Is a Reverse Mortgage Foreclosure Possible?
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When Reese Everson’s grandmother died in 2014, leaving her a condominium in Detroit, Everson planned to sell it to another family member. But that plan was thwarted when Everson, now a lawyer living in Washington, D.C., discovered that her grandmother had taken out a reverse mortgage on the property in 2005. Even with an heir who wanted to keep the property and repay the debt, the bank foreclosed on Everson’s condo and evicted her in December 2017.
A reverse mortgage can be a way for older adults to stay in their homes through retirement, but it does carry risks for both them and their heirs.
Is a reverse mortgage foreclosure possible?
For seniors who are “house rich but cash poor,” a reverse mortgage allows them to borrow against the equity in their homes that they’ve built up over decades. The loan is paid back when the borrower dies, sells, moves out or violates loan requirements — the Consumer Financial Protection Bureau has warned that some lenders neglect to mention that last part.
Before 2015, the only thing homeowners 62 and older needed in order to qualify for a reverse mortgage was equity in their home. New rules on the Home Equity Conversion Mortgage (HECM), loans insured by the Federal Housing Administration and the most common type of reverse mortgage, mean borrowers must undergo a financial assessment to make sure they will be able to pay their taxes and insurance and other home-related fees. Failure to pay them means seniors run the risk of foreclosure.
How to avoid a reverse mortgage foreclosure
“It’s natural that as senior homeowners age, these things slip their minds,” said Greg Cook, vice president of Reverse Lending Experts in Temecula, Calif.
Based on the results of the financial assessment, a reverse mortgage lender may:
- Establish a Lifetime Expectancy Set-Aside (LESA). Money for taxes, insurance, homeowners association fees or home repairs may be set aside. The LESA Is funded by the borrower as a part of the loan closing.
- Withhold funds. For example, if the reverse mortgage pays the borrower $1,000 per month and the monthly insurance and property taxes are $200 per month, the lender would withhold $200, reducing the monthly disbursement to $800.
The LESA isn’t foolproof. The amount set aside in a LESA is based on the life expectancy of the youngest borrower (in the case of co-borrowers). It’s possible that the borrower may outlive the life expectancy tables, and the amount set aside would be insufficient to cover the obligations.
If the LESA runs out of money and cannot cover the obligations, the borrower is responsible for paying property taxes and insurance. If the borrower doesn’t pay them in a timely manner, the loan servicer will make the payment on the borrower’s behalf.
After advancing the funds to cover those obligations, the lender will work with the borrower to come up with a repayment plan. If the borrower doesn’t meet the terms of the repayment plan, the lender can begin foreclosure proceedings.
A 2017 analysis by the financial services firm New View Advisors LLC found that the tax and insurance default rate on HECMs dropped from 1.17% prior to the financial assessment rules to 0.39% after the LESA requirement was put in place in 2015. So while requiring borrowers to establish LESAs isn’t a perfect solution, it appears to have helped many borrowers avoid foreclosures due to failure to meet obligations.
The reverse mortgage foreclosure process
Once a lender becomes aware that a borrower has defaulted on such payments, the loan servicer sends a “Due and Payable” letter with the current loan balance, options for paying back the reverse mortgage, a timeline for a response, and opportunities to avoid foreclosure. In this situation, the borrower might be able to get current on those items and avoid having the reverse mortgage due immediately. However, if the letter was triggered by the property being sold, or the borrower’s death or move, the borrower or their heirs will need to come up with a plan to pay off the debt.
Owners or their heirs who want to keep the home can pay the debt or 95% of appraised value of the property — whichever is less. Owners or heirs who do not want to keep the property can decide to sell. With an HECM, if the property sells for less than the balance on the reverse mortgage, the borrower or their estate are not responsible for the difference. However, if the loan balance is less than the market value of the home when sold, the additional proceeds go to the homeowner or heirs.
Generally, the lender will give the borrower or their estate up to six months to repay the reverse mortgage and a maximum of two 90-day extensions can be requested, as long as the heirs are actively marketing the property for sale or pursuing financing to purchase the property. During this time, interest continues to accrue on the loan, so the balance will continue to grow.
