Common Causes for Defaultof Reverse Mortgages

A Home Equity Conversion Mortgage (HECM), often referred to as a reversemortgage, allows homeowners to take out the equity in their home while

still living in the home. An HECM is only available to homeowners 62 yearsor older and was conceived to assist limited-income elderly homeowners

remain in their home.  

01Death of the Borrower and the Non-Borrowing Spouse

Once the borrower dies, the HECM is due and payable.                                     But wait, what about the Non-Borrowing Spouse?

Instead foreclosing on the non-borrowing spouse, a “Deferral Period” may be initiatedupon the death of the borrower, which allows a Non-Borrower Surviving Spouse to live inproperty until his or her death, as long as all other HECM obligations are met.[7]

Lenders must certify when the reverse mortgage is granted whether a non-borrowingspouse is an “Eligible Non-Borrowing Spouse” or “Ineligible Non-Borrowing Spouse.”[8]

To be “Eligible” the non-borrowing spouse must:

Be the spouse of a borrower;Be properly disclosed to the lender and named as an Eligible Non-Borrowing Spousein the HECM mortgage and loan documents;Occupy the property as a principal residence.[9]

An HECM mortgage becomesdue and payable when one of

the following occurs:

First, the lender must notify HUD that the borrower isdeceased and  receive approval to declare the HECMdue and payable.[1]

Next, the lender must notify the non-borrower spouse,the borrower’s estate, and borrower’s heirs  within 30days after receiving HUD approval that the mortgage isdue and payable.[2]

HUD regulations require foreclosure to begin within sixmonths.[3] Meanwhile, heirs may sell the property orbuy it themselves for 95% of its appraised value to payoff the mortgage, even if the loan balance is more.[4]

If the heirs can show they are attempting to sell ormortgage the property, up to  two three-monthextensions may be granted.[5]

Alternatively, heirs may provide the mortgagee with adeed in lieu of foreclosure.[6]

02The Borrower sells the property 

If the borrower sells the property beforethe HECM is due and payable, the amountowed is limited to the lesser of the totalloan balance or the appraised value.[10]

The appraised value is determined by aHUD-approved appraiser.[11]

03 The property is no longer thePrincipal Residence of any Borrower

A property will no longer be considered the borrower's “principal residence” if they fail to occupy the property formore than "12 consecutive months" due to physical ormental illness and the property is not the principal residenceof at least one other borrower.”[12]

In this event,  the mortgagee must notify the borrower anddescribe how the default can be cured. Preoccupancy of theproperty within two months of the notice will cure thedefault.[13]

04Borrower fails to keep PropertyCharges current

Borrowers are also required to maintain property insurance, payproperty taxes, and pay required  HOA fees on the home(referred to a “Property Charges”).

Failure to pay required  Property Charges is  defaulting on theloan, including participation in any tax deferral program thatresults in a lien on the property in Texas. [14]

Because there are no monthly mortgage payments to the lender,the lender does not maintain an escrow account for PropertyCharges. 

As shown above, a reverse mortgage should not be entered into lightly. Borrowers whotake out a reverse mortgage without fully understanding the risks could quickly findthemselves in default and at risk of foreclosure. It is essential that borrowersunderstand that while there is no monthly payment made to the lender with a reversemortgage, all other expenses of homeownership remain. Homeowners considering areverse mortgage should seek both financial and legal counseling before entering intoone of these loans.

Final Thoughts

REFERENCES:[1] HUD Mortgagee Letter 2015-10.[2] Id.[3] 24 C.F.R. §206.125(d).[4] 24 C.F.R. §205.125(a)(2)(ii).[5] See HUD Mortgagee Letter 2015-10; HUD Handbook 4235.1, Chapter 9: HUD Servicing; HUD Handbook4330.1, Chapter 13: Home Equity Conversion Mortgages.[6] Id.[7] HUD Mortgagee Letter 2014-07.[8] 24 C.F.R. § 206.55(c).[9] Id.[10] 24 C.F.R. § 206.125(c).[11] 24 C.F.R. §206.125(b).[12] 24 CFR § 206.27(c)(2)(ii).[13] HUD HECM Handbook, 4330.1 Rev. 5 § 13-32(B)(2).[14] HUD HECM Handbook, 4330.1 Rev. 5 § 13-12C; Texas Property Tax Code §33.06(d).