By Christhie Montero, Esq. and Mario A. Serra, Esq.
Reverse Mortgage is a home loan that allows homeowners to convert a portion of the equity in their homes into cash. Many reverse mortgages are FHA insured under the Home Equity Conversion Mortgage (HECM) program. A reverse mortgage differs from a home equity mortgage or second mortgage in that the borrowers are not required to make monthly payments or other periodic payments to repay the loan. Instead, the lender makes payments of a portion of the property’s equity to the borrower and the interest is added to the principal balance of the loan. The payments to the Borrower can be a lump sum, monthly cash advance, or a combination of lump sum and monthly payment. The borrower can use the money for anything. The loan does not become due and payable until one of the specific triggering events occur. The homeowner in a reverse mortgage retains title to the property and is responsible for paying the property taxes, hazard insurance and maintenance.
Reverse mortgages are a non-recourse loan which means they carry no personal liability and lenders cannot look to a borrower’s other assets to satisfy the loan. A reverse mortgage can be repaid if the borrower sells the property and pays back the loan money with the proceeds of the sale, any heirs to the property pay back the loan or borrower or heirs take out a new forward mortgage on the loan. With a reverse mortgage a borrower or his heirs can never owe more than the value of the property at the time the loan is repaid. For HECM loans, HUD will accept 95% of the appraised value of the home.
HECM loans are available to homeowners 62 years and older who own their home without any mortgages or who have paid down the balance of their existing mortgage. The homeowner must have sufficient income to pay ongoing property charges including taxes and insurance and must live in the premises. Reverse mortgages which are not for a specified number of years become due and payable when the borrower dies, fails to occupy the premises for 12 months or longer, or fails to meet a contractual obligation such as paying taxes or keeping the property in good condition. Some HECM loans feature a set-aside account for the purpose of paying property taxes, insurance and charges.
Reverse mortgages, unlike a traditional or home equity mortgage cannot be assumed by a non-borrower spouse or heir and some defaults thereunder cannot be cured. If a homeowner sells, re-finances, transfers all or part of the title, rents the property or takes out new debt against the home, the HECM loan would become due and payable. When a HECM becomes due and payable mortgagees must inform borrowers in writing that they have 30 days to respond to a due and payable notice . The notice must reference any available loss mitigation options and must inform the borrower of the ability to sell the property or complete a Deed-in-Lieu of foreclosure. If a HECM falls into default because the borrower no longer uses the premises as a primary residence this default may be curable provided the borrower can move back-in to the premises. In certain circumstances HUD requires that a borrower be given an opportunity to cure the HECM default.
The death of the last borrower would also make the loan due and payable except that the deferral period may be extended for an eligible non-borrower spouse. In the case where the borrower is survived by a non-borrower spouse the mortgagee may elect to foreclose under the terms of the mortgage or to assign the mortgage to HUD which has the effect of extending the deferral period. There are strict requirements which must be met when a mortgagee exercises this option . A deferral period in the HECM context refers to that period of time following the death of the last surviving borrower during which the due and payable status of a HECM is further deferred based on the continued satisfaction for an eligible non-borrower spouse.
HUD has revised the guidelines for loss mitigation for HECM loans in default due to unpaid property charges. Mortgagees may offer the option of refinancing into a new HECM provided all applicable HECM guidelines are met or the mortgagee may offer free information to the borrower on available local assistance programs. However if these options are not available or have been exhausted a mortgagee may offer one of two permissive loss mitigation options: a repayment plan or an extension of foreclosure timeframes for “at risk” borrowers. However, prior to offering any of these options, the mortgagee must ensure the borrower remains eligible under the requirements.
In evaluating a mortgagor for a repayment plan a servicer must first determine the total amount of the outstanding balance of unpaid property charges less any outstanding HOA fees. Then, the mortgagee must evaluate the borrower’s ability to repay the corporate advances through a repayment plan. The arrearage would then be divided into equal monthly installments not to exceed 60 months. This monthly installment however, can not exceed 25% of the borrower’s surplus income. In limited circumstances, the mortgagee may still be able to offer a repayment plan even it exceeds the 25% of the surplus income limit.
If a borrower is currently subject to a repayment and again fails to pay required property charges, a mortgagor may in limited circumstances offer another plan after soliciting new financial information and assessing a new repayment. If a borrower fails to perform successfully under an existing repayment plan, then a mortgagee may reevaluate and recalculate a repayment plan provided the total arrears are not greater than $5,000 and a mortgagee determines it is reasonable. repayment plans, however, are not available to borrowers currently subject to foreclosure. Thus, after a HECM in default due to property charges is referred to foreclosure, the borrower cannot receive a repayment plan and must pay in full the property charges due to cure the default.
If a repayment plan is unsuccessful or is insufficient any extension of foreclosure timeframes ceases immediately. A mortgagee may however request an additional extension to the foreclosure timeframes for “at risk” borrowers provided criteria are met: the youngest living borrower is at lease 80 years of age; and the mortgagee has determined that the borrower has critical circumstances such as supported terminal illness or long-term disability. If the last surviving borrower dies, the extension to the foreclosure timeframe allowed by the “at risk” criteria ceases immediately. Any outstanding corporate advances owed become immediately due and payable. If any amount owed is not satisfied within 30 days, the mortgagee must proceed in accordance with applicable guidelines.
For more information please contact via email Mario A. Serra or by phone at 973-538-4700 ext. 196.
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