No Mortgage is Risk-Free

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The media often overlooks the risks inherent in any mortgage: froward or reverse

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We see many national media headlines on how risky a reverse mortgage can be for older homeowners. Risky? This week we briefly touch on the most common risks that can be found in traditional and reverse mortgages and how most risks can be avoided.

Spending the kids inheritance.

Many formal complaints filed on a federally-insured reverse mortgage are from the adult children or heirs of a borrower. Many are unpleasantly surprised that mom or dad took out the loan only to learn that some or all of the home’s equity has been consumed. In many instances the parents could not cover their daily living expenses and chose a HECM to maintain a sense of financial independence. Often the adult children who are expecting to inherit the home were unable to financially assist their parents financially. While heirs may worry their inheritance is being spent, their parents often face real and more pressing and immediate financial concerns in their non-working years. If the parents were unable to keep their traditional mortgage payments current and lost the home to foreclosure, any remaining equity would be lost for both the parents and children alike…

Additional resources:
| Dan Hultquist article: Can a foreclosure occur with a reverse mortgage? |
| USA Today HECM foreclosure map | NRMLA response to USA Today article |

1 comment

The_Cynic July 23, 2019 at 7:56 am

The industry loves very false sentences that they deem to be so powerful as to overcome objections. We will address just one brought up in the video, protecting the Non-Borrowing Spouse (NBS). Let us start by looking at the three Mortgagee Letters (MLs) that supposedly provide NBS displacement protection: 2014-07, 2015-02, 2015-15.

1) If a covenant default is not from the borrowing spouse passing away, there are no NBS protections.

This is so important it needs to be repeated. These MLs only protect those NBSs who survive the death of the borrowing spouse. If the loan goes into default for a) the borrowing spouse not meeting the required periods of living in the collateral within a calendar year (or meeting the 12 month rule for illness) or b) failure to pay taxes or insurance, there are no absolutely NO NBS protections, period.

2) NOT EVERY NBS IS ELIGIBLE TO QUALIFY FOR THE DEFERRAL RIGHT.

For example, if a widow gets a HECM and remarries after closing, that NBS is automatically not qualified. The reason is that one of the qualifications for NBS deferral is that the NBS must have been continuously married to the borrowing spouse for a period that starts before the HECM is closed to the death of the borrowing spouse. So if the borrowing spouse promises the home to a spouse who became a legal spouse after the HECM closed and the inheritance docs pass the collateral to the surviving NBS, the NBS will inherit a home on which the Unpaid Principal Balance (UPB) is immediately due and payable.

3) The last ML (2015-15) is the only one protecting NBSs where the HECM providing that protection has an assignment date before August 4, 2014. Yet even if the NBS meets each and every requirement of that ML, the NBS can only be granted the deferral on paying the UPB if the LENDER agrees to it. Imagine meeting all NBS eligibility requirements only to be turned down by the lender.

—————-

Is this the way that Congress intended that the HECM would work? See what you think when you read HECM law which states in part at 12 USC 1715z-20(j):

“(j) Safeguard to prevent displacement of homeowner

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.”

The law intended and intends HUD to be much more generous in defining who a qualified NBS is and the events that trigger this Safeguard. The three MLs are a repugnant compromise to the Safeguard provision that Congress intended in the original law. The Safeguard provision has remained unchanged to this very day. Worse it took HUD until 2014 to recognize that NBSs should be safeguarded as to displacement to any degree. With hundreds of thousands of HECMs terminated before these MLs were published and posted, how many NBSs were never able to obtain NBS deferral even though they qualified under the ML 2015-15? Even for these NBSs, it was HUD that denied them deferral by not having any displacement Safeguards in place before 6/12/2015, the date that ML 2015-15 was posted; lenders had nothing to do with this denial. There has been no attempt to compensate any NBS who should have received NBS deferral but were denied that right because their loan terminated before 6/12/2015.

To be clear HUD has so limited the right of NBSs to be safeguarded against displacement that the three MLs hardly reflect the law that has been in place before the first HECM was even offered to the public. If it had not been for the AARP sponsored court case and a pending decision that HUD did not want to face, we would not have the three MLs we do. HUD did not create the three MLs because they were concerned about NBSs. HUD did it because they feared the potential results of the Bennett court decision, last pending in the federal District Court of DC. See the RMD article at

https://reversemortgagedaily.com/2015/06/16/hud-asks-court-to-drop-reverse-mortgage-non-borrowing-spouse-case/

and prior RMD articles for more information on the Bennett case.

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