? for the mortgage experts

[BobT]

I don't know every detail so I'm working with bits and pieces but I'm hoping someone can help me out.

My mother-in-law entered into a reverse mortgage agreement about a year ago. There was a rather significant lien against the property but there was adequate equity to cover it and still leave her with a small monthly income from the reverse mortgage.

Today my wife told me, and this is where things are sketchy, that her property was going into foreclosure. Supposedly the bank that wrote the reverse mortgage has filed bankruptcy or they sold the mortgage and the new owner has filed.

From the research I did over a year ago, my understanding was that in simple terms, a reverse mortgage basically means that she deeds her home to the bank with the payments set up so the bank never really pays it off in full before her passing. The bank is investing that she'll never live long enough to use all the equity faster than it grows and so they will be able to recoup the cost after her passing. I also understood that at the time of her passing her children would be able to buy the deed back by paying for the total equity she used. I also understood that she is allowed by law to live in the home for as long as she wishes.

Am I correct and if so, can the bank's bankruptcy situation have any affect on her ability to live on the property?

Thanks,

[Jackpine Rob]

The details are really important Bob. Banks typically don't go into bankruptcy, but get taken over by the FDIC. Unless there is a skunk in the woodpile from when the mortgage was originally taken out, foreclosure on a reverse mortgage would really have me scratching my head. In other words, something doesn't sound right here.

You mother in law had better scoop up all of the papers from the closing, any correspondence, and consult a real estate attorney pronto. If you want to contact me off-list, I can give you some other ideas and maybe give you a better handle on your next move. rmaki (at) villagetitle (dot) com. No legal advice from me - but at least I can steer you in the right direction.

Reverse mortgages are highly regulated, and the amount available is well below the appraised value of the house. The owner gives a mortgage to the bank/mortgage company which does not require payment until the owner dies or permanently leaves the home, and usually pays the owner a monthly check. The family is allowed to come in and either sell the home (pocketing whatever is left after paying the mortgage) or pay off the mortgage themselves after the owner has died or moved permanently.

[luckey]

Good answer Jackpine. Also, I found this.

Reverse Mortgage Myths

If I take out a reverse mortgage the lender will own my home.

This is probably the most common of the reverse mortgage myths out there. The fact is that you retain title and ownership to your home, and can choose to sell your home anytime you wish. The lender cannot force you from your home or foreclose on you as long as you maintain your home and pay your property taxes and homeowners insurance. The lender only has a security interest in your home in the form of a first mortgage or trust deed, just the same as in a regular forward mortgage.

Something fishy with your situation.

[BobT]

Thanks for the replies. I have done some more research and you are correct and I was mistaken about the deed.

[fisherdog19]

I don't write much for reverse mortgage's, but I've never heard of a foreclosure resulting from one. I don't think it's actually possible.

[Tom7227]

A basic tenant of a mortgage is that it must have a foreclosure mechanism. If it doesn't it isn't a mortgage. Courts frown on any attempt to claim something is a mortgage when it doesn't have a forclosure option, and will treat it like a simple contract with the right to award damages in case of a breach rather than allow the property to be turned over.

The whole issue of the securitization of mortgages makes all the stuff way more complicated than most think.

BobT - find a real estate lawyer in your neck of the woods and have that person assist your mother-in-law in dealing with this situation. There's all sorts of questions about the contents of the contract, whether the 'mortgage' was ever filed with the County Recorder, etc.

You may want to also contact the Commerce Department and/or the Consumer Division of the Attorney General's office to have them check into the situation.

[BethP]

Hi Bob,

I specialize in reverse mortgages and thought I would respond to help you have accurate information.

First, a reverse mortgage is a mortgage just like any other but has special terms for seniors 62 and older. The borrowers keep the title so the deed of the home is still in their name, or in your case, your mother-in-laws name. (The deed has not been transferred to the bank.) Borrowers are responsible for paying taxes, keeping insurance on the home, maintaining the home and abiding by the terms of the loan.

Instead of making payments, borrowers can use the equity and receive funds to use now, while still living in the home. Options are in a lump sum, line of credit, monthly payments or a combination of these.

The lien amount against the house is recorded at 150% the appraised value because over time borrowers can access more funds than the home value at the time of closing. This doesn't mean that is what will need to be paid off when the loan is due and payable - it just means the the lender has a right to be paid up to that amount if the home value increase 150% and the borrower has accessed up to 150% of the home value.

The reverse mortgage needs to be in first lien position (meaning the lender will be repaid before any other lien against the property). It sounds like in your mother-in-laws case that she had a current mortgage paid off with the reverse mortgage and is now receiving monthly payments. So her cash flow has increased with her not making monthly payments to the other lender on the reverse mortgage and she is receiving some additional funds each month.

When the home is no longer the borrower's primary residence, the loan becomes due and payable. The amount paid back includes any funds received by the borrower, closing costs, interest, etc.

