Maryann D'Aniello* Attorney, Legal Aid of NorthWest Texas
LANDLORD TENANT LAW
Older homeowners sometimes find themselves with limited or fixed income, but rising monthly costs. One option to consider is a Home Equity Conversion Mortgage, or “Reverse” Mortgage. The article below, written by Maryann D’Aniello, explains certain risks to consider before entering into a Reverse Mortgage.
A Home Equity Conversion Mortgage (HECM), often referred to as a reverse mortgage, allows homeowners to take out the equity in their home while still living in the home. Unlike a regular mortgage, the borrower does not make monthly payments to the mortgage holder. HECM loans are insured by the Federal Housing Administration (FHA) and are regulated by the U.S. Department of Housing and Urban Development (HUD) regulations and servicing requirements.¹ While there are some non-HECM reverse mortgages, this discussion focuses only on HECM loans.
An HECM loan is only available to homeowners aged 62 or older.² The amount available to the borrower is a function of the amount of equity in the home and the age of the borrower.³ When spouses are both borrowers, the age of the younger spouse is used.⁴ The actual amount of money the borrower receives is less than the full equity in the property, and the proceeds of the reverse mortgage loan may be paid to the borrower in a lump sum, a monthly amount, or drawn on as needed like a line of credit.⁵ HECM mortgage loans are “non-recourse” loans, meaning the borrower will not owe more than the loan balance or the value of the property, whichever is less.⁶
These loans were conceived as a way to assist elderly homeowners with limited income to remain in their home, and all borrowers are required to complete counseling with a HUD-certified loan counselor before entering into the loan.⁷ Despite this counseling, and because proceeds from the loan are frequently used to pay-off an existing mortgage, many borrowers think of the reverse mortgage as a way to live “free.” These borrowers may lose sight of the fact that they do in fact have a mortgage that contains covenants and responsibilities. In 2018, the Government Accountability Office found that 18% of reverse mortgage terminations were due to borrower default.⁸
Although the borrower does not make monthly mortgage payments, mortgage insurance premiums and servicing fees are charged every month to the borrower’s account.⁹ Under the loan provisions, the borrower remains responsible for the taxes, insurance, home maintenance, and other property charges, such as homeowner association fees.¹⁰ Additionally, the home must continue to be occupied as the borrower’s principal residence.¹¹
As with any mortgage, the borrower may occupy the property until the mortgage becomes due and payable. An HECM mortgage will become due and payable when one of the following occurs: (1) the borrower dies, (2) the property is sold, (3) the property is no longer the borrower's principal residence, (4) the borrower does not occupy the property for 12 consecutive months for health reasons, or (5) the borrower violates the mortgage covenants.¹²
WHEN THE MORTGAGE IS DUE AND PAYABLE 1. Death of the Borrower and the Non-Borrowing Spouse Once the borrower (or last borrower of the two spouses) dies, the HECM is due and payable. The mortgagee (the lender/bank) must first notify HUD to receive approval to declare the HECM due and payable.¹³ Next, the mortgagee must notify the non-borrower spouse, the borrower’s estate, and borrower’s heirs, as applicable, within 30 days after receiving HUD approval that the mortgage is due and payable.¹⁴ HUD regulations then require the mortgagee to begin the foreclosure process within six months.¹⁵ Meanwhile, the heirs may sell the property or buy it themselves for 95% of its appraised value and pay off the mortgage, even if the loan balance is more.¹⁶ If the heirs can show they are attempting to acquire financing, or selling the property, up to two three-month extensions may be granted.¹⁷ Alternatively, they may provide the mortgagee with a deed in lieu of foreclosure.¹⁸
→ But wait, what about the Non-Borrowing Spouse? An HECM mortgage is due and payable upon the death of all surviving “mortgagors” or borrowers.¹⁹ If both spouses are borrowers and thus mortgagors, the mortgage is not affected and the surviving spouse may remain in the home after the first spouse dies.
