Task Force on Fannie Mae and Freddie Mac Opinions

The government sponsored entities, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (usually referred to as Fannie Mae and Freddie Mac, respectively, or GSEs), have established forms of legal opinions which borrowers’ counsel are expected to follow in connection with commercial real estate loans that are originated by banks and other lending institutions, sold to Fannie Mae or Freddie Mac and then usually securitized. The loans primarily finance multifamily and senior housing properties. Counsel for the originating lender (often referred as “seller/servicer” because the lender sells the loan to Fannie Mae or Freddie Mac and retains servicing responsibilities) is required by the applicable GSE that is purchasing the loan to obtain a legal opinion consistent with the GSEs applicable promulgated form. Seller/servicer counsel understandably is usually reluctant to permit substantial deviation from the promulgated form, lest such noncompliance causes the GSE not to purchase the loan from the originating lender.

For borrower’s counsel, this presents a dilemma. Although many lawyers may be content to adopt a lender’s form of legal opinion instead of starting from the opinion giver’s form, most lenders making conventional (i.e. non-GSE) loans permit borrower’s counsel to use such counsel’s preferred form of opinion letter as a starting point and then provide comments to the extent the opinion letter is perceived to be deficient in some respects. However, trying to use a law firm’s standard form of opinion letter in lieu of the Fannie Mae or Freddie Mac form will likely be a non-starter or, at the very least, will result in extensive negotiation and much higher legal fees for the borrower. At the same time, the GSE-promulgated forms are notably inconsistent with the current customary opinion practice. For example, they contemplate that the opinion letter should recite all kinds of documents that the opinion giver has reviewed even though many of those documents are not the subject of any of the opinions included in the opinion letter. They also do not include all of the assumptions and qualifications that an opinion giver would customarily list, including, for example, an assumption as to the genuineness of signatures.

The respective opinion committees of the ABA Section of Real Property, Trust and Estate Law, the American College of Real Estate Lawyers and the American College of Mortgage Attorneys have established a task force to examine the legal opinion forms and requirements of Fannie Mae and Freddie Mac. The task force’s study is still in its early stages, and no formal recommendations have yet been made. However, preliminary discussions have focused on three possible approaches:

• Fannie Mae and Freddie Mac probably cannot be persuaded to adopt the practice of most conventional lenders and allow borrower’s counsel to start with its own form of legal opinion rather than the forms promulgated by the GSEs. Although the Task Force can try to pursue this, the Task Force’s efforts will probably be better spent on other approaches.
• The Task Force should engage with in-house counsel at Fannie Mae and Freddie Mac to discuss ways in which the promulgated forms can be revised to more closely follow current customary opinion practice. Preliminary contacts in this regard have been encouraging.
• Because many law firms have developed “hybrid” opinion letter forms that Fannie Mae and Freddie Mac will accept in lieu of strictly following the promulgated forms, it may be useful to share such forms among members of the task force and perhaps ultimately make them available to other lawyers on the respective opinion committees. Such hybrid forms, for example, may follow the format of the Fannie Mae and Freddie Mac forms but contain substantive assumptions and qualifications that the opinion givers require in conventional loans.

Any member of the ABA RPTE Committee on Legal Opinions in Real Estate Transactions or of the ACREL or ACMA opinion committees is welcome to participate in this task force as it moves forward with its study and recommendations.