Private Investor Requirements

Private investors are private investment bankers and organizations, as distinguished from "agency" or quasi-government investors such as Fannie Mae, Freddie Mac, and Ginnie Mae, who purchase loans for investment purposes. As part of the sale, a servicer may agree to perform loan administration duties on behalf of the investors in exchange for a servicing fee. The document governing the relationship between the investor and the servicer is the servicing agreement. Reconciliation for private investors is generally done monthly. Private investors may not require monthly documentation to be submitted upon completion of the reconciliation; however, they may request a yearly certification stating that the accounts are reconciled.

When establishing a T&I custodial account, the servicer must submit

Form 1014

Which of the following Fannie Mae forms is used to document discrepancies in principal and interest payments, loan counts, and UPBs for portfolio mortgages?

Form 473 - Reconciliation of Mortgage Portfolio

The forms required to reconcile principal and interest (P&I) and taxes and insurance (T&I) custodial accounts

Form 496 Form 496A Form 473 (Schedule 1) Form 473A (Schedule 2) Form 512 (Schedule 1) Form 472 (Schedule 3)

Loan Reconciliation Difference Report

Four sections summarize every transaction that Freddie Mac did not accept during the reporting cycle, for instance: Loan transactions applied by Freddie Mac (beginning and ending balances) Loan transactions applied by the servicer (total amounts due from activity) Invalid Freddie Mac loan number reported (loan numbers reported that Freddie Mac did not recognize as valid) Incorrect servicer number reported (loan numbers that Freddie Mac shows as belonging to a different servicer)

Which of the following is the primary reason servicers conduct reconciliations?

Fraud

NOT considered a clearing account

General ledger

The account types that must be reconciled are

General ledger Clearing P&I custodial

Ginnie Mae Clearing Account

Ginnie Mae I remittances to the individual security holders are often remitted out of a separate Ginnie Mae clearing account, although a separate account is not a requirement. The funds are debited from the P&I custodial account and moved to the Ginnie Mae clearing account. Either these funds are drafted by the current remitting agent, or checks are generated for the individual security holder. If a check is not cashed within six months on the Ginnie Mae clearing account, these funds must be identified and sent to Ginnie Mae to be held in trust for the security holder.

Ginnie Mae - Reconciling the Taxes and Insurance Custodial Account

Ginnie Mae requires the T&I portion of loan payments for each Ginnie Mae pool be deposited into a single T&I custodial account. These funds belong to the mortgagor (borrower). The account may contain funds for more than one pool provided that the issuer maintains separate accounting records for each pool. The servicer must also maintain individual account records for each account. The T&I custodial account is reconciled on a monthly basis. The servicer validates that the adjusted bank balance matches a servicer system generated report and that of the T&I custodial account balances at cutoff. The T&I account includes for each loan in the portfolio: Escrow funds Unapplied funds Loss drafts HUD funds

Investor - Reconciliation Forms

Private investors may have designated forms for reconciling the P&I and T&I custodial accounts. These forms have common elements in dictating the information the servicer must report, such as: Bank statement balance Deposits in transit Disbursements in transit Adjustments on loans

Issuer's Monthly Remittance Advice - HUD 11714

Provides a summary of information to the security holder with respect to current month's account transactions and calculation of security holder's share percentage of total cash distribution.

Freddie Mac Reporting Methods - Scheduled/Actual

Interest is calculated off the reported ending unpaid principal balance (UPB) of the prior cycle and the accounting net yield. The scheduled net or pass-through interest for one month must be reported and remitted, regardless of what is received from the mortgagor. In addition, actual principal received during the cycle is reported and remitted. This accounting method is used for the majority of investor reporting and remitting to Freddie Mac.

Investor Requirements in Bank Reconciliation

Investor Requirements in Bank Reconciliation examines the special requirements for reconciling accounts with each of these investors. It touches on requirements for reconciling P&I and T&I accounts, special considerations when reconciling accounts, and specific forms to use for each agency investor. The course also discusses private investor data requirements, reconciliation guidelines, and required forms.

What individual acts as a liaison between servicer and investor when reconciling accounts?

