Foreclosures involving a Reverse Mortgage
Chance of Foreclosures With a Reverse Mortgage
Since reverse mortgage borrowers don't have to make payments,
foreclosure rarely comes into play. But there are occasions
when a foreclosure is used with a reverse mortgage.
Before a reverse mortgage can be foreclosed, it must first be due and payable. The often quoted times when a reverse mortgage is due and payable is when:
1. The borrower sells the home.
2. The borrower moves.
3. The borrower dies.
Other occassions are when:
4. The borrower refuses or cannot pay property taxes or homeowner's insurance. There are documented occurrences of this. More frequent with the downturn in the economy. Regular mortgages have the same requirements with foreclosure the solution for the lender.
5. The property is in disrepair and the borrower refuses or cannot make repairs.
Before any foreclosure action, the lender will issue a repayment
notice advising the borrower that the loan is now due and payable.
If the borrower can correct the deficiency (move back in, pay the
taxes or insurance, or repair the property, the loan can continue as
it was. At about the same time, the lender will stop any
payments the borrower may be receiving and will freeze any funds in
the Line of Credit. If corrections are not made, foreclosure
could begin in one to three months.
Let's look at the 5 typical possibilities:
1. The borrower sells the home. It would be unusual for foreclosure to be needed. In most sales, escrow is used. The escrow office will accept the money from the buyer, pay off the reverse mortgage along with any other liens or costs and give the left over funds to the seller. If a borrower sold a home to someone without going through escrow, there could be an issue. It might be innocently done when selling to a relative. It might also be done fraudulently by selling to a relative while wishing to keep access to the reverse mortgage funds or payments. When the lender learns of this (they have ways), they would issue the due and payable repayment notice and then move on to foreclosure.
2. The borrower moves.
If the last surviving borrower moves into a care facility, they have a 12 month grace period. If they haven't returned to the home after the 12 months, the repayment notice would be sent.
If the borrower moves and changes their principle residence (perhaps even renting the home with the reverse mortgage on it) the repayment notice would go out as soon as the lender learned of this.
3. The borrower dies.
Typically, there aren't any issues here. In most cases the heirs will sell the home and the lender will be paid off through escrow. The time frame for the heirs to sell the home are fairly generous. They initially have 6 months. If they follow some simple guidelines and request an extension, HUD will may allow two 90 day extensions. This assumes the heirs are making a valid attempt to sell the home. The extensions are handled on an individual basis based on the facts.
If the heirs determine that the home is worth less than the amount of the loan, they may not wish to go through the sale process knowing they would receive no money. When notified, the way the lender would collect the collateral (the home) would be to begin the foreclosure process.
4. The borrower refuses or cannot pay property taxes or homeowner's insurance. If there are still funds available in the reverse mortgage, the lender will advance funds to pay the property taxes or insurance. Lenders wouldn't like to foreclose on a little old lady due to a few hundred dollars for insurance. Effective January, 2011, HUD stopped allowing lenders to advance funds if not available in the line of credit. Also, effective January, 2011, HUD began requiring lenders to start the foreclosure process for borrowers behind on their property taxes and homeowner's insurance. Prior to actual foreclosure, they are required to try to create a workout process, sometimes with monthly payments over a couple years, to bring the taxes and/or insurance current.
5. The property is in disrepair and the borrower refuses or cannot make repairs. This may be handled the same as the taxes and insurance. However, the disrepair could be a health or safety issue. Depending on the dollars and condition of the home, foreclosure many be the only choice.
Voluntary Foreclosure When the Loan Comes Due
Remember, the loan comes due when the borrower(s) sell, move or pass away (or a couple other cases such as not paying homeowners insurance or taxes (see Chances of Foreclosure).
If the borrower is selling, foreclosure is not happening. There may be a short sale and that is handled the same as with a regular mortgage.
If the borrower moves, typically they would be selling the home. If they do not do so, then they could be foreclosed on.
If the last borrower passes away, the loan becomes due. Typically the executor/successor trustee/heirs will sell the home, the loan will be paid by escrow from the proceeds and the balance after expenses will be given to the estate to settle with the heirs. If the home cannot be sold for more than the loan value, foreclosure may be the remedy. Usually it is voluntary foreclosure.
Typically, the situation should work like this:
The Executor/Executrix/Successor Trustee will determine if any heirs wish to keep the property. If so, they need to pay off the loan balance.
Assuming no heirs wish to keep the home, the Executor (I'll skip all the other titles from here) would check with a Real Estate agent to get an estimate of what the home would sell for.
If the estimated home value is more than the loan balance, the
Executor would likely choose to put the house on the market.
After it sells, the lender and any other lien holders are paid off,
fees to vendors assisting in the sale are paid and a check would
then be sent to the Executor for the balance.
If the estimated home value is less than the loan balance, the
Executor would choose not to go through the effort of selling the
home knowing they would receive nothing. In that case, they
should notify the lender they have determined the home value is not
sufficient to pay off the loan and they wish to turn over title to
the lender. Usually, the lender would need an appraisal to
verify. Then, typically, they will ask the Executor to execute
a Deed in Lieu to transfer title. There may be a ton of red
tape but that should be it from the Executors point of view.
If the Executor thought there was enough value to attempt selling then it is likely the lender would require the Executor to maintain the home in saleable condition since the property has not transferred to the lender and the estate is still responsible for the home.
I imagine it is possible for a lender to 'bully' an Executor who is trying to return the home to the lender into trying to sell it themselves. I haven't come across this but I guess not all lenders are nice.