Reverse Mortgages and Foreclosures: What You Need To Know
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In theory, a reverse mortgage should be the perfect solution for aging seniors who have a lot of equity in their homes but not enough in their retirement accounts. The lender loans the borrower money up to the full value of the equity in their home. The borrower then gets to live in the home rent-free until they move out or pass away. Unfortunately, a lot could go wrong. This article discusses the causes of reverse mortgage foreclosures as well as ways to avoid or stop them.
Written by Attorney John Coble.
Updated October 24, 2021
In theory, a reverse mortgage should be the perfect solution for aging seniors who have a lot of equity in their homes but not enough in their retirement accounts. The lender loans the borrower money up to the full value of the equity in their home. The borrower then gets to live in the home rent-free until they move out or pass away.
What could go wrong? Unfortunately, a lot. These mortgages are meant to serve older adults, but some dishonest reverse mortgage lenders take advantage of older borrowers. When borrowers forget to make their monthly maintenance payments, they put themselves at risk of foreclosure. This article discusses the causes of reverse mortgage foreclosures as well as ways to avoid or stop them.
What Is a Reverse Mortgage?
A reverse mortgage is where you put up the equity in your home as collateral for either a lump-sum loan or monthly payments over several years. There are two types of reverse mortgages. These are proprietary reverse mortgages and government-backed Home Equity Conversion Mortgages (HECM) reverse mortgages.
Proprietary Reverse Mortgage
Proprietary reverse mortgages are made by private lenders. They’re usually on homes whose appraised values are too high for the Federal Housing Administration (FHA) to insure the mortgage. The value limits vary by county across the nation and are updated annually. In 2021, the highest value available for FHA backing is $822,375. Proprietary reverse mortgages make up only a small portion of the reverse mortgage market.
Home Equity Conversion Mortgages (HECM)
The vast majority of reverse mortgages are HECM loans. This article will focus on this kind of reverse mortgage. There are several requirements to qualify for the HECM program:
You must be at least 62 years old.
You must own a home with enough equity.
The home must be your principal residence.
You must obtain counseling from a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor.
The lender must check your credit. If you don't have a sufficient credit score, a portion of the reverse mortgage money must be set aside for home property charges such as property taxes, HOA fees, condo association fees, and insurance.
The loan can't be given as a line of credit. It's disbursed as a lump sum or in fixed payments.
Though the credit check required to decide who must set aside home maintenance money is well-intentioned, it misses an important issue. As some people age, they become more forgetful. Because of this, some aging borrowers are more likely to forget an insurance or other maintenance payment as they get older.
How Can a Reverse Mortgage Be Foreclosed?
In a reverse mortgage, the borrower isn't required to make payments, so how can their home be foreclosed? Many things can lead to a reverse mortgage foreclosure. For example, if the borrower is no longer using the home as a primary residence because they’ve moved to an assisted living facility or another home or if the borrower dies, the home can be foreclosed.
Many reverse mortgages include provisions that allow the family to pay off the loan and keep the home. But if the borrower has a spouse who wasn’t a joint owner but is still living in the home, they may face foreclosure, which can be a serious problem.
Sometimes one spouse is not listed as a borrower on the reverse mortgage. In this case, they’d be called a non-borrowing spouse. Though the home may be both spouses’ primary residence, if the borrower moves out or dies, the non-borrowing spouse may not be allowed to stay in the home. Though there are some protections for non-borrowing spouses, they don’t always guarantee non-borrowing spouses will be able to stay in their homes.
Failure To Occupy the Home for 12 Months
Usually, if you don’t occupy your home for 12 consecutive months, you’re at risk of foreclosure. Because of the COVID-19 pandemic, HUD eased this requirement, but many reverse mortgage lenders have not. Older adults who’ve chosen to live with relatives during the pandemic may now be finding themselves at risk of foreclosure for not meeting this occupancy requirement. While there was a foreclosure moratorium, it’s since ended, lifting protections for reverse mortgage borrowers who’ve been away from their homes during the pandemic. If you're in this situation, it's a good idea to contact a HUD-approved housing counselor for advice.
Failure To Make Maintenance Payments on the Home
Reverse mortgages require you to make maintenance payments, including property taxes, home insurance, home association fees, and condo association dues. You're also required to do whatever upkeep is necessary to keep your home from falling into disrepair. Falling behind on these payments may be the most prolific cause of reverse mortgage foreclosures. It's important to realize that one of the marks of advanced age is forgetfulness. With some companies, a missed insurance payment could lead to foreclosure.
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Reverse Mortgages Have a Bad Reputation
USA Today ran an investigative piece on reverse mortgage foreclosures, which showed that some dishonest reverse mortgage companies take advantage of older adults by preying on their forgetfulness.
For example, one reverse mortgage servicer foreclosed on a widow because she forgot to change the property deed into her name. Another reverse mortgage borrower forgot to pay a relatively small insurance payment that increased to over $20,000 with fees as the reverse mortgage servicer tried to foreclose. The man has now been fighting foreclosure for years.
The article also highlights several examples of deceptive advertising by reverse mortgage companies. Many of these companies have been sanctioned by the Consumer Financial Protection Bureau (CFPB) and different states. Some of these companies are very well-known because of TV commercials with celebrity endorsements.
Reverse mortgages can be a good idea if they're handled right. Before taking out a reverse mortgage, discuss it with your family. If you have a relative or close friend that works in the mortgage industry, they could be a good source of advice. The Federal Trade Commission (FTC) also provides great resources to better understand reverse mortgages.
Foreclosure Avoidance Options
Some reverse mortgage servicers will deduct your maintenance costs from your monthly payment. While this means you’ll get less money each month, it also guarantees necessary payments will be made. You’ll be at less risk of foreclosure, and your reverse mortgage will be safer. If you choose to make the monthly payments yourself, ask a trusted family member to verify you’ve done so each month. There may be a time in the future when you'll forget a necessary payment.
Even if you default on your reverse mortgage by not complying with one of its requirements, you still may have options. Coronavirus relief measures that apply to regular mortgages also apply to reverse mortgages. With reverse mortgages, your lender may also offer one of the following options to help you avoid foreclosure:
A repayment plan for property charge arrearages over 60 months;
At-risk extensions for borrowers who are at least 80 years old and face issues like terminal illnesses. HUD must approve these extensions;
Leniency in foreclosing if your maintenance arrearage is less than $2,000;
To pay the maintenance arrearage itself. If your lender does this it can't add the charges onto your loan balance or ask HUD for a reimbursement.
If you fail to pay your maintenance payments and your reverse mortgage goes into foreclosure, you can still stop the foreclosure by bringing your maintenance payments current.
At the earliest notice that your lender is calling your loan due, it's important to know your rights. The first step may be to contact a HUD-approved housing counselor to learn your rights. It may be a good idea to find a foreclosure defense attorney to help fight foreclosure. If you can't afford an attorney, you may qualify for free legal assistance. If all else fails, you can consult with a bankruptcy attorney. A local bankruptcy attorney can explain how bankruptcy can help you.
Reverse mortgages are a good idea in theory. They can provide much-needed money for retired Americans. That said, there are drawbacks. People sometimes become forgetful when they're older. Forgetting to make a non-borrowing spouse election, pay the homeowners' mortgage insurance premium, or pay property taxes can result in the borrower's home being foreclosed.
If a borrower becomes prone to forgetfulness, it's a good idea for a family member to check to make sure all the requirements of the reverse mortgage loan are being met. This simple level of protection could be what keeps an older adult from having their home foreclosed.