Investor reporting specialist

Importance of Accuracy

Investors require servicers to reconcile their accounts monthly to identify and correct any discrepancies between the servicer's records and the investor's records. There are several benefits of performing these monthly reconciliations for investors: Differences are quickly identified and more easily resolved. Remittances are more accurate. What happens when a servicer doesn't conduct accurate reconciliations? In a worst case scenario, if the servicer doesn't reconcile the accounts accurately, the investor could pull the servicing rights from the servicer and move loans to another servicer, thereby eliminating the monthly servicing fee revenue the servicer had been earning on the loans. Some additional items that could affect the servicer: There could be monetary penalties enforced by the investor. The servicer's standing with the investor could be affected. There could be an adverse effect on whether the servicer could sell additional loans to the investor. Reconciliation is an integral part of the mortgage servicing industry. Monthly reconciliation sheds light on potential issues and allows the servicer to address them before they are out of hand. Reconciliation reveals exactly how much money was deposited in, and disbursed from, custodial accounts which gives the servicer or accountant a clear-cut audit trail to share with investors; showing where cash activity originated, how it arrived, and where it went.

Form 473A (Schedule 2)

Reconciliation of Interest Rate/Pass-Thru Rate - Form 473A (Schedule 2) Used to document discrepancies in interest rates and/or pass-through rates for portfolio mortgages (accounted for as actual/actual, scheduled/actual, or scheduled/scheduled remittance types) and to determine their effect on the servicer's shortage/surplus. Used to document discrepancies in interest rates and/or pass-through rates for MBS pool mortgages that are accounted for as the scheduled/scheduled remittance type. Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Form 473 (Schedule 1)

Reconciliation of Mortgage Portfolio - Form 473 (Schedule 1) Used to determine document discrepancies in principal and interest (P&I) payments, loan counts, and unpaid principal balances (UPB) for portfolio mortgages that have either an actual/actual or a scheduled/actual remittance type and to determine their effect on the servicer's shortage/surplus. Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Investor - Reconciling the Principal and Interest Custodial Account

Investors require their principal and interest collections and escrow collections be held in separate custodial accounts on their behalf. This is documented in the servicing agreement between investor and the servicer. The servicer is required to reconcile the principal and interest account monthly. The investor may not require monthly documentation be submitted upon completion of the reconciliation; however, it may request a yearly certification stating that the accounts are reconciled. There are various regulatory requirements concerning the reconciliations of custodial accounts regardless of what is stated in the servicing agreement. Reconciling the P&I custodial account vary depending on the reporting method. Here are some items that the servicer will take in consideration when reconciling the principal and interest custodial account: Delinquent and prepaid net interest payment Payoffs with interest shortages or overages Loan types, odd due date, bi-weekly, daily simple interest, interest only Scheduled vs. applied interest which could result in interest differentials Monthly ARM changes Payoff and curtailment interest shortfall Curtailment/additional principal application and reversals Pool to security differences and any interest differential because of these differences Edited items or corrections Remittance differences from the investor P&I advances

Ginne Mae - Reconciliation Forms

Issuer's Monthly Accounting Report - HUD 11710A Issuer's Monthly Remittance Advice - HUD 11714

What report has four sections that summarize every transaction that Freddie Mac did not accept during the reporting cycle?

Loan Reconciliation Difference Report

Reports Freddie Mac sends out to servicers to use for reconciling custodial accounts

Loan Reconciliation Difference Report Monthly Account Statement Detailed Adjustment Report Seller/Servicer Remittance Analysis

What statement must the servicer use to reconcile the principal and interest custodial account?

Monthly account statement

In addition to completing the forms required to reconcile Fannie Mae's custodial account, the servicer should also perform three additional checks: the monthly reconciliation of principal, the daily cash reconciliation collection, and which of the following?

Monthly minimum cash required

Three additional monthly calculations that the servicer should perform on Fannie Mae accounts:

Monthly reconciliation of principal Monthly minimum cash required Daily cash reconciliation collection/disbursements

tax and insurance account

Most servicers reconcile the tax and insurance account as of the investor's cutoff date. The T&I account should be reconciled to the total escrow and other funds that are held in the escrow account associated with the loan level detail. This information can be found on a trial balance report or other similar reports, and the total page should be included in the reconciliation folder. Each day, the servicer should compare all the daily deposits and disbursements with the daily system transactional report.

