Section 1907

Credit Enhancing Variable Rate Bonds

1907.01	Terms

Guidance

Fannie Mae does not provide liquidity support for variable rate demand BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. .

Requirements

Terms	Credit Enhancement Instrument	MBS for Bonds
Variable Interest Rate	A BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. and Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. must have an interest rate linked to the SIFMA Municipal Swap Index, an IndexIndexBasis for determining the Gross Note Rate of an ARM Loan, including any required alternative index that may be determined necessary by Fannie Mae because the Index is no longer widely accepted or has been replaced as the index for similar financial instruments. that adjusts weekly, or a SOFRSOFRFor any Business Day, the Secured Overnight Financing Rate as published by the Federal Reserve Bank of New York, or any successor administrator, on the Federal Reserve Website. -based index.	Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. must comply with Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans. BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. must have an interest rate linked to a SOFRSOFRFor any Business Day, the Secured Overnight Financing Rate as published by the Federal Reserve Bank of New York, or any successor administrator, on the Federal Reserve Website. -based index.
Bond Liquidity	You must obtain Fannie Mae’s approval for any third party providing BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. liquidity support.
No New 4% LIHTCs	Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. must have a term of at least 5 years, with a maximum of 30 years.	Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. must have a: term of at least 5 years, with a maximum of 30 years; and Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. coinciding with the final BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. maturity date, adjusted for applicable payment timing differences, or initial BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. tender and remarketing, if the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. has a scheduled mandatory tender date for remarketing.
New 4% LIHTCs	Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. must have a term of at least 10 years, with a maximum of 30 years.	Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. must have a: term of at least 10 years, with a maximum of 30 years; and Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. coinciding with the final BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. maturity date, adjusted for applicable payment timing differences, or initial BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. tender and remarketing, if the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. has a scheduled mandatory tender date for remarketing.
Maximum Note Rate	Determined by Fannie Mae.	Per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans.
Amortization	For a variable rate Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. using an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. , use the greater of the Maximum Note RateMaximum Note RateEquals the sum of the: minimum Cap Strike Rate as set by Fannie Mae; and Mortgage Loan margin equal to the sum of the Investor spread, Guaranty Fee, and Servicing Fee. , or actual Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. .	Per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans.
Maximum SARM Loan	Per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans.
PRF	You must establish a PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. .	Not applicable.
Fannie Mae Fees	Credit Enhancement FeeCredit Enhancement FeeFee due to Fannie Mae for a Credit Enhancement Instrument. .	Guaranty FeeGuaranty FeeFee retained by Fannie Mae for credit enhancing a Mortgage Loan or assuming credit risk on a Mortgage Loan, and which may be expressed as a percentage. .
Trustee Fee and Bond Issuer Fee	Underwritten as an operating expense, or part of the Gross Note RateGross Note RateInterest rate stated in the Loan Documents. .	Underwritten as an operating expense.
Gross Note Rate	Sum of the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. interest rate, Facility Fee (calculated perPart III, Chapter 19: Bond Transactions and Credit Enhancement Mortgage Loans, Section 1908: Facility Fee) divided by the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. UPBUPBUnpaid Principal Balance , trustee fee and BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. IssuerIssuerEntity that: issues Bonds for a Credit Enhancement Mortgage Loan; packages mortgages for sale as a Security for an MBS; or issues a Letter of Credit. fee, if they are not underwritten as an operating expense, and cap cost factor.	Sum of the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. interest rate, Guaranty FeeGuaranty FeeFee retained by Fannie Mae for credit enhancing a Mortgage Loan or assuming credit risk on a Mortgage Loan, and which may be expressed as a percentage. , and Servicing FeeServicing FeeFee a Servicer receives for collecting payments, managing operational procedures, and assuming your portion of credit risk for a Mortgage Loan, and which may be expressed as a percentage. .

