(The pdf for the issue in which this article appears is available for download: Bifocal, Vol 41, Issue 5.
The COVID-19 pandemic has resulted in widespread health and economic upheaval for older adults and other consumers. For borrowers with reverse mortgages who are facing foreclosure, recently enacted federal protections and guidance will provide temporary relief, allowing them to stay in place. The protections, however, will expire in the near future and borrowers must rely on existing foreclosure avoidance options and tools to keep their homes. This article discusses newly enacted protections related to the pandemic and existing options for reverse mortgage borrowers and spouses facing default and foreclosure.
It is important to note that guidance regarding post COVID-19 pandemic protections may shift. For the latest updates on federal and other protections, please see National Consumer Law Center, Major Consumer Protections Announced in Response to COVID-19.
Reverse mortgage basics
Reverse mortgages allow older borrowers to convert home equity into cash and receive the loan proceeds as a lump sum, as a stream of payments, or through a line of credit. No payment is due on the loan until the borrower dies, sells, or permanently moves out of the home or is unable to meet other loan obligations. Unlike a conventional mortgage, the amount owed on a reverse mortgage will increase over time as the borrower receives payments from the lender and interest and fees are added to the loan.
There are two types of reverse mortgages: Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages. Proprietary reverse mortgages are developed and backed solely by private financial institutions. Most reverse mortgages are federally-insured HECMs. The U.S. Department of Housing and Urban Development (HUD) manages the HECM program and provides guidance to approved lenders on originating and servicing the loans.
The amount of money the borrower receives under a reverse mortgage is based on age, interest rate, and housing value (or HUD-established limits, whichever is less). Loans originated after April 2015 are subject to a financial assessment that includes a review of the borrower’s credit history and cash flow.[1] The borrower must have a satisfactory credit history that demonstrate an ability to pay property charges, including property taxes and insurance, and meet other financial obligations. A portion of the HECM proceeds will be set aside to pay future property taxes and insurance as a condition of the loan’s approval if the borrower does not meet the financial assessment criteria.
HECM Key Eligibility Requirements
- Borrower must be 62 years of age or older.
- Own a home with sufficient equity.
- Occupy the home as the principal residence.
- Obtain counseling from a HUD-approved counselor.
- Have the resources to make timely payment of ongoing property charges and meet other terms and conditions of the loan.
New Protections Under the CARES Act
In recent years, defaults on HECM loans jumped from 2 percent in fiscal year 2014 to 18 percent in fiscal year 2018, the Government Accountability Office (GAO) reports[2. Most defaults were due to borrowers falling behind on property taxes or insurance, or not meeting the loan’s occupancy requirement. More borrowers will likely fail to meet these financial obligations in the future and incur non-mortgage related expenses due to the pandemic.
The federal Coronavirus Aid, Relief and Economic Security Act (CARES Act) imposes a moratorium on foreclosure for a 60-day period until May 17, 2020, for all federally backed mortgage loans, including HECM loans.[3] The lender may not start or continue the foreclosure process, order or conduct a foreclosure sale, or conduct a foreclosure-related eviction. The moratorium does not apply to properties that are vacant or abandoned.
An additional layer of protection is provided by HUD. Before passage of the CARES Act, HUD imposed a 60-day moratorium on foreclosure and eviction from properties with FHA-insured single-family mortgages, including properties with HECM loans.[4] HUD later extended the foreclosure timeline and deadlines for HECM foreclosure avoidance program options, including those discussed below.
For HECM loans in default or at risk of foreclosure, the servicer must delay calling the loan due and payable for six months until October 1, 2020.[5] This extension is not automatic; the borrower must request this delay from the lender or servicer of the loan. No proof of hardship or documentation is required. An additional six-month extension is available with HUD approval. During this period, the lender must waive all late charges, fees and penalties, if any. If the foreclosure process has already started, and the loan is due and payable or in deferral, the lender has the discretion to extend the foreclosure process for six months or longer with HUD approval.
What this means:
- Older adults who have moved away from home to temporarily shelter in place with family members or for other reasons can request that the lender delay calling the loan due and payable for not meeting the loan’s occupancy requirement.
- The deadline for filing assignment for a Mortgagee Optional Election or MOE, discussed below, can be extended six months.
