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Reverse Mortgages: Forwards and Backwards

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Reverse Mortgages: Forwards and Backwards REVERSE MORTGAGES: FORWARDS AND BACKWARDS Bruce Levitt, Esq. Levitt & Slafkes (Maplewood) Victor Medina, Esq. Medina Law Group (Pennington) WRPP03136 © 2016 New Jersey State Bar Association. All rights reserved. Any copying of material herein, in whole or in part, and by any means without written permission is prohibited. Requests for such permission should be sent to NJICLE, a Division of the New Jersey State Bar Association, New Jersey Law Center, One Constitution Square, New Brunswick, New Jersey 08901-1520. Thank you for logging in – the webinar will begin shortly. WHAT EVERY ATTORNEY NEEDS TO KNOW ABOUT REVERSE MORTGAGES Using The Online Classroom 1. All Attendee phone lines are muted. 2. Questions may be submitted Via Chat on the right hand side of your screen. Questions will be answered periodically during the presentation Note: Attendees with dial up connections will see a slower response. Asking Questions – Easy as 1,2,3 3. See your messages here 1. Type your question here. 2. Send SEMINAR MATERIALS AND CLE FORMS • TO ACCESS SEMINAR MATERIALS, ATTENDANCE VERIFICATION AND CLE FORMS PLEASE GO TO: WWW.NJICLE.COM/WEBINAR ATTENDANCE VERIFICATION • PLEASE FAX OR E-MAIL YOUR ATTENDANCE VERIFICATION FORM TO NJ ICLE • FAX: 732-249-1428 • E-MAIL: [email protected] REVERSE MORTGAGES Reverse Mortgages - Two Parts • What Is It and How Does It Get Set-Up? • How Do They Go Wrong Reverse Mortgages - What Are They • Bank loan for people 62 and older against their home equity. • Repayment is deferred until you sell or die, or some other trigger of default. • Amount available depends on equity, age, prevailing interest rates. (Loan to Value range is 30 to 75) Reverse Mortgages - Who Qualifies? • Must be 62 or older • Must be a homeowner (own title) • Must received HUD counseling prior to making application Reverse Mortgages - Options on Proceeds • Lump sum • Line of credit • Fixed monthly payments • OR, any combination of the above. Reverse Mortgages - Tax Impacts • Money is distributed tax free • Fixed monthly payments do not affect Social Security or Medicare payments Reverse Mortgages - The History • First created in the late 1980s • Prevalence has grown as: • Seniors on fixed income having a hard time making ends meet. • Retirement account values have decreased. Reverse Mortgages - The Bad & The Ugly • Instruments are Negative Amortization Loans • i.e. balance grows every month • Interest compounds • While initial loan value is a percentage of the value of the home, can easily and quickly grow to consume the entire value of the home. Reverse Mortgages - The Really Ugly • Closing costs can be between $10,000 and $20,000 • If you’re forced to move soon after closing on the loan, the closing costs are sunk costs. Reverse Mortgages - The Link to Elder Law • Takes an exempt asset, and turns it into a liquid asset • Money is available for Medicaid or nursing home spend down (and that’s not always a good thing) • Has no plan or cushion for what happens when you run out of the money from the reverse mortgage • Less money than if you sold the home Please record this code for your MCLE forms: reverse@92215 MCLE Code REVERSE MORTGAGES EVENTS TRIGGERING DEFAULT Common Triggers • The death of the mortgagor when the property is not the principal residence of at least one surviving mortgagor. • A mortgagor conveys all title to the property and no other mortgagor retains title. • The property ceases to be the principal residence of the mortgagor for a period of more than 12 months. • Failure to pay real estate taxes. • Failure to pay homeowners insurance. • Failure to maintain property. 28 C.F.R. §206.27(b) & (c) Death of Mortgagor • Scenario One: Only mortgagor resided in property. 1. Mortgagor’s estate has up to one year to sell the property for the lesser of the amount owed or 95% of the fair market value in an arms- length transaction. 26 C.F.R. § 206.125(c) But what if the mortgagor’s family or heirs wish to purchase the property? Is this an arm’s length transaction outside of the 95% rule? Santos v. Reverse Mortgage Solutions, Inc., 2012 WL 4891597 (N.D. Cal. Oct. 12, 2012) (court enjoined foreclosure on a home where lender refused to sell at 95% to family member). 2. Mortgagor’s estate can give a deed in lieu of foreclosure. 3. Lender will foreclose. • Scenario Two: Surviving spouse is also a mortgagor and resides on the property. The trigger for repayment does not occur until the last surviving mortgagor still living on the property dies. Be careful for situation where the surviving spouse is not still living on the property, i.e. in a nursing home or with relatives. • Scenario Three: Surviving spouse is not a borrower or mortgagor. Typical Situations - 1. One spouse was under 62 at the time of the reverse mortgage and title was transferred to the older spouse to complete transaction. 