Special Considerations

Most servicers will have some form of a variance; it could be a variance from last month or a difference in whether a deposit or disbursement is outstanding. The following are some items that should be considered when looking for outstanding deposits or disbursements: Edited reports received from Freddie Mac Exception activity with the correct remittance/adjustment amount Interest differences in what was remitted and what was collected Back dated payoffs Unidentified debits or credits to the bank account Any adjustments from Freddie Mac Participation funds

Form 512 (Schedule 1)

Reconciliation of Mortgage Portfolio - Form 512 (Schedule 1) Used to determine document discrepancies in P&I payments, loan counts, and UPB for portfolio mortgages that have either a scheduled/scheduled MBS or MRS remittance type and to determine their effect on the servicer's shortage/surplus. (FNMA Investor Reporting Guide 1-02) Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Bank Reconciliation in Mortgage Servicing Overview

One of the most efficient and most commonly used tools for verifying the accuracy of the bookkeeping system is a process known as "bank reconciliation" (or "bank recon"). This is carried out once a month, before the end of the month.Bank reconciliation is the process of comparing the servicer's loan records with investor and bank records and accounting for any differences among the three. Reconciliation consists of accountants or loan administration associates doing a monthly check to verify that all in-transit funds, outstanding debits, deposits, disbursements, and any miscellaneous fees are accounted for properly. In general, bank reconciliation establishes control and accountability for financial transactions associated with funds owed to investors and client monies. The bank reconciliation process is similar to the process of balancing a personal account in which you are trying to make sure that neither you nor the bank has made any mistakes. The same applies in the mortgage industry; servicers conduct mortgage reconciliations monthly to review and address any discrepancies.

Reconciliation Forms

P&I Reconciliation Worksheet Escrow Reconciliation Worksheet

types of clearing accounts

Payment Clearing Account Disbursement Clearing Account Remittance Clearing Account

Fannie Mae Reporting Methods - Scheduled/Actual

Payment activity passed through to Fannie Mae is scheduled interest based on the last reported principal balance and actual principal collections. The scheduled net or pass-through interest for one month must be reported and remitted, regardless of what is collected. In addition, actual principal received is reported and remitted.

Fannie Mae Reporting Methods - Actual/Actual

Payment collections are calculated on each individual note. Actual net or pass-through interest and principal collected during the cycle is reported and remitted to Fannie Mae.

Form 496

Principal and Interest Custodial Account Analysis - Form 496 Used to reconcile the servicer's P&I cash book to the P&I custodial accounts for funds held in Fannie Mae's portfolio and for MBS pool mortgages. Used to determine composition and reasonableness of the amount of funds held in the custodial accounts at the close of the reporting period. Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Which accounting method is used for the majority of investor reporting and remitting to Freddie Mac?

Scheduled/Actual

SURF

Servicer's Reconciliation Facility. SURF provides online reviewing and reconciliation of loan level data and displays the last three months of account records. Investors: Fannie Mae

Reconciling the Principal and Interest Custodial Account

Servicers should remit the funds that are due to Fannie Mae on or before the monthly due date. The exact remittance method depends on whether the mortgage is one Fannie Mae holds in its portfolio or as part of a mortgage backed security NMS pool and if the funds are to be drafted or wire-transferred. The majority of loans sold to Fannie Mae are in pools with varying interest rates, service fees, and guarantee fees. Fannie Mae requires the servicer to segregate the P&I custodial accounts by remit type and the Fannie Mae seller/service number. Here are some additional items to take into consideration when reconciling this account: For Fannie Mae actual/actual reporting, the total monthly wires should equal the collection reports; payments, curtailments, and paid in full loans For Fannie Mae scheduled/actual and scheduled/scheduled reporting, the total collections should equal the amount reported to Fannie Mae Loans may be reclassified out of an MBS pool to actual/actual remittance after three months of delinquency For scheduled/actual contracts, Fannie Mae receives 15 days of interest for every loan paid in full Delinquent and prepaid net interest and principal payments Curtailment application and reversal Monthly ARM changes Pool to security differences and possible interest differential needed because of these differences Over-collateralized / under collateralized pool differences Any loan modifications, reclassifications, repurchase of loans, and default-related activity P& I Advances

General ledger accounts

Servicing Fees Late charges Escrow advances P&I advances Corporate advances A general ledger account is reconciled prior to the servicer closing its books for the month-end.

