Sadly, the understanding of how a reverse mortgages works remains weak. The fact is the HECM Reverse Mortgage always has provided essential safeguards for the consumer since its inception by Congress in 1989. So even if it is wise to avoid using the word “never” in life, homeowner fears are allayed via an understanding of the HECM 4 Nevers.
HECM Never #1
The HECM is a mortgage like any other but with deferred payment. When the homeowner leaves the house, there is a mortgage attached to the home that must be paid. The homeowner’s heirs can elect to pay off the HECM (but never have to pay more than 95% of the home value) by acquiring their own financing, thereby keeping the house in the family.
Alternatively, they can elect to sell the house with any remaining profit being theirs to keep. The HECM, unlike some older reverse mortgages, does not allow the lender to take an equity share on appreciated value. All available equity beyond the loan balance belongs to the borrower or the estate. Additionally, if the loan is underwater, they may grant the lender a deed-in-lieu, hand over the keys, and literally walk away. The lender’s loss is made good by the FHA insurance pool, with no recourse to the borrower or the estate.
*Remember, foreclosure can happen when taxes, insurance, and reasonable home maintenance are not provided by the homeowner. Taxes, insurance, and home maintenance (including HOA fees) are the only mandatory funding obligations for the borrower.
HECM Never #2
The HECM protects the borrower and all heirs. The loan documents state that “no deficiency judgment may be taken against the borrower or his estate.” It is not possible for the parents to leave a reverse mortgage debt to their children to have to pay.
This safeguard is possible because the HECM is a non- recourse loan. When a person applies for the HECM, the borrower is not required to verify that the loan can be repaid. The house alone serves as collateral for the loan. If the estate sells the house to satisfy the HECM loan balance, any remaining equity belongs to the heirs. The lender cannot access any equity beyond the loan balance. The heirs may retire the mortgage for 95% of the home’s appraised value, or the loan amount, whichever is less.
HECM Never #3
Some people think that people with reverse mortgages have given their homes to the bank, and once the bank decides it has lent enough money, it can throw the homeowners to the curb and force them to move. We have already seen that the HECM protects ownership and that the borrower never gives up the title, just like any mortgage. Yet unlike other mortgages, the HECM does not have a “maturity” or required end date.
Well, technically there is an end date, but one that should not give much worry. The HECM comes due on the 150th birthday of the youngest borrower! The loan does require meeting obligations of home ownership, just as any mortgage does. The homeowner must maintain his or her property taxes, just like any mortgage. The homeowner must maintain property insurance to protect against fire and other hazards, just like any mortgage. Additionally, the borrower must not allow the home to fall to ruin, just like any mortgage.
So let’s bring up that ugly word: Foreclosure. In the go-go years of easy credit and rapidly increasing home appreciation, some borrowers used a reverse mortgage like an ATM. They stripped their home equity and could not, or would not, pay their tax and insurance obligations. Under the terms of the loan, lenders were faced with foreclosing in these cases.
Foreclosing on seniors is tragic under any circumstances and reporters had a heyday with it. The fact is these technical foreclosures had nothing to do with the loan being a reverse mortgage. Tax and insurance default can result in foreclosure for mortgages, period. There is nothing special about a reverse mortgage in this regard.
HECM Never #4
However, there is something special about reverse mortgages and foreclosure beyond taxes and insurance. The risk of foreclosure with a HECM is fundamentally and drastically different. This is because monthly payments are never required. Therefore, no foreclosure based on non-payment can ever happen.
So think about this: is Homeowner #1, who carries a traditional mortgage requiring monthly debt service, better off than Homeowner #2, who cannot lose the home by missing payments? At minimum you must admit that there is greater risk of foreclosure for anyone holding a standard amortizing loan (with payments) versus a reverse mortgage (with no payments required). As long as taxes, insurance, and maintenance obligations are met, the HECM persists until the last borrower, or eligible non-borrowing spouse, dies, moves, or sells.
The HECM loan documents state this feature in unambiguous terms:
No deficiency judgments. Borrower shall have no personal liability for payment of the debt secured by this Security Instrument. Lender may enforce the debt only through sale of the Property. Lender shall not be permitted to obtain a deficiency judgment against Borrower if the Security Instrument is foreclosed. If this Security Instrument is assigned to the Secretary upon demand by the Secretary, Borrower shall not be liable for any difference between the mortgage insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment.
In other words, the lender can assign the loan to FHA (“the Secretary” of HUD) to recoup losses and the borrower has no personal responsibility for the loan. Regardless of what the loan balance becomes, as long as home ownership obligations are met, the HECM is totally open-ended. The home is there to serve the borrower for as long as he or she lives in the house, all thanks to FHA insurance.