Tom MacDonald - Reverse Mortgage Consultant

     

 

 

 

 

       Reverse Mortgage Consultant

      Tom MacDonald

 

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Foreclosures involving a Reverse Mortgage

What is the Likelihood of a Foreclosure on a Reverse Mortgage?

I'm going to start with an opinion and then provide more information.  The likelihood of a foreclosure for a qualified borrower living in their home with a reverse mortgage is very small.  (If the borrower has moved or passed away, foreclosure may be the only solution the lender can use if the borrower or heirs do not pay back the loan.  See the discussion at the bottom of this section.)

Can I back up the statement that foreclosures are not likely for borrowers living in their home with facts.  The truth is I cannot find facts to back this up.  But I can offer a number of anecdotal statements.

The first is my own experience.  In about 12 years as a Reverse Mortgage Specialist originating hundreds of reverse mortgages, I am not aware of one of my clients being foreclosed.  I keep in touch with my clients at least twice a year.  I encourage them verbally and in writing to contact me anytime they have any questions about reverse mortgages.  Not once have I had anyone call me to say foreclosure was even threatened.  Would my regular mortgage counterparts be able to say the same thing?

I've had close relationships with dozens (if not, hundreds) of other reverse mortgage originators like myself over the years.  A discussion of foreclosure has occasionally come up and no one has ever mentioned a client having been foreclosed.

Prior to writing this page, I searched the Internet looking for the statistics of foreclosures of Reverse Mortgages.  I couldn't find any.  Not even one word talking about the actual situation of foreclosure of a reverse mortgage in a blog, news article, media website or a link to a hint of foreclosure.  I could find a ton of references of foreclosures in general.  One would think with the concern of foreclosures that the media would have a ton of articles about a heartless bank tossing a reverse mortgage holder out on the street.  (If anyone can find one please send it to me via my Contact page.)

There are a number of potential clients I have talked to over the years that chose not to do a reverse mortgage.  Instead, some of them did a refi with a regular mortgage company taking out extra cash in order to make the payments.  Others chose to avoid the high costs of a reverse mortgage and got an equity line so they could draw cash as they needed it.  Recently, I've talked to a number of these people who are concerned about losing their home because the extra cash has been used up or because they can no longer make the mortgage or equity line payments.  I have been able to help a couple but most now owe more than is available in a reverse mortgage.  There are a few who's phones have been disconnected and the letters are being returned.  I'm fearing the worst.

There is one case I can personally describe to you where a foreclosure action was started against a property with a Reverse Mortgage.  Note I was specific to identify the action against a property and not against a borrower.  Here is the story.

In 2004, I did a Reverse Mortgage for a disabled lady.  She had three daughters.  One (or maybe two) lived with her.  She died about a year later.  Seven months after she died, I was contacted by a conservator who had been hired to handle the estate. 

The heirs are supposed to notify lender when a Reverse Mortgage borrower dies.  The daughters did not.  In fact, at least one of them who had a Power of Attorney continued to draw money from the Reverse Mortgage line of credit.  That is fraud.  The normal guideline on the death of the borrower is the heirs have 6 months to pay back the loan (usually by selling the home but that is not required).  They are sometimes given two 90 day extensions if they follow some simple rules.  

The heirs were not cooperating with the lender to pay back the loan.  They had already violated the rules by drawing funds after the death of the borrower and not notifying the lender within 6 months of the death of the borrower.  The lender was forced to file notice of foreclosure.  Since this was happening in early 2006, the conservator was able to place the home on the market for sale.  The lender allowed her to complete the sale.  Since home values had continued to go up from the time of the initiation of the reverse mortgage to the time of the sale, there was still equity that went to the heirs.  This is as close as I have come to having a foreclosure associated with a reverse mortgage.

Obviously, there must have been some foreclosures over the years of Reverse Mortgages.   But since a Reverse Mortgage borrower is not making monthly payments, there aren't many ways a borrower can find themselves to be foreclosed upon.

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. 

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