However, prior to August 2014, some HECM loans were originated with only one spouse as the mortgagor. This occurred when one spouse was less than 62 years old, but the other was 62 years old or older. In that instance, only the older spouse could be a mortgagor for an HECM but the borrower could obtain higher loan proceeds. At closing, the younger spouse had to deed his or her interest in the property to the older spouse, which meant only the older spouse was the borrower and mortgagor. After the death of this sole borrower, there were no protections for the non-borrowing spouse.
This practice created a conflict between the language of the statute authorizing HECM loans, and HUD regulations regarding the status of remaining non-borrower spouses. Statute 12 U.S.C. § 1715z-20(j) provides:
The Secretary may not insure a home equity conversion mortgage under this section unless the mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, sale of the home, or the occurrence of other events specified in the regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of the homeowner. (emphasis added).
The regulations, however, provided that the mortgage became due and payable “if a borrower dies and the property is not the principal residence of at least one surviving borrower…”²⁰
In order to resolve this problem for the surviving, non-borrowing spouse, HUD issued Mortgagee Letter 2014-07, effective for all HECM loans with HUD case numbers assigned on or after August 4, 2014. The Letter created a “Deferral Period” that may be initiated upon the death of the borrower, which allows a Non-Borrower Surviving Spouse to live in the property until his or her death, as long as all other HECM obligations are met per the HECM terms.²¹ This Letter and subsequent regulations require lenders to certify at the closing whether a non-borrowing spouse is an “Eligible Non-Borrowing Spouse” or “Ineligible Non-Borrowing Spouse.”²² To be “Eligible” the non-borrowing spouse must meet the following requirements at the time of the closing:
Be the spouse of a HECM borrower at the time of the loan closing;
Be properly disclosed to the mortgagee at origination and specifically named as an Eligible Non-Borrowing Spouse in the HECM mortgage and loan documents;
Has occupied and continues to occupy the property as a principal residence.²³
Upon the death of the borrowing spouse, the mortgagee has a 180-day due diligence window to decide whether to:
Notify HUD that the loan is due and payable; or,
Apply to HUD for a Mortgagee Optional Election (MOE) assignment of the mortgage to HUD (and thus have the federal insurance pay the mortgage claim) if the surviving spouse is Eligible.²⁴
If the mortgagee elects to apply for an MOE, HUD will only grant the MOE if the Eligible Non-Borrowing Spouse meets the following criteria:
The spouse must have been married to the borrower at the time of the loan closing (except for same-sex couples who could not legally marry at that time) and remain married at the time of borrower’s death;
The home must be the surviving spouse’s principal residence; and
Any property charges in default must be cured.²⁵
If HUD grants the MOE, the due and payable status of the loan will be deferred until either the surviving spouse dies or the loan becomes due and payable for other reasons, such as non-payment of Property Charges.
The MOE election process should be initiated immediately after the death of the borrower. It can be a complicated process, especially for a grieving spouse. The Non-Borrower Surviving Spouse should promptly seek the assistance of an attorney or HUD-certified loan counselor to navigate this process. Same-sex couples who were in a committed relationship but prohibited from marrying at the time of HECM loan origination need to legally marry before the borrower passes away.²⁶
2. The Borrower sells the property If the borrower sells the property when the HECM is not due and payable due to a default, the amount due is limited to the lesser of the total loan balance or the appraised value.²⁷ The appraised value is determined by a HUD-approved appraiser.²⁸
3. The Property is no longer the Principal Residence of any Borrower HUD regulations require that the borrower verify at least once a year that the property is the principal residence of at least one borrower.²⁹ The borrower may designate an alternate individual (such as a Power of Attorney or relative) to receive copies of notifications from the lender and serve as the lender’s contact if the borrower is unable to reply to the verification request.³⁰ A property will cease to be the borrower’s “principal residence” when “a borrower fails to occupy the property because of physical or mental illness and the property is not the principal residence of at least one other borrower” ... “[f]or a period of longer than 12 consecutive months.”³¹ If the borrower believes that the property ceased to be their principal residence, the mortgagee must notify the borrower and describe how the default can be cured. Preoccupancy of the property within two months of the notice will cure the default.³²
4. Borrower fails to keep Property Charges current Borrowers are also required to maintain property insurance, pay property taxes, and pay HOA fees on the home (referred to as “Property Charges”). Failure to do so constitutes a default in the contractual terms of the loan. This includes participating in a tax deferral program. The mortgagee may not participate in any tax deferral program that creates a lien unless the lien is subordinate to the mortgage, meaning that the subsequent lien cannot be a higher priority than the HECM lien.³³ In Texas, obtaining a tax deferral creates a lien on the property that is not subordinate to the mortgage.³⁴ Thus, a tax deferral will lead to default.