An advantage of the reverse mortgage is that it is a non-recourse loan which means that if the loan balance is higher than what the home can be sold for the borrower or their heirs do not have to pay the difference as long as they, the borrower, or their heirs are not retaining ownership. In other words if the loan balance is $200,000 but the home can only be sold for $150,000 the lender accepts the $150,000 and the borrower or the heirs do not have to come up with the additional $50,000.

The home is sold for more than the loan balance the borrowers or the heirs keep the difference.

If the children want to keep the home the loan balance, whatever that amount is would need to be paid to the lender. Usually done with a new mortgage.

Most reverse mortgages are insured by HUD (Housing and Urban Development department of FHA) and called a HECM (Home Equity Conversion Mortgage). In the last year proprietary products were not available unless it was done by a local bank but the large banks who also offer HECM's no longer offer the proprietary products.

Now to get to your specific questions and concerns.

Being the loan (most likely) is insured by HUD even if the bank/lender did close their doors (for any reason) HUD would find another servicing company. So no worries that your mother-in-laws reverse mortgage would be impacted if the bank is in foreclosure. With the HECM the funds are guaranteed to be available to her as long as she's living in the home and abiding by the terms of the loan. So she can go on living in her home.

But I have to say that I haven't heard of any banks that offer reverse mortgages are in foreclosure - even if it was a small local bank that set up the original reverse mortgage is closing their doors, the loan is most likely serviced by another company as there are a limited number of companies that actually service reverse mortgages.

Now regarding reverse mortgages and foreclosures. If the borrower does not keep insurance on their property, pay the property taxes, maintain the home or abide by the terms of the loan the lender can (and has) foreclosed on homes. Generally the lenders/servicing company will work with borrowers to address the situation and it takes time before the foreclosure would actually happen. If taxes aren't paid the county could put the home in foreclosure.

So now that I've given you a lot of information, without knowing all the details of your situation, in summary, if the bank is closing their doors and the reverse mortgage is a HECM, insured by HUD you/she doesn't have any worries, HUD will find another servicing company.

If your mother-in-law did not pay taxes, insurance, maintain the home or abide by the terms, I would contact the lender/servicing company and get the details and find out what needs to be done to address the issue.

[BobT]

Welcome to the site, Beth, and thank you very much for the information. I have learned a lot in the last couple days and regarding her situation, it sounds like I've been getting some less than accurate information.

My information is still a little sketchy and most of it second hand but the gist of it is that there was a list of repairs that needed to be done as part of the loan agreement. She did set aside some funds for this purpose and hired a contractor to do the roof and siding repairs. Some of the work involved some exterior painting and when the contractor submitted his claim, it triggered an inspection of his work. In the process the inspector noted that the painting wasn't complete yet. Weather, time, etc. prevented her from finishing it completely and what's left is some trim. Anyway, I think she began to panic thinking they would foreclose on her because she wasn't done with the painting.

I don't know what the time limit was for her to finish but I find it hard to believe they would force her to hire a painter to do this in the dead of winter. It costs enough as it is much less to have to also pay to enclose and heat the area. I told her to tell them to be patient and I'd do it myself once the weather warms.

Thanks again,

[BethP]

Hi Bob,

With a reverse mortgage the property needs to meet HUD's requirements. Generally repairs can be done after the closing of the reverse mortgage and obviously this is the situation of your mother-in-law.

There is a time frame for the repairs to get completed. Generally within 6 to 9 months after closing, depending on the lender. The lender can get an extension from HUD for up to 12 months if the repairs were not completed in the initial time frame.

Since it sounds like the 12 months are past and outside painting cannot be done here in MN (or other northern climates), have your mother-in-law call the lender/servicing company and discuss how to resolve the situation. Have her explain that outside painting can't be done in MN at this time and not likely until May (April if it's a warm spring). I have had to explain to servicing representatives who are usually in warmer climates that it's cold and snowing here in MN through March and sometimes into April so outside painting can't be done until May. (I'm assuming she's in MN/WI.)

Yes, have her tell them that the painting will be done as soon as weather permits. If you, Bob, can do this timely, great. If not you may need to use a contractor so it can be done sooner than later.

Note that technically HUD could call the loan due and payable which means the lender/servicing company could do so because the repairs were not completed within the required time frame as per the loan agreement. Even if they do not call the loan due and payable the funds could be frozen until the repairs are completed. (No pun intended. )

So her monthly payments may be stopped (it's likely this will happen). At least she isn't required to make a monthly payment.

Communication, communication, communication with the lender/servicer is of the utmost importance.

Also note that if repairs were required by HUD then a repair set-aside would have been done to cover the costs of the repairs. Once repairs are completed the contractor will be paid and, if any extra was set aside that would be made available to her. If you do the painting the she'll have to send in the receipts for the paint, have the inspection and then the remaining funds made available to her.

Hope this helps you further.

Good luck and call if you need more specific answers.

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