- The deadline for obtaining a repayment plan for property charge arrears, discussed below, is also extended six months. Typically, a borrower who misses a payment and defaults on a plan to repay property charge arrears and owes more than $5,000 is not eligible for another plan. HUD has issued a temporary waiver to remove the $5,000 total arrearage limit to allow lenders to offer new repayment plans.
In addition to the coronavirus-related foreclosure protections, HUD recently made several changes to the HECM program. The most significant changes allow more leeway for surviving non-borrowing spouses to remain at home after the borrower on a reverse mortgage dies.
More Flexibility
HECM loans generally must be paid off when the last borrower dies, sells, or permanently relocates from the home. Since August 4, 2014, the HECM loan documents explicitly allow for a non-borrowing spouse to remain in the home after the borrower’s death, until the non-borrowing spouse either dies or moves out. For HECMs made before August 4, 2014, a non-borrowing spouse living in the home can end up in foreclosure unless they take action. HUD created the Mortgagee Optional Election (MOE) to allow non-borrowing spouses with pre-August 2014 loans to remain at home after the borrower dies if they meet the eligibility criteria and continue to fulfill the terms and conditions of the loan. Under the revised guidelines issued September 2019, non-borrowing spouses no longer must provide proof of marketable title or a legal right to remain in the home.[6] The prior requirement and the strict program deadlines proved to be a barrier for many spouses wishing to access the program. The new policy relaxes program deadlines and requires servicers to notify borrowers about the existence of the option and request the names of spouses who may potentially qualify for the option. Borrowers will receive the notice and form with the annual occupancy certification.
The reverse mortgage lender is not required to offer a MOE to a non-borrowing spouse. The decision is up to the lender. To avoid being financially penalized, a lender must elect the MOE option within a reasonable period, typically within 180 days of the death of the borrower. This period is temporarily extended due to the pandemic. Lenders may choose the MOE option even after starting the foreclosure process. A surviving non-borrowing spouse who is offered the MOE must establish eligibility under the program’s guidelines. Eligible non-borrowing spouses include those who were married to the borrower at the time of loan closing (or engaged in a committed relationship); live in the home as a principal residence; and have a loan that is not due and payable for other reasons. If the borrower was enrolled in a plan to repay property charge arrears, the non-borrowing spouse must bring the delinquency up to date before the lender assigns the loan to HUD.
If the non-borrowing spouse qualifies for the MOE, the due and payable status on the loan will be deferred and the loan will not be subject to foreclosure until the spouse moves out of the home, dies, or fails to meet the terms and conditions of the loan. The non-borrowing spouse must certify annually that the conditions are met.
Foreclosure avoidance options
Borrowers with a reverse mortgage must pay property-related charges including real estate taxes, hazard and flood insurance premiums and, if applicable, HOA fees, condominium association fees, ground rents, or other special assessments. Lenders may use various options to address property charge defaults. Despite the menu of options, lenders can exercise their discretion and refuse to offer any of the listed below:
Repayment Plans: Repayment plans of 60 months or less are offered based on the borrower’s surplus income. The calculation involves consideration of all available sources of income and the borrower’s necessary living expenses and property charges (i.e., taxes and insurance) due over the next 90 days. In some instances, repayment plans can be renegotiated if the borrower suffers a new hardship or again fails to pay property charges.
At Risk Extensions: Borrowers 80 years or older may qualify for an “at risk extension” of the foreclosure timeframe if they meet certain critical conditions such as suffering from a terminal illness, long-term physical disability or a unique occupancy need (i.e. terminal illness of a family member receiving care at the home). HUD must approve this extension, which is renewed annually.
Delay calling the loan due for a low amount of property charge arrears: If the property tax and insurance arrears are less than $2,000, lenders can delay calling the loan due while they work with the borrower to get caught up. HUD lenders have up to 12 months from the date of the first missed property charge to contact the borrower and work out repayment.
Lender Payment of Outstanding Property Charges: Lenders may use their own funds to pay a borrower’s outstanding property charges but they are not permitted to add that amount to the loan balance or seek reimbursement from HUD. They also are subject to other limitations.