In a typical mortgage, monthly payments are paid to a bank, and the bank maintains an escrow account, which is responsible for Property Charges. Because there is no monthly mortgage payment to the lender with a HECM loan, there is no escrow account maintained to pay the Property Charges. If the borrower did not take all the proceeds in a lump sum, the remaining available funds can be used to pay the Property Charges. However, issues arise when borrowers take all available equity proceeds at once and then have no additional resources to pay the Property Charges.
To address this problem, HUD issued Mortgagee Letter 2013-27. The Letter provides that beginning on January 13, 2014, lender/mortgagees must complete a financial assessment of borrowers before loan approval to determine whether the borrower will have the resources to maintain the Property Charges. If the financial assessment indicates the borrower may lack the resources in the future, the lender may require that a Lifetime Expectancy Set-Aside (LESA) be created from some of the loan proceeds to keep funds available for payment of the Property Charges, or, if the proceeds are paid in monthly amounts, to deduct the Property Charges from those payments.³⁵ A borrower can also choose to have the lender maintain a LESA.
For borrowers who obtained the HECM loan before the LESA was required but no longer have additional loan proceeds to pay the Property Charges, HECM regulations require that the mortgagee notify the borrower within 30 days of the mortgagee’s notice of nonpayment of taxes or property insurance.³⁶ This notification is called the Property Charge Delinquency Letter.³⁷ The Letter must contain the following:
The borrower’s obligation to pay the Property Charges has not been met;
This failure will result in the loan becoming due and payable;
The amount the mortgagee advanced on behalf of the borrower to pay the Property Charges, if any;
Notice of availability of Housing Counseling; and
Notice of any available loss mitigation options offered by the mortgagee.³⁸
It is important to note that HUD does not require specific loss mitigation options be provided if there are no remaining loan funds to pay the Property Charges before beginning the foreclosure process.³⁹ The options that FHA allows its mortgagees to consider are:
Refinancing the defaulted HECM into a new HECM; or
Provide information about local assistance programs, if they exist.⁴⁰
If either of these options are unavailable, the mortgagee may offer one of the following options:
(1) HECM Loss Mitigation Repayment Plan⁴¹ If the mortgagee, at its discretion, offers loss mitigation and determines that the borrower is eligible, the Repayment Plan must pay back the Property Charges Arrearage in no more than 60 payments (5 years), or a shorter time if the mortgage balance increases to 98% of the Maximum Claim Amount. The mortgagee must show that the borrower has monthly surplus income sufficient to pay the proposed Repayment Plan amount.
(2) “At Risk” Property Charge Loss Mitigation Extension⁴² If the borrower does not qualify for a Repayment Plan or fails to successfully complete a Repayment Plan, the mortgagee may request that HUD grant an extension of the otherwise required foreclosure timeframes when:
The youngest living mortgagor is at least 80 years old; and
The mortgagor has “critical circumstances such as a supported terminal illness, substantiated long-term disability, or a ‘unique’ occupancy deed (e.g. terminal illness of family member receiving care at the residence).”⁴³
HUD has exclusive discretion to approve or deny an “At Risk” extension. If approved borrowers must provide supporting documentation no less than once a year.⁴⁴
As shown above, a reverse mortgage should not be entered into lightly. Borrowers who take out a reverse mortgage without fully understanding the risks could quickly find themselves in default and at risk of foreclosure. It is essential that borrowers understand that while there is no monthly payment made to the lender with a reverse mortgage, all other expenses of homeownership remain. Homeowners considering a reverse mortgage should seek both financial and legal counseling before entering into one of these loans.