2. One spouse was older than the other. The older spouse qualifies for a larger loan amount. The conflict – The Home Equity Conversion Mortgage program defines the term homeowner to include the spouse of the homeowner. The relevant HUD Rule, however, provides that the mortgage is due upon the death of all surviving mortgagors. These loans are generally not assumable by the non-borrowing spouse. Relying on the regulation, many reverse mortgage lenders have foreclosed on properties, ultimately forcing the surviving spouse out of the home. In Bennett v. Donovan, 703 F.3d. 582 (D.C. Cir. 2013), the Court although not ruling directly on the issue, noted that it was “somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute”. The Court in Kerrigan v. Bank of America, 2011 WL 3565121 (C.D. Cal. Aug. 12, 2011) reached the same result. HUD Mortgagee Letter 2014-07 1. Applies to all loans issued on or after August 4, 2014. 2. Purpose of the letter is to amend HECM program “regulations and requirements concerning due and payable status where there is a Non-Borrowing Spouse at the time of loan closing”. 3. Applies only prospectively. 4. “’Non-Borrowing Spouse’ is defined as the spouse, determined by the law of the state in which the spouse and the mortgagor reside or the state of celebration, of the HECM mortgagor at the time of closing who also is not a mortgagor.” 5. Extends the due and payable status of the loan until the death of the last surviving Non-Borrowing Spouse or until another listed event occurs. 6. In order for the deferral period (the time in which the loan must be satisfied) to apply to the Non-Borrowing Spouse, the Non-Borrowing Spouse must: A. Have been the spouse of the mortgagor at the time of loan closing and remain the spouse for the duration of the mortgagor’s lifetime. B. Have been properly disclosed to the mortgagee at origination as a Non-Borrowing Spouse. C. Have occupied, and continue to occupy, the property as the Principal Residence. 7. The Non-Borrowing Spouse must continue to meet all of the requirements of the loan as established by the HUD Secretary during the entire deferment period. 8. “The mortgagor maintains the ability to sell the property, whether or not the mortgage is due and payable, for at least the lesser of the outstanding balance or the appraised value. Further, if the mortgage is due and payable, the mortgagor maintains the ability to sell the property for at least the lesser of the outstanding balance or 95% of the appraised value or present the mortgagee with a deed-in- lieu.” 9. “If the mortgage is due and payable by reason of the last surviving mortgagor’s death, the mortgagor’s estate and/or the mortgagor’s heir(s) have the ability to ‘sell’ the property for at least the lesser of the outstanding balance or 95% of the appraised value.” Death of Borrower for Loans Prior to August 14, 2014 • Upon the death of the Borrower the Lender has the option to call the loan subject to the one year and 95% requirements or to transfer the loan to HUD. • Mortgagee Optional Election (“MOE”). Loans may be transferred to HUD through the MOE process. The MOE procedures have been modified numerous times due to ongoing litigation. Note that the election is solely at the discretion of the mortgagee. HUD Mortgagee Letter 2015-15 • (1) Spouse must have been legally married to the borrower at time of the loan (with an exception for same sex couples who could not legally marry) and must have been legally married at the time of borrower's death; • (2) Spouse must currently reside in the home as his/her principal residence, and must have done so at time of origination and throughout the borrower’s life; • (3) Loan not due and payable for any other reason - If there has been a default on property taxes or homeowner's insurance, spouse must cure any such default before the loan can be eligible for assignment. (4) Spouse must have, or be able to obtain within 90 days of the death of the borrower, “good, marketable title to the property” or a legal right to stay in the home until his/her death. Timing: within 90 days of the death. What is “good, marketable title”? Legal right to stay until death Long-term lease Court order Partial ownership interest? (one of several heirs) • 1) Mortgagee must notify HUD within 60 days of the last borrower's death or within 30 days after a determination of eligibility for the MOE, whichever is later, that the loan was come due and payable because of the death of the last borrower but there is a surviving spouse; • (2) By the later of 120 days after the death of the borrower or 120 days after issuance of the Mortgagee Letter (June 12, 2015), Mortgagee must elect to take the MOE or exercise its contractual rights; • (3) Within 30 days after the election, Mortgagee must notify the spouse and the borrower's estate of what election it made; • (4) Within the 60 day period after an election of the MOE, Mortgagee must review all criteria to ensure that the loan is eligible - and if it isn't, the deferral period will end (and Mortgagee will foreclose); • (5) Within 120 days after making the election, Mortgagee must initiate the assignment to HUD.
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