With the aging U.S. population, reverse mortgages are becoming a popular way for older Americans to access the equity in their homes as a source of additional retirement income.
Fannie Mae is heavily invested in the reverse mortgage market and holds the bulk of conventional Home Keeper Mortgages and Federal Housing Administration (FHA) Home Equity Conversion Mortgages. Reverse mortgages provide the option for loan advances to be based on a lump sum, a line of credit or periodic payments.
The unique nature of reverse mortgages creates some special challenges to servicers and their attorneys once they have matured or the homeowner has defaulted.
A reverse mortgage becomes due and payable (i.e., matures) when the last surviving borrower dies, ceases to occupy the property as a principal residence or sells the property. As part of the loan agreement, the borrower promises to maintain the property and pay the property taxes and insurance during the life of the loan, and failure to do so is a default for violating the covenants of the mortgage.
Fannie Mae servicing guidelines for both conventional and FHA reverse mortgages provide that a mortgage may be called due by the servicer if it is matured as a result of the last surviving borrower's death, the borrower's failure to occupy the property as a principal residence or sale of the property.
Doing so, however, generally require investor approval – or Department of Housing and Urban Development (HUD) approval in the case of FHA loans – prior to calling due based upon a default under the terms of the mortgage.
When a reverse mortgage is called due and payable because of maturity, the servicer should send a repayment notice, that includes the total amount due and notice that foreclosure proceedings will commence if the amount is not paid within 30 days.
When a reverse mortgage is in default, the repayment notice should specify the nature of the default, describe the actions required to cure the default, and indicate that foreclosure will commence if the default is not cured.
After receiving the repayment notice, the borrower may correct any default that led to the notice, or the borrower (or his or her estate) may sell the property to pay off the outstanding debt. Servicing guidelines require working with the borrower to prevent foreclosure if the borrower has the desire and means to cure the conditions giving rise to the default.
Attorneys handling the foreclosure of reverse mortgages should consider the unique attributes of reverse mortgages and how these might require special handling. For example, reverse mortgages are nonrecourse loans. To avoid potential Fair Debt Collection Practices Act violations, servicers and their partners must ensure that communications with the borrower do not state or imply that the foreclosure may result in a personal judgment or deficiency.
Naturally, in judicial foreclosures, the complaint should not seek a personal judgment, but it should merely seek a foreclosure against the property itself.
Compared to traditional forward mortgage foreclosures, reverse mortgage foreclosures are more likely to involve a deceased or incapacitated borrower, which can create a variable potpourri of legal issues.
For starters, some states impose an automatic stay or moratorium to foreclosure following a borrower's death. Once the process is begun, foreclosing on a deceased borrower often requires locating the borrower's heirs, naming out-of-state heirs in the foreclosure complaint or even taking some action in probate court.
Further, any redemption rights granted under state law do not simply vanish simply because the borrower has died. Rather, the redemption rights normally vest in the borrower's estate or heirs.
When a servicer is foreclosing on an incapacitated borrower, court rules often require the appointment of a guardian ad litem to represent the borrower. Although the guardian's fees can normally be included in the foreclosure judgment, actual recovery of these fees depends upon remaining equity in the property.
Foreclosure of a reverse mortgage of a deceased or incapacitated borrower is likely to involve some delays and additional costs that are not present with a typical foreclosure, and these obstacles must be taken into account by servicers when they are analyzing loss mitigation options.
Accepting a deed in lieu of foreclosure while the borrower is alive and well will almost always prove to be a less costly alternative than foreclosing on the property once the borrower has died or become incapacitated.
Bankruptcy is another area that requires special attention with reverse mortgages. Once a servicer receives a notice of bankruptcy, in most cases, it will stop any future advances that it might be otherwise obligated to make to the borrower under the terms of the loan agreement.
If the loan is a Fannie Mae loan, servicing guidelines provide that the loan must be referred to a Fannie Mae-approved bankruptcy attorney to ensure the lender's security interest is protected throughout the bankruptcy.
In Chapter 13 bankruptcies, the bankruptcy attorney should review the plan to make sure the borrower will continue to pay the taxes and insurance, will not dispose of the property without satisfying the reverse mortgage, and will not attempt to modify the reverse mortgage to the detriment of the lender.
The bankruptcy attorney should also review the proposed budget to make sure that the borrower does not intend to fund his plan with future advances under the reverse mortgage when those advances will be discontinued. Naturally, the attorney should file an objection to confirmation if necessary to protect the lender's interests.
In Chapter 7 bankruptcies, the attorney should monitor the case for the discharge order and trustee abandonment, and once these are filed, the attorney should contact the servicer for further instructions.
The bankruptcy trustee may file a motion to sell the property – particularly if the borrower has not reached the loan limit for advances and retains substantial equity. As with all motions to sell by the trustee, the attorney should file a response and ultimately ensure that the mortgage is fully satisfied as a condition to the court's approval of the sale.
If a bankruptcy is filed by the borrower's heirs or estate, the servicer's referral to the bankruptcy attorney should instruct the attorney to seek immediate relief from stay and object to confirmation to challenge the heirs' right to modify the reverse mortgage insofar as they are not obligated on the loan.
Filing of a bankruptcy itself is not a default under the loan agreement, and thus, it is not a basis to initiate foreclosure.
As reverse mortgages grow in popularity, and as reverse mortgage borrowers age, more reverse mortgages will mature and fall into default. Default servicing of reverse mortgages requires special handling by the servicer – as well as by the servicer's attorney – to ensure the best possible resolution for each loan.
Garry McCubbin is a partner with law firm Kozeny & McCubbin LC, as well as co-founder of the American Legal & Financial Network (AFN) and is co-owner of Bankers & Lenders Title. He can be reached at (314) 991-0255.