*Ms. D’Aniello is a graduate of the Southern Methodist University Dedman School of Law. She joined Legal Aid of NorthWest Texas (LANWT) in 2005 as the Hurricane Legal Relief Liaison and worked with Hurricane Katrina evacuees in a joint effort with LANWT and the Dallas Volunteer Attorney Program (DVAP). She coordinated the efforts of LANWT and private attorneys working to serve hurricane evacuees in the wake of the New Orleans disaster. In 2007, Ms. D’Aniello joined the Housing, Consumer and Economic Benefits Division of LANWT and began working with the Housing Crisis Center (HCC). She represents low-income tenants and homeowners with housing issues in an effort to prevent homelessness and preserve title and is a member of LANWT’s Foreclosure Prevention Team. She also serves as the DVAP mentor attorney for pro bono attorneys that take on housing-related cases. In addition, her practice consists of representing individuals on issues involving economic benefits such as disability (SSI/SSDI), Medicaid programs, SNAP (food stamps) and unemployment compensation, as well as various elder care and probate issues. Maryann D’Aniello is the Team Lead for LANWT’s Public Benefits Team.
Sources ¹ Housing and Community Development Act of 1987, Pub. L. No. 100-242, S. 825, 100th Cong. (1988). ² 12 U.S.C. § 1715z-20(b)(2). ³ HUD HECM Handbook 4235.1 (1-4 Principal Limit). ⁴ Id. ⁵ HUD HECM Handbook (1-5 Payment Plan). ⁶ 12 U.S.C. § 1715z-20(d)(7). ⁷ 12 U.S.C. § 1715z-20(f); 24 C.F.R. § 206.41. ⁸ GAO-19-702: Published Sep 25, 2019. Publicly Released: Sep 25, 2019.
⁹ HUD HECM Handbook 4235.1 (1-10 Mortgage Insurance Premium). ¹⁰ 24 C.F.R. § 206.27. ¹¹ 24 C.F.R. § 206.39. ¹² 24 C.F.R. § 206.27(c)(1). ¹³ HUD Mortgagee Letter 2015-10. ¹⁴ Id. ¹⁵ 24 C.F.R. § 206.125(d). ¹⁶ 24 C.F.R. § 205.125(a)(2)(ii). ¹⁷ See HUD Mortgagee Letter 2015-10; HUD Handbook 4235.1, Chapter 9: HUD Servicing; HUD Handbook 4330.1, Chapter 13: Home Equity Conversion Mortgages. ¹⁸ Id. ¹⁹ 24 C.F.R. § 206.27(c). ²⁰ 24 C.F.R. § 206.27(c)(1). ²¹ HUD Mortgagee Letter 2014-07. ²² 24 C.F.R. § 206.55(c). ²³ Id. ²⁴ HUD Mortgagee Letter 2019-15. ²⁵ Id. ²⁶ HUD Mortgagee Letter 2015-15. ²⁷ 24 C.F.R. § 206.125(c). ²⁸ 24 C.F.R. § 206.125(b). ²⁹ 24 CFR § 206.211. ³⁰ 24 C.F.R. § 206.40(c). ³¹ 24 CFR § 206.27(c)(2)(ii). ³² HUD HECM Handbook, 4330.1 Rev. 5 § 13-32(B)(2). ³³ HUD HECM Handbook, 4330.1 Rev. 5 § 13-12C. ³⁴ Texas Property Tax Code § 33.06(d). ³⁵ HUD Mortgagee Letter 2013-27. ³⁶ HUD Mortgagee Letter 2015-11 (Loss Mitigation Guidance for Home Equity Conversion Mortgages in Default due to Unpaid Property Charges). ³⁷ Id. ³⁸ Id; page 4. ³⁹ HUD Mortgagee Letter 2015-11; see also Regulation X Loss Mitigation Procedures, 12 C.F.R. § 1024.41 (does not apply to reverse mortgages); 12 C.F.R. § 1024.30(b)(2). ⁴⁰ HUD Mortgagee Letter 2015-11. ⁴¹ HUD Mortgagee Letter 2015-11, pages 5-8 (details how the mortgagee determines whether the borrower is eligible for a Repayment Plan). ⁴² HUD Mortgagee Letter 2015-11, page 8. ⁴³ Id. ⁴⁴ Id.