If the property is not sold or refinanced, or if the borrower or their heirs do not respond to the Due and Payable letter within 30 days, the loan servicer can begin foreclosure and the borrower and their heirs will eventually lose their interest in the property.
Types of reverse mortgage foreclosures
The reverse mortgage foreclosure process may vary depending on state statutes and the reason for the foreclosure. Reverse mortgage foreclosures typically fall into two categories:
1. Tax and insurance default
In a tax and insurance default, the borrower stops paying property taxes and homeowners insurance or maintaining the residence. In these situations, the borrower may be evicted from their home as a part of the foreclosure process.
2. Death of the borrower
When a reverse mortgage borrower dies, their heirs or estate may sell the house; pay the debt or 95% of appraised value of the property (whichever is less); sign a deed in lieu of foreclosure to voluntarily turn the property over to the lender; or do nothing and let the lender foreclose on the property. In some cases, a borrower will pass away without any heirs or an estate. In these cases, the foreclosure process typically does not involve an eviction.
The process starts with a pre-foreclosure notice being mailed to the borrower’s home address by the loan servicer or a foreclosure attorney.
According to the National Reverse Mortgage Lenders Association (NRMLA), lenders and loan servicers “will seek to resolve the due and payable loan with willing heirs whenever possible,” but that was not Reese Everson’s experience.
Everson said she tried to work with the bank to keep her grandmother’s condominium. At first, she disputed the bank’s appraisal that came in at $70,000. “I thought it was worth closer to $40,000 to $50,000,” she said.
Everson said she also worked with an attorney at a clinic that provides free legal advice, trying to determine how her grandmother was able to get a reverse mortgage in the first place. Everson’s grandmother had placed the condo in a trust in 1997, and according to Everson, the bank assured her they were not planning on foreclosing on the property, but just a few months later she received a pre-foreclosure notice.
At that point, Everson said she again tried to buy the house, but the bank ordered another appraisal — this time, the property was appraised at $100,000. The bank also told her she would need to come up with the full amount in cash in order to buy the property, then told her they weren’t interested in selling the property to her at all. In the end, Everson says the bank sold the property for $114,000. The balance on the reverse mortgage at the time was about $140,000.
What if you inherit a reverse mortgage that is being foreclosed on?
If you inherit property with a reverse mortgage on it, you should immediately get in contact with the loan servicer.
“Many foreclosure proceedings are the result of the heirs not notifying the lender of their intent,” Cook said.
As the NRMLA states:
“Servicers audit the death records of borrowers using a variety of tools. It is not to your advantage to delay notifying your servicer … [deadlines tend to be] based upon the date that the borrower passed away – not the date that the loan servicer was made aware of the borrower’s death.”
Don’t be alarmed if you receive a Due and Payable notice after notifying the loan servicer of the borrower’s death. This notice is required by law, and you have 30 days to respond to the notice and let the loan servicer know of your intentions for the property.
The loan servicer will give you up to six months to either pay off the reverse mortgage debt, by selling the property or using other funds, or purchase the property for 95% of its current appraised value. You can request up to two 90-day extensions if you need more time, but you will have to demonstrate that you are actively working toward a resolution and HUD will have to approve your request.
If you do not respond to the loan servicer’s correspondence or let your 90-day extensions expire without making an effort to satisfy the debt, the loan servicer may pursue a foreclosure.
Whether you want to keep the home, sell it to pay off the reverse mortgage balance, or walk away from the property and let the lender handle the sale, it’s important to keep in contact with the loan servicer. If, like Everson, you have trouble dealing with the lender, you can submit a complaint with the Consumer Financial Protection Bureau online or by calling (855) 411-CFPB.
Cook said part of the problem with reverse mortgages is in their perception. “When the last homeowner passes away, HUD begins proceedings to take back the property. This leads to a lot more foreclosure proceedings than actual foreclosures,” he said.
If you are facing reverse mortgage foreclosure, work with your loan servicer to resolve the situation. The servicer can connect you to a reverse mortgage foreclosure prevention counselor, who can work with you to set up a repayment plan. This counseling is free and can help you decide on the best course of action for you.