Can I Negotiate a Deed in Lieu of Foreclosure for a Reverse Mortgage?
Q: My parents took out a reverse mortgage on their home years ago. My father has since passed away and my mother is about to permanently move into an assisted living facility. No one is living in the home and the amount owed on the reverse mortgage is more than the property is currently worth. The real estate market in the area is weak and we have been unable to find any interested buyers for the home. We don’t feel comfortable just “walking away” from the property and letting it go into a long foreclosure process. Can we work with the reverse mortgage company to negotiate a deed in lieu of foreclosure instead of just turning our backs and walking away?
A: Yes – reverse mortgage companies will often work with borrowers and their representatives to negotiate a deed in lieu of foreclosure. This article will discuss reverse mortgages generally and the options available to borrowers who are unable to fulfill their obligations under the reverse mortgage -including negotiating a deed in lieu of foreclosure.
[Note: There are several kinds of reverse mortgages available. The information in this article relates specifically to Home Equity Conversion Mortgages (HECMs), which are backed by the U.S. Department of Housing and Urban Development (HUD). The information may not apply to other types of reverse mortgages.]
A reverse mortgage is a specific type of home loan that allows people who meet certain age and other eligibility requirements to convert part of the equity in their homes into cash without selling their homes. Given the way these mortgages work today, the term “reverse mortgage” is a bit of a misnomer; the name stems from the original concept of these products which “reversed” the traditional mortgage payment stream – instead of the borrower making monthly payments to the lender to repay the loan, the lender would make monthly payments to the borrower. While this kind of reverse mortgage is still available, it is more common now for the lender to make a single lump sum payment, rather than monthly payments, to the borrower.
Reverse mortgages differ from traditional mortgages in several ways. One major difference is that there is no obligation to make monthly payments on the loan. Reverse mortgages generally do not have to be repaid until the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. Because of this, the amount owed on the mortgage increases over time as interest is charged on the outstanding balance each month.
Another difference between reverse mortgages and traditional mortgages is that the federally-backed HECMs are “non-recourse” loans. This means that the borrower and the borrower’s estate and heirs will not be pursued for a deficiency judgment after a foreclosure if the proceeds from the foreclosure sale are not adequate to pay off the balance of the loan.
Borrowers (and their families) are often unsure of what to do when an event occurs that causes the full balance of the loan to become due. Because of the nature of the events that trigger acceleration of the loan, it is often family members who bear the responsibility of dealing with the borrowers’ obligations. The scenario noted above is a common one – the daughter or son of a borrower, who has often obtained a power of attorney for the borrower/parent, is left to deal with the reverse mortgage when the parents are no longer able to live in the property and the loan becomes due.
When reverse mortgage companies become aware that a triggering event has occurred (such as the borrowers no longer occupying the property) they will generally send correspondence to the borrowers notifying them that the loan has become due. Such notices often outline the borrowers’ options, which include:
- Curing the default that caused the loan to become due (where the default is due to something other than death and is something that can be cured such as failure to pay property tax);
- Paying off the full amount of the loan due;
- The borrower’s estate or heirs paying off 95% of the amount due (available only when there is a post-death conveyance of the property);
- Third-party sale of the property/short sale (using the sale proceeds to pay off the loan);
Entering into a deed in lieu of foreclosure; or
- Walking away and allowing the lender to foreclose.
Because of financial realities and market conditions, borrowers may believe that their only option for dealing with a reverse mortgage that has become due is to walk away from the obligation. Some people, however, are uncomfortable with the uncertainty that goes along with this decision and would prefer an option that allows them to feel that the matter has been addressed and is closed. For those people, it is reasonable to try to work with the lender to enter into a deed in lieu of foreclosure. The lender will require specific documents and will conduct an inspection of the property to determine if it meets their requirements for accepting a deed in lieu of foreclosure. Although the paperwork and process may take some time, the inconvenience is often well worth the psychological reward of knowing that the situation has been dealt with and the lender now holds title to the property in question.
If you are faced with a reverse mortgage that has become due and payable because of some triggering event, you can enter into negotiations directly with your borrower to try to deed the property to the lender in lieu of the foreclosure process. If you want help with this process or have questions about entering into a deed in lieu with your lender, please feel free to contact me for assistance.
For questions regarding this article please contact Jon Goodman.