Adjusted bank balance statement does not agree

Some of the items to take in consideration when the adjusted bank balance statement does not agree with the servicer internal reports are shown below: Manual deposits/disbursements Loans sold to an investor and escrow-related funds not transferred to the new investor's T&I custodial account An adjustment to any escrow-related balance without the corresponding deposit or disbursement Sale of loans or acquisitions of new loans or funds not reconciled between the two servicers New loan established with an escrow balance but funds not transferred Escrow advances not credited to the account for any loan not having enough escrow to pay a required bill Escrow advance repayments not debited from the account but updated on the loan level

Form 496A

Tax and Insurance Custodial Account Analysis - Form 496A Used to reconcile the servicer's T&I cash book to the T&I custodial accounts it uses to maintain funds for mortgages held in Fannie Mae's portfolio and for MBS pool mortgages. Used to determine the composition and reasonableness of the amount of funds held in the T&I custodial accounts at the close of the reporting period. Fannie Mae uses these forms to compare: Loan count Monthly P&I amount Principal balance Pass-through rate

Ginnie Mae Requirements

The Government National Mortgage Association (GNMA), also known as Ginnie Mae, was created in 1968 as an amendment to Title III of the National Housing Act. Ginnie Mae is a wholly-owned corporate instrument of the United States government within the Department of Housing and Urban Development (HUD). Ginnie Mae issues securities backed by FHA, VA, USDA, and NIH ("government" loans) and has two mortgage-backed securities (MBS) programs:

Investor - Reconciling the Taxes and Insurance Custodial Account

The T&I account reconciliation should reconcile the total escrow funds held for each loan with the investor to the adjusted bank balance for the custodial account holding those funds. The reporting method will not vary the reconciliation of the T&I account. Here are some items the servicer must take in consideration when reconciling the T&I custodial account: Differences must be identified In-transit deposits or disbursement must be identified

What would the servicer use to ensure the accuracy of reconciling accounts?

The adjusted bank balance statement.

The different investor accounting methods

The different investor accounting methods do not play a role in reconciling the T&I escrow account. Some investors require specific forms to be completed. If the investor does not have a specific form, the servicer's servicing system generally provides a screen that allows for validation of all the loan level information with each custodial account.

General Reconciliation Process

The general demand deposit or general ledger (GL) account reconciliation process is standard for any accounting type or reporting method. The reconciliation process is similar to the process used to reconcile a personal checking account. Let's review the process a little more closely.

Ginnie Mae - Reconciling the Principal and Interest Custodial Account

The issuer or servicer is required to establish and maintain a central principal and interest custodial account. This account can be a separate account for each program or a single account for both programs from which disbursements for investor payments and guaranty fees will be made. Each central P&I custodial account, whether Ginnie Mae I or II, must be maintained at a financial institution capable of being accessed by ACH by the depository and by the Central Payment and Transfer Agent Bank account reconciliations must be completed within 30 days of the servicer's monthly reporting cutoff date for all accounts relating to Ginnie Mae pools or loan packages, including but not limited to P&I custodial and disbursement accounts, escrow custodial accounts, collection clearing accounts, and buydown and other special escrow custodial accounts containing Ginnie Mae pool or loan package funds. The Ginnie Mae reporting method is scheduled/scheduled remittance. The servicer has to consider the following when reconciling the principal and interest custodial account: Delinquent and prepaid scheduled net interest and scheduled principal payments Payoffs Curtailment and payoff shortfall interest Curtailment/additional principal application Curtailment/additional principal reversals Monthly ARM changes Over-collateralized pool differences that are funded and then recovered once the over-collateralized differences are reconciled Under-collateralized pool differences that need to be passed through immediately Pool to security differences and any interest differential because of these differences Ginnie Mae II pool draft differences (principal and interest) Ginnie Mae I and II guaranty fee drafted amount P&I advances

Types of Reconciliation Accounts

The most common are principal and interest (P&I) and tax and insurance (T&I) custodial accounts. However, servicers must reconcile other types of accounts as well such as clearing accounts, general ledger accounts, and escrow advance accounts.

Fannie Mae Reporting Methods - Scheduled/Scheduled

The servicer calculates the scheduled net or pass-through interest and scheduled principal portion of a payment based on the last reported schedule principal balance. Scheduled principal is the amount calculated to (fully) amortize the loan over the term. Both the scheduled principal and the net or pass-through interest calculated for each loan is passed through to Fannie Mae regardless of collection.

