BY SVIATLANA LIASHCHYNA
as seen in Issue-30 of a360inc's Compliance Newsletter
A reverse mortgage is a loan for older homeowners which allows them to borrow against the home equity and requires no monthly payments. Firms often receive referrals for completing reverse mortgage foreclosure actions, but what are the unique issues that firms should consider when proceeding with these actions and what laws and regulations apply?
The majority of reverse mortgages are insured by FHA under the Home Equity Conversion Mortgage (HECM) program, which provides maximum loan amounts, borrower eligibility requirements, and servicing standards. Some lenders offer proprietary mortgage products typically designed to offer borrowers the protections similar to those allowed by the FHA HECM program. In light of this, Fannie Mae implemented Reverse Mortgage Servicing Manuals to provide servicing guidelines with regards to this mortgage type.
Reverse mortgages are also covered by the following federal laws and regulations: RESPA (the general servicing requirements regarding policies and procedures; early intervention; continuity of contact; and loss mitigation procedures of RESPA are not applicable to reverse mortgages), TILA, FDCPA, GLBA, ECOA, and UDAAP. Additionally, the CFPB has rulemaking and enforcement authority for this loan type.
Since reverse mortgages require no monthly payments, the causes of default are different from the traditional mortgages. Reverse mortgage default occurs when:
There are two major legal issues that might arise during a reverse mortgage foreclosure action which are addressed differently in different jurisdictions.
The first issue relates to the rights of the non-borrowing spouse after the borrower’s death. The case law is different across the states. Many courts ruled that the non-borrowing spouses are to be considered borrowers for the purposes of reverse mortgage transactions. Those courts relied on additional evidence presented by the non-borrowing spouse about their intended status in the reverse mortgage transaction. (Smith v. Reverse Mortg. Sols