A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a combination financial and actuarial product that allows the homeowner to borrow money with a mortgage that does not come due until the homeowner passes away, sells the property, or defaults on paying property charges (property taxes, homeowner’s insurance, water, etc.). If the homeowner is age 62 or older, has a substantial amount of equity, and is currently living in the home, the program allows the homeowner to borrow against the equity in his or her home. Homeowners with a forward mortgage (a typical mortgage with monthly payments) may also be able to obtain a reverse mortgage to fully pay off their forward mortgage. Reverse mortgages can be a resolution for homeowners in foreclosure.
Some concerns that should be addressed with seniors thinking about obtaining a reverse mortgage include:
- Compounding interest and large fees increase the size of the loan over time;
- Senior borrowers may not be aware of and then default on their responsibilities to pay their property charges if there is no set aside or LESA (Life Expectancy Set Aside) account or that account has run out;
- Heirs and non-borrowing spouses, who can keep the property provided that they submit documentation or a payout to the servicer, may be unfamiliar with these policies and can face foreclosure when the loan becomes due after the death of the borrower; and
- Servicers paying property tax charges to the municipality on the borrower’s behalf then refusing to enter into a repayment plan with the borrower and placing the property into foreclosure.
- Youngest borrower must be 62 years of age or older
- Borrower must own the property outright or haved paid down a considerable amount on their forward mortgage(s)
- Borrower must occupy the property as a principal residence
- Borrower cannot be delinquent on any federal debt
- Borrower must have financial resources to continue to make timely payments of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
- Borrower must participate in a consumer information session with a HUD-certified HECM counselor
- Verification of income, assets, monthly living expenses, and credit history
- Verification of timely payment of real estate taxes, hazard and flood insurance premiums
- A LESA account may be required, and is required for borrowers in foreclosure or who have delinquent credit history
- Closing costs may be financed in the mortgage
The borrower is still responsible for:
- Property taxes
- Hazard insurance premiums, including flood insurance if the borrower lives in a flood zone
- Mortgage insurance
- Home maintenance costs
- If there are insufficient funds from the reverse mortgage to set aside for the LESA account, payments may be required
To find a HECM counselor, you can go to https://entp.hud.gov/idapp/html/hecm_agency_look.cfm.
Other types of reverse mortgages are proprietary or single-purpose, but these account for a small fraction of reverse mortgages. The majority are insured by FHA and regulated by HUD.
Insurance and Property Taxes
- Ensure that the homeowner has applied for all applicable property tax exemptions or subsidies, and has the correct property valuation on record with the municipality.
- Ensure that the homeowner has secured their own competitively priced homeowner’s insurance in order to avoid expensive force-placed insurance.
If a borrower fails to pay their property charges on time (property taxes, homeowner’s insurance, water, etc.) or to prove occupancy, this is considered a default in the terms of their reverse mortgage and the reverse mortgage servicer may call the loan due and payable. Once the reverse mortgage loan is called due and payable, the loan will be referred to foreclosure and a court action for foreclosure will be commenced. As of 2017, New York law expanded forward mortgage protections to reverse mortgages such as requiring settlement conferences and 90-day notices.
In order to prevent a foreclosure and bring the reverse mortgage loan back into good standing, the homeowner must cure the default balance owed. Once the borrower has obtained a letter from the reverse mortgage servicer detailing the default balance, the borrower can apply for either a repayment plan or for a grant and/or loan to cure the default.
HUD’s mortgagee letter ML 2015-11 and its clarification letter gives guidance to servicers for loss mitigation as well as what a repayment plan would look like; however, loss mitigation is permissive, meaning the servicer can refuse to offer anything.
If a servicer refuses to provide a repayment plan, escalate the case through the Center’s Escalations program, or refer to a legal services provider.