Freddie Mac - Reconciling the Principal and Interest Custodial Account 2

The servicer must reconcile the total balance of the T&I custodial account as of the accounting cycle cutoff to the summary total amount due to Freddie Mac. The same deadline applies for reconciling this account as noted above. Here are some special requirements when reconciling the T&I custodial account: Differences must be identified Escrow trial balance totals reflect negative and positive escrow balances Adjustments for loans not included on trial balance Any shortages the servicer must advance funds into the account Must include any buy-down balances

Freddie Mac - Reconciling the Principal and Interest Custodial Account

The servicer must reconcile the total balance of the principal and interest custodial account as of the accounting cycle cutoff to the summary total amount due to Freddie Mac for the same accounting cycle cutoff. The deadline for reconciling Freddie Mac accounts is 45 days after each accounting cycle cutoff. The servicer should use the monthly account statement (MAS) to reconcile the principal and interest custodial account. The total amount due to Freddie Mac for the accounting cycle is the ending balance on the MAS that the investor transmits to the servicer. Within 90 days of the accounting cycle cutoff, the servicer must notify Freddie Mac of any overage variances receive any refunds and fund any shortage variances. (FHLMC User Guide - Understanding Custodial Accounts pg 1-13) The amount of funds to be reported and remitted from the mortgagor's account activity is determined by the accounting method used. Here are some items that should be taken into account when reconciling the principal and interest custodial account: Delinquent and prepaid net interest Delinquent and prepaid on scheduled/scheduled contract Curtailment/additional principal held until the next remittance month Inactivation of loans referred to foreclosure Repurchases Minority principal and interest not remitted Interest advances for scheduled/actual

Payment Clearing Account

This type of account is a zero balance account where all checks, ACH rafts, loan payoffs, and claim funds are deposited until a payment transaction or other transactional activity is processed on a loan. All funds are deposited in the payment clearing account. Then, based on activity posted to the loan, minus system rejects, the money should be moved from this ledger account to the individual investor's custodial accounts or into various general ledger accounts. This can be automated or done manually. Since this is a very active account with a high volume of funds being deposited and disbursed, this account should be reconciled to zero on a daily basis. Since this is a very active account with a high volume of funds being deposited and disbursed, this account should be reconciled to zero on a daily basis. Some of the issues to check for in reconciling a payment clearing account include: Funds are deposited but a transaction is not processed A transaction is processed but the funds are not posted Funds are deposited but the transaction rejects and is not applied to the loan Funds are deposited but the loan is not established on the servicing system, so the cash application cannot be posted Manual or automatic cash movement from this account to an investor or general ledger account is not completed ACH funds are not received on a drafted loan but the transaction was posted, or the ACH funds were deposited but the transaction not posted Western Union, pay-by-phone, or web-based deposit transactions are not posted properly Funds are deposited or disbursed with no loan level payment activity

What report can a servicer use to locate the funds to be reconciled in a tax and insurance custodial account?

Trial balance report

Reconciliation requirements for private investor are documented in the servicing agreement.

True

The servicer can establish one central P&I custodial account for Ginnie Mae MBS programs.

True

When the T&I custodial account does not reconcile, the bank reconciliation specialist should check for any recent manual escrow deposits/disbursements.

True

GinnieNET

Used as a data entry portal for information. Investors: Ginnie Mae

LASER

Used by investors to capture loan level details on mortgages serviced. It allows the servicer to recognize and account for any differences. Investors: Fannie Mae

Form 1014

Used to notify Fannie Mae that the servicer has established a custodial account in an acceptable insured depository for the deposit of tax and insurance escrow deposits (and other funds belonging to a borrower) that are related to the various remittance types that it services for Fannie Mae.

Issuer's Monthly Accounting Report - HUD 11710A

Used to report monthly pool accounting data. This report is broken up into five sections: Pool Administration. Describes the loan activity of the month Schedule of Payments. Principal and Interest Principal Amount of Securities. Describes amount from last report to current report. Remittance to Ginnie Mae. Status of Custodial Accounts. Account numbers and financial institution.

Monthly reconciliation of principal

aids in recording a pool's loan principal to security balance. This calculation takes in the consideration of the following: Principal balance Plus repaid principal Plus prepaid principal on paid in full loans Less delinquent principal Less schedule principal Plus last liquidation principal Plus or minus any adjustments Plus interest in advance loans These items are totaled and compared to the total reported balance.