1907.02	Principal Reserve Fund

Operating Procedures

Topics	Principal Reserve Fund Process
Borrower Election	Before CommitmentCommitmentContractual agreement between you and Fannie Mae where Fannie Mae agrees to buy a Mortgage Loan at a future date in exchange for an MBS, or at a specific price for a Cash Mortgage Loan, and you agree to Deliver that Mortgage Loan. , the BorrowerBorrowerPerson who is the obligor per the Note. must select 1 of the following options to redeem BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. : Minimum Dollar Balance: Required option for a non-single-asset entity BorrowerBorrowerPerson who is the obligor per the Note. . PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits accumulate until the balance is at least $100,000. BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. eligible for redemption are redeemed in $100,000 increments. Minimum Percentage Balance: PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits accumulate until the balance is at least $100,000 greater than 20% of the original BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. principal amount. BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. eligible for redemption are redeemed in $100,000 increments, but the redemption payments may not reduce the PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. balance below 20% of the original BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. principal amount.
PRF Deposit Amount	PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits represent the principal amortization amount of the Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. based on level P&IP&IPrincipal and interest payments throughout the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. term, and amortization per Part III, Chapter 19: Bond Transactions and Credit Enhancement Mortgage Loans, Section 1907.01: Terms.
PRF Deposit Schedule	On the Mortgage Loan Origination DateMortgage Loan Origination DateDate you fund a Mortgage Loan to the Borrower. , you must calculate and attach the Schedule of Deposits to the Principal Reserve FundPrincipal Reserve FundAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. to the Reimbursement Agreement.

Topics

Principal Reserve Fund Process

Borrower Election

Before CommitmentCommitmentContractual agreement between you and Fannie Mae where Fannie Mae agrees to buy a Mortgage Loan at a future date in exchange for an MBS, or at a specific price for a Cash Mortgage Loan, and you agree to Deliver that Mortgage Loan. , the BorrowerBorrowerPerson who is the obligor per the Note. must select 1 of the following options to redeem BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. :

Minimum Dollar Balance:
- Required option for a non-single-asset entity BorrowerBorrowerPerson who is the obligor per the Note. .
- PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits accumulate until the balance is at least $100,000.
- BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. eligible for redemption are redeemed in $100,000 increments.
Minimum Percentage Balance:
- PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits accumulate until the balance is at least $100,000 greater than 20% of the original BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. principal amount.
- BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. eligible for redemption are redeemed in $100,000 increments, but the redemption payments may not reduce the PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. balance below 20% of the original BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. principal amount.

PRF Deposit Amount

PRFPRFAccount you hold accumulating principal amortization payments for variable rate Bond credit enhancements. deposits represent the principal amortization amount of the Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. based on

level P&IP&IPrincipal and interest payments throughout the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. term, and
amortization per Part III, Chapter 19: Bond Transactions and Credit Enhancement Mortgage Loans, Section 1907.01: Terms.

PRF Deposit Schedule

On the , you must calculate and attach the Schedule of Deposits to the to the Reimbursement Agreement.

1907.03	Interest Rate Cap

Requirements

Terms	You must ensure the third-party Interest Rate Cap...
Interest Rate Cap	For a variable rate Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. with variable rate BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. , is purchased and maintained for the entire time the variable rate BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. are credit enhanced.
Index	Has the same IndexIndexBasis for determining the Gross Note Rate of an ARM Loan, including any required alternative index that may be determined necessary by Fannie Mae because the Index is no longer widely accepted or has been replaced as the index for similar financial instruments. as the variable rate BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. .
Interest Rate Cap Provider	Is obtained from an approved provider listed on https://multifamily.fanniemae.com.
Initial Interest Rate Cap	Notional Amount equals the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. UPBUPBUnpaid Principal Balance when the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is purchased.
Minimum Interest Rate Cap Term	Agreement remains continually in place until the earlier of 5 years, or the remaining BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. term.
Replacement Interest Rate Cap	ReplacementReplacementCapital item replacements and major maintenance needs identified by the Property Condition Assessment or otherwise required. is purchased if the existing Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. expires before the variable rate BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. conversion or Maturity DateMaturity DateDate all Mortgage Loan amounts become fully due and payable per the Loan Documents. .
Cap Strike Rate for Replacement Interest Rate Cap	Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. for the ReplacementReplacementCapital item replacements and major maintenance needs identified by the Property Condition Assessment or otherwise required. Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is the same or lower than that of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .
Cap cost factor	Cost factor is included in the Maximum Note RateMaximum Note RateEquals the sum of the: minimum Cap Strike Rate as set by Fannie Mae; and Mortgage Loan margin equal to the sum of the Investor spread, Guaranty Fee, and Servicing Fee. per Part III, Chapter 19: Bond Transactions and Credit Enhancement Mortgage Loans, Section 1907.05: Cap Cost Factor Included in Maximum Note Rate.
Interest Rate Cap Reserve Adjustment	Cash reserve: is evaluated at the end of each 6-month period to determine if the cost of the replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. has increased, based on market conditions; and future deposits are not decreased even if the future Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. cost has decreased.
Documents	Documents are: on acceptable forms; and delivered to Fannie Mae, including the Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. , and applicable Interest Rate Cap Reserve and Security Agreement (Form 6442 series).