A borrower may pay off outstanding property charges such as property taxes and insurance at any time, even after foreclosure proceedings have begun, and the loan will be reinstated, subject to certain limitations. Aside from foreclosure avoidance options, a HECM may be refinanced if there is sufficient equity and if the borrower can meet enhanced underwriting guidelines, including the financial assessment criteria. Direct aid from nonprofit organizations and state government may also help delinquent borrowers, where available. Assistance may be available from a HUD-approved housing counseling organization to access these options.
Non-occupancy determination
A reverse mortgage may be called due and payable if the home is not the principal residence of at least one borrower for longer than 12 consecutive months. Lenders seek to establish occupancy primarily by sending a certification form annually (or more frequently if they suspect the property is vacant) to be signed and returned. Non-borrowing spouses who qualified for a deferral of foreclosure must also provide a certification of occupancy. HUD has taken steps to temporarily ease documentation requirements during the COVID-19 pandemic by allowing an email or verbal certification from the borrower.[7]
Unfortunately, many lenders may still rely on the signed occupancy certification or fail to take additional steps to verify occupancy of the home. Borrowers and non-borrowing surviving spouses can defend against a loan called due prematurely by providing proof of occupancy with utility bills or other such records.
Conclusion
Federally-insured HECM reverse mortgages allow older homeowners to use the equity in their home as resource to age in place. Unfortunately, an increasing number of older homeowners are defaulting under the terms of the mortgage and facing foreclosure and eviction from their home. This trend is likely to worsen as older homeowners deal with the fallout from the COVID-19 pandemic. Use of foreclosure avoidance options and other alternatives can ensure that borrowers with reverse mortgages and their surviving spouses stay at home and age in their community.
Additional Resources
- U.S. Department of Housing and Urban Development (HUD): www.hud.gov
- Find a HUD-approved housing counseling agency: www.hudexchange.info/programs/housing-counseling/customer-service-feedback
- HECM for Lenders Website with copies of HECM regulation, model forms, Handbook and Mortgagee Letters: https://www.hud.gov/program_offices/housing/sfh/hecm
- Housing Counseling & National Advocacy Organizations
- Senior Homeownership Preservation Project (SHOPP): (773) 262-7801. This project works with HECM borrowers who are facing default on their mortgages due to non-payment of property taxes or homeowners insurance.
- National Consumer Law Center, www.nclc.org
- Legal Assistance
- Legal services/ Legal aid: www.lsc.gov/what-legal-aid/find-legal-aid
- Volunteer lawyers: www.americanbar.org/groups/legal_services/flh-home/flh-free-legal-help.html
- National Association of Consumer Advocates: www.naca.net
- Publications
- National Consumer Law Center, Home Foreclosures (1st ed. 2019)
- National Consumer Law Center, Mortgage Lending (2019 3rd ed.)
[1] The Revised HECM Financial Assessment and Property Charge Guide is available as an attachment to Mortgagee Letter 2016-10 (July 13, 2016) at https://www.hud.gov/program_offices/housing/sfh/hecm/hecmml.
[2] Government Accountability Office, “Reverse Mortgages: FHA Needs to Improve Monitoring and Oversight of Loan Outcomes and Servicing,” (September 2019), available at: https://www.gao.gov/assets/710/701676.pdf.
[3] Federally backed loans are those where Fannie Mae or Freddie Mac is the investor or where the Federal Housing Administration (FHA), Veterans Affairs (VA), or the U.S. Department of Agriculture’s Rural Home Service (RHS) insures or guarantees the mortgage. This protection does not apply to proprietary reverse mortgages, unless Fannie Mae is the investor.
[4] U.S. Department of Housing and Urban Development, Mortgagee Letter 2020-04, March 18, 2020.
[5] U.S. Department of Housing and Urban Development, Mortgagee Letter 2020-06, April 1, 2020.
[6] U.S. Department of Housing and Urban Development, Mortgagee Letter 2019-15, Sept. 23, 2019.
[7] U.S. Department of Housing and Urban Development, Mortgagee Letter 2020-12, April 14, 2020.
Odette Williamson, an attorney with the National Consumer Law Center, focuses on housing sustainability, issues impacting older adults, and directs the Racial Justice and Equal Economic Opportunity initiative. She is co-author of NCLC’s manuals on foreclosures and mortgage servicing.