What is a Non-Recourse Reverse Mortgage?
The Non-Recourse feature of the Reverse Mortgage product is something that is often misunderstood by the general public and has been the topic of a recent lawsuit between AARP and HUD over the interpretation and implementation of it.
Simply, Non-Recourse reverse mortgage means that a borrower can never owe more than their home is worth at the maturity of their reverse mortgage loan.
What does this mean and how does this benefit the consumer?
I will give you an example of just how advantageous this feature of the product can be.
Example of a non-recourse protection
For Example, a 66 year old homeowner with a $500,000 home currently qualifies for $321,000 in available funds on the Fixed Rate Reverse Mortgage product based on today’s parameters.
Over the life of this Reverse Mortgage, the homeowner’s balance is going to increase and after 20 years of interest accrual and the homeowner enjoying being payment free the balance could exceed $1,000,000.
Now, their home may have appreciated in that time, it could have stayed the same or even decreased in a possible down real estate market.
The Non-Recourse feature of the Reverse Mortgage guarantees that the maximum amount owed on this Reverse Mortgage at this 20 year mark if the homeowner were to have passed away, would be whatever the home appraises for in year 20.
If the home appraises for more than $1,000,000 for example, the heirs to the property can either sell the property to pay off the Reverse Mortgage and take the proceeds as inheritance, or they can choose to refinance the Reverse Mortgage with another loan to pay off the balance and keep the home.
The choice is entirely up to the heirs of the property. In a worst case scenario, let us assume that the property was only worth $500,000 in year 20 when the Reverse Mortgage borrower passed away.
Under this scenario, the heirs to the property can choose to sell the property, refinance the property or wash their hands of the property completely and leave it to the bank.
Either way, the maximum amount owed is $500,000 and the Lien Holder cannot come after the estate for the difference between the accrued balance and the current value of the property.
In this case, HUD would guarantee the Lender’s loss on the loan because the Reverse Mortgage is a Federally Insured Program.
Amortization example on interest owed
HUD issued Mortgagee Letter 2008-38 which clarified and changed their position on the interpretation and implementation of the Non-Recourse feature of the Reverse Mortgage program.
This is where the lawsuit from AARP comes into play
Before this Mortgagee Letter in 2008, the Non-Recourse feature applied to any circumstance involving a maturity event on a Reverse Mortgage.
Basically, when a Reverse Mortgage loan was deemed as due and payable because of a “Maturity Event”, the Non-Recourse feature was in place no matter what the heirs chose to do with the property.
What this means is, whether the heirs chose to sell the home or refinance the Reverse Mortgage and keep the property, the max that could be owed to the Lender was what the home appraised for at that time.
However, Mortgagee Letter 2008-38 stated that this would only apply to a bona-fide sale transaction where the heirs or the bank were selling the property to a 3rd party purchaser of the home.
What this did was prevent the heirs from having the option of refinancing the Reverse Mortgage with a new loan, or coming up with the required funds to pay off the Reverse Mortgage based on the value of the home at maturity.
For example, if the home appraised for $500,000 and the balance owed on the Reverse Mortgage was $600,000 the heirs would have to come up with $600,000 if they wanted to keep the home.
This brings me back to the AARP lawsuit. AARP’s lawsuit against HUD was to eliminate this change to how the Non-Recourse feature was interpreted and implemented for Reverse Mortgage loans. Mortgagee Letter 2011-16 rescinded Mortgagee Letter 2008-38 and HUD has now re-imposed the original Non-Recourse policy.
This is the peace of mind enjoyed by all homeowners who obtain a Federally Insured Reverse Mortgage.
No matter how long someone has a Reverse Mortgage on their home for and no matter how much interest accrues on their loan while they enjoy no monthly mortgage payments, they will never be “personally” obligated for the balance of the loan.
The property that is owned by the individual is the sole collateral for the Reverse Mortgage loan.
What happens if the reverse mortgage balance is higher than the property value?
Nothing for as long as you live in the home. You can continue living in the home and if you still have funds available on the line of credit, you can still draw the available proceeds. When you pass, your family does not have to repay the amount above the value of the property if they want to keep the home.
What happens if I live beyond 100 years old?
If you live beyond 100 years of age you still can remain in your home under the terms of the reverse mortgage without having to repay the loan for as long as you live in the property and pay your taxes and insurance in a timely manner.
Can the bank/servicer go after my heirs or other assets if I borrow too much?
The reverse mortgage is a non-recourse loan. The only security the lender has and from which the lender may seek repayment for the obligation is the house. They cannot look to your heirs or your estate for additional repayment.
How do you get out of a mortgage that is upside down?
There is no benefit to voluntarily leaving a home early that is upside-down in value. You can stay in the house regardless of the shortfall but when you pass, or must leave the home due to the need for assisted living, etc., all you must do is contact the lender and inform them that you will be vacating. Your heirs have the option of paying off the debt at 95% of the value of the home if they wish to keep the property but if not, you can deed the home back to the bank if the title is clear or the bank will initiate a foreclosure. Either way, the lender cannot seek repayment from any other assets.
If I do a deed in lieu of foreclosure on a reverse mortgage will it ruin my credit?
Most of the time a Deed in Lieu of Foreclosure is done at the very end of the loan when borrowers are entering assisted living and credit is not a factor any longer. Lenders don’t even report reverse mortgages to credit repositories. However, if you do a Deed in Lieu of foreclosure early simply because you no longer wish to live in your location and then seek other financing on another property later, there is no way to determine how a new lender would look at that later.
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