Is a Reverse Mortgage Foreclosure Possible?
Reverse mortgages allow senior citizens to convert home equity into cash, either as a lump sum or through monthly payments. The U.S. Department of Housing and Urban Development reports that some 46,000 reverse mortgages – or about 8 percent of the total — are in default. Fortunately, the Center for Retirement Research at Boston College found that 2013 and 2015 HUD policy changes requiring lenders to evaluate an applicant’s financial and credit risk profile may slash defaults on reverse mortgages by 50 percent going forward. Unfortunately, even with the policy changes, taking out a reverse mortgage is not without risks. For this reason, applicants must attend a HUD-approved counseling session to understand when a reverse loan is “due and payable” in order to avoid reverse mortgage foreclosure.
What is a Reverse Mortgage Foreclosure?
Under a reverse mortgage, borrowers can defer payments on the debt until they die, relocate, move to assisted living for more than 12 months, or sell the property. The borrower on home equity conversion mortgages, or HECMs, agrees to meet all owner criteria and obligations. Throughout the duration of the reverse mortgage, the loan servicer will remind owners about the status of property taxes, and insurance and homeowner fees (if applicable). The property will also be inspected by the servicer at that time to ensure that the terms are being met.
For HECMs acquired on or after August 4, 2014, in which the owner dies, the non-borrowing spouse can remain in the home provided they:
- Are named as a spouse on the loan document
- Were married to the borrower at the time of the loan and the time of their death
- Maintain home taxes, insurance, and maintenance
In failing to meet payments and home condition requirements, the borrower — or surviving spouse — may be strapped with a “due and payable” notice and, unable to satisfy the debt, may face reverse mortgage foreclosure if they fall behind in real estate taxes, insurance premiums, and home maintenance. Under foreclosure, the lender assumes the title and may sell the home to recover their losses.
In a reverse mortgage foreclosure, residents other than the owner and qualified spouse can be considered tenants and evicted. Heirs can keep the home, provided they pay the lender at least 95 percent of the current appraised value. Selling the home can repay the loan, fees, and interest. If the sale price falls below the amount the borrower owes, the federal government absorbs the difference.
How is a Reverse Mortgage Foreclosure Possible?
During reverse mortgage counseling sessions, prior to obtaining their reverse loan, the applicant should have been advised to add an eligible spouse (aged 62 or older) to the mortgage or loan document. This can offer protection to their heirs and living spouse should the owner pass away. However, they must add the spouse at the outset. According to Fannie Mae, the original owner may not add co-borrowers to their reverse mortgage once it has been approved.
Seniors who agree to a reverse mortgage may see trouble coming in meeting their loan obligations, or they can be blindsided by financial distress. For example, they may have agreed to have delinquent property taxes paid by the lender and suddenly get a massive bill for the payments plus interest. The practice of advancing funds for taxes was disallowed in 2011, but HUD legislation enacted the same year requires the lender to begin reverse mortgage foreclosure proceedings if the owner falls behind in taxes and insurance.
In another case, an innocent senior may sell the home to a family member without going through escrow. Or, the condition of the home may have degraded and the owner cannot afford or will not pay for having it brought up to standards. In these cases, HUD regulations call for the lender to initiate reverse mortgage foreclosure.
How to Avoid a Reverse Mortgage Foreclosure
Understanding the ownership/property maintenance requirements on a reverse mortgage is a way to see if you can keep up your part. For those who get cold feet, all applicants have a three-day right of rescission to cancel the new reverse mortgage and ask for their financing money back, penalty free. The Federal Trade Commission says that cancellation must be made in writing and that lenders have 20 days to return the money.
The best way to avoid reverse mortgage foreclosure is to work with a reputable lender from the outset. The National Association of Consumer Advocates says that seniors fearing for their financial future may be prey to emotional, pressure advertising from “predatory lenders, unscrupulous loan agents, and dishonest brokers”. One way to ensure that they’re getting a realistic reverse mortgage, the association says, is to shop and compare quotes from multiple lenders.
In most cases of reverse mortgage foreclosure, if spouses are not included in the reverse mortgage when the owner-partner passes away, the surviving partner can remain in the home and avoid repayments on the mortgage only if they refinance the reverse loan. Otherwise, the surviving spouse may receive a “due and payable” notice, the first step toward potential reverse mortgage foreclosure, or an eviction notice. At that time, the heirs may choose to buy the home or sell it off to repay the loan. Refinancing a reverse mortgage may also be a way of adding the spouse to the loan, if the current owner is still alive, to get a better interest rate and protect the spouse from losing the home in the future.
If they find their finances in peril of reverse mortgage foreclosure, a borrower should contact the loan officer immediately to discuss their options. They may be eligible for a reverse mortgage refinancing package. To qualify for refinancing, the owner must still have significant equity in the home. And the cash proceeds from refinancing must be forecast at five times the amount of the new closing costs.
What Do I Do if I Inherited a Reverse Mortgage Foreclosure?
Under the law, heirs have up to 30 days from the “due and payable” notice to decide how to handle the debt. The decision is often made for them if they cannot afford to pay back the loan. By law, heirs are allowed six months to seek alternative financing. If they show evidence that they’re actively seeking financing, they can apply for up to two additional 90-day extensions. Or they may choose to show the lender proof they are trying to sell the home to pay off the balance.
In a worst-case scenario, they cannot sell the home or afford to settle the outstanding debt, interest, and fees. Under their remaining options, heirs may sign a deed-in-lieu of foreclosure or negotiate a short sale.
With a deed-in-lieu of foreclosure, the lender cancels the loan and takes possession of the home. The lender has the legal right to sue the heirs for the difference between what they get for selling the home and how much was owed on it. Therefore, to protect themselves, it’s up to the heirs to get it in writing that the lender won’t sue them for the difference.
With a short sale, the home is sold for less than what is owed on it and the lender must agree to release the lien. Both borrowers and heirs should get legal or loan counseling before undertaking a short sale since they will be required to produce documentation of financial hardship. And any forgiven debt may be taxable.
Fortunately, the heirs’ ultimate financial exposure has limits. Since reverse mortgages are “nonrecourse loans”, the lender cannot take legal action against their assets.