When loan documents are signed at closing, borrowers agree to the terms of the loan. Whether the borrower took out a conventional loan or a Home Equity Conversion Mortgage (HECM), the reverse mortgage insured by HUD, the title of the home remains in the borrower's name, the bank doesn't own the home, nor do they want to own the home.
The reverse mortgage has helped seniors 62 and older remain in their home with their security, independence, dignity and control but not without responsibilities to adhere to the terms of the loan. The main responsibilities are to not violate terms of the loan, generally these include:
- Paying property taxes
- Keeping hazard insurance on the property
- Maintaining the property
- Paying association dues if appropriate
- not changing/transferring the title
Paying property taxes means keeping up with the county property taxes, paying them on time. If one doesn't pay property taxes, with or without a loan, the county could start tax forfeiture or foreclosure.
Maintaining the property is required to protect the lender's investment in the property. Keeping hazard insurance on the property helps protect both the homeowner and the lender from the costs incurred from unexpected damage. For example if a tree falls on the home and destroys the roof, hazard insurance covers the cost to replace it.
If one lives in a condo or town home, association dues are required. If these dues are not kept current, the association has the right to force the homeowner from the property.
What are the consequences if the requirements of the reverse mortgage loan terms are not followed?
If terms of the loan agreement are not followed, the lender has the right to call the loan due and payable and even foreclose.
Changing or transferring titles will mean the loan becomes due and payable. For example if one decides to add a person to the title of the property, implement a Life Estate, or sell the property this changes who the lender's have invested their interests. If the property is going to be put in a trust it will not mean the loan will be come due and payable however the lender will need to review the trust to ensure that it meets the requirements of their investors and in the case of the HUD insured HECM, the trust must meet HUD's guidelines.
The issue that has caused the biggest problem for reverse mortgage lenders: when borrowers don't pay their the property taxes and hazard insurance.
Even though there are a large number of borrowers who fall into this area, to date there have been very few reverse mortgages foreclosed because of defaults on taxes and insurance payments. HUD has been very forgiving by not pressuring loan servicing companies to foreclose, however this is about to change.
Due to FHA's budget, the arm of the Housing and Development arm who insure the majority of reverse mortgages, is looking to find a solution to their budget shortfalls. Fannie Mae who has a large portfolio of the HUD reverse mortgages is also encouraging the HECM servicers to address the issue of delinquent taxes and insurance to protect their company from losses.
With conventional mortgages, if taxes and insurance are not paid, the lenders will start an escrow account, requiring more money from borrowers in their monthly payments for the escrow account. The lenders then make the tax and insurance payments on behalf of the borrower from their escrow accounts.
If reverse mortgage borrowers are not making payments, collecting funds for the escrow account is not an option. So what the servicing companies have done instead is, if there is a line of credit is use, these funds are allocated to pay the delinquent taxes. If a reverse mortgage borrower is receiving monthly payments, they will be restructured so that the taxes and insurance can be paid. Unfortunately if all the funds have been used and taxes and insurance have not been paid, the loan is in default.
HUD is working toward establishing guidance for the reverse mortgage servicing companies to address the tax and insurance delinquencies. But if the borrowers do not have the capacity to pay the taxes and insurances they owe, the servicer will be forced to foreclose on the property per HUD's requirements. (Note that reverse mortgage servicing companies are required to abide by HUD's requirements.)
While the originators, counselors and loan documents spell out these requirements, borrowers must take their responsibilities seriously. It is also their responsibility to be sure to look at their budget and have a plan to be able to pay their property taxes, hazard insurance as well as maintaining the property. Then they can remain in their home and enjoy the many benefits of the reverse mortgage.