Operating Procedures

Fannie Mae will engage outside counsel at your expense to review all Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. -related documents.

1907.04	Cap Strike Rate

Operating Procedures

The BorrowerBorrowerPerson who is the obligor per the Note. must purchase an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. with a Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. that is determined

for a Credit Enhancement InstrumentCredit Enhancement InstrumentAgreement between Fannie Mae and a Bond Trustee where Fannie Mae provides credit enhancement of a Credit Enhancement Mortgage Loan, Bonds issued to finance a Credit Enhancement Mortgage Loan, or an Interest Rate Hedge Agreement; and if applicable, a Bond liquidity facility. , by Fannie Mae, or
for an MBS for BondsMBS for BondsFannie Mae MBS: issued to credit enhance tax-exempt Bonds; or exchanged for Bonds redeemed at MBS issuance. , per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1205.02: Determining the Cap Strike Rate.

1907.05	Cap Cost Factor Included in Maximum Note Rate

Requirements

When determining the Maximum Note RateMaximum Note RateEquals the sum of the: minimum Cap Strike Rate as set by Fannie Mae; and Mortgage Loan margin equal to the sum of the Investor spread, Guaranty Fee, and Servicing Fee. used to calculate the minimum required Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 203: Income Analysis, as adjusted for the applicable products and…, you must include a cap cost factor based on the term of the

Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. , and
initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .

You do not need to include a cap cost factor if the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. term equals the Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. term.

You must ensure the cap cost factor equals the

estimated cost of the replacement cap (when the term of the initial cap expires), divided by
term of the initial cap.

Operating Procedures

For example, to calculate the cap cost factor assuming a 5-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. and 10-year Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. term:

You must include an annual cap cost factor in the Maximum Note RateMaximum Note RateEquals the sum of the: minimum Cap Strike Rate as set by Fannie Mae; and Mortgage Loan margin equal to the sum of the Investor spread, Guaranty Fee, and Servicing Fee. .
If the Credit Enhancement Mortgage LoanCredit Enhancement Mortgage LoanMortgage Loan financed by a Bond issuance where Fannie Mae provides credit enhancement by a Credit Enhancement Instrument, or an MBS for Bonds. term is 10 years and an initial cap is purchased for a 5-year term, the cap cost factor equals the estimated cost of a replacement cap divided by 5 (the number of years of the initial interest rate term).
The replacement cap has a 5-year term and a Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. equal to that of the initial cap.
If a 5-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. at the initial Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. costs 20 basis points, you must divide 20 by 5, then add the result (4 basis points) to the Maximum Note RateMaximum Note RateEquals the sum of the: minimum Cap Strike Rate as set by Fannie Mae; and Mortgage Loan margin equal to the sum of the Investor spread, Guaranty Fee, and Servicing Fee. .

1907.06	Interest Rate Cap Reserve

Requirements

You must ensure the BorrowerBorrowerPerson who is the obligor per the Note. fully funds a cash reserve to purchase replacement Interest Rate CapsInterest Rate CapsInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .

Operating Procedures

If the initial Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. term is 5 years, you must ensure the BorrowerBorrowerPerson who is the obligor per the Note. funds the cash reserve with each monthly Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. payment during the term.
Calculate the monthly reserve payments for the first 6 months using the estimated cost of a replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. with a 5-year term and the initial Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. .
If the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. term is more than 5 years, you must ensure the Borrower'sBorrower'sPerson who is the obligor per the Note. monthly reserve payments for the replacement cap begin no later than 5 years before the existing Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. expires.

Guidance

For example, if

a 5-year initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is purchased with a 10-year term and a 6.00% Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. , and
the cost of a replacement 5-year cap with a 6.00% Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. is $140,000, then
the monthly reserve for the first 6 months would be $2,333.33 ($140,000 cost ÷ 60 months).

1907.07	Interest Rate Cap Reserve Adjustments

Requirements

You must evaluate the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. reserve every 6 months. If the replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. cost:

increased, you must raise the monthly reserve payment to purchase the replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. before the existing Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. expires; or
decreased, do not adjust the reserve.

When a replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. is purchased, the reserve cycle resets to match the term of the new Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. . Any amount remaining in the reserve after purchasing the replacement Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. must be used to fund the subsequent reserve.

1907.08	Interest Rate Cap Contract Documentation and Delivery

Requirements

For credit enhancements using:

an MBSMBSMortgage-Backed Security , you must comply with Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1205.04: Interest Rate Cap Contract Documentation and Delivery; or
a Credit Enhancement InstrumentCredit Enhancement InstrumentAgreement between Fannie Mae and a Bond Trustee where Fannie Mae provides credit enhancement of a Credit Enhancement Mortgage Loan, Bonds issued to finance a Credit Enhancement Mortgage Loan, or an Interest Rate Hedge Agreement; and if applicable, a Bond liquidity facility. , this Section applies.

Operating Procedures

Topic	Process
Cap Provider Payment	You must ensure the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. provider pays you or the Bond TrusteeBond TrusteeTrustee for a Credit Enhancement Instrument. directly on the 1st or 15th day of the month corresponding with the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. payment dates, and when the BondBondTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. interest rate index is greater than the average Cap Strike RateCap Strike RateIndex interest rate specified in the Interest Rate Cap Agreement at or above which a payment obligation will be triggered by the Interest Rate Cap provider. for a month. Only disburse a provider payment to the BorrowerBorrowerPerson who is the obligor per the Note. if there is no Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. default, and you received all payments due under the IndentureIndentureBond issuer trust indenture or resolution listing Bond terms. and BondsBondsTax-exempt or taxable multifamily revenue bonds, or other tax-exempt or taxable bonds, issued to finance 1 or more Credit Enhancement Mortgage Loan Properties. for that month. If the BorrowerBorrowerPerson who is the obligor per the Note. defaults under the Mortgage LoanMortgage LoanMortgage debt obligation evidenced, or when made will be evidenced, by the Loan Documents, or a mortgage debt obligation with a Fannie Mae credit enhancement. or Reimbursement Agreement, you must promptly notify Fannie Mae and any applicable Bond TrusteeBond TrusteeTrustee for a Credit Enhancement Instrument. , and direct the Bond TrusteeBond TrusteeTrustee for a Credit Enhancement Instrument. to suspend its payment to the BorrowerBorrowerPerson who is the obligor per the Note. .
Timing	The BorrowerBorrowerPerson who is the obligor per the Note. must accept a bid for the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. in writing from a Fannie Mae approved provider before you request a CommitmentCommitmentContractual agreement between you and Fannie Mae where Fannie Mae agrees to buy a Mortgage Loan at a future date in exchange for an MBS, or at a specific price for a Cash Mortgage Loan, and you agree to Deliver that Mortgage Loan. .
Purchase Price	The BorrowerBorrowerPerson who is the obligor per the Note. must pay the entire purchase price for an Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. to the provider when the Interest Rate Cap AgreementInterest Rate Cap AgreementContract setting forth the terms and conditions of an Interest Rate Cap, Hedge, or Swap. is issued.
Pledge to Fannie Mae	The BorrowerBorrowerPerson who is the obligor per the Note. must pledge its interest in the Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate. The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. and any reserve to Fannie Mae using the documentation provided by Fannie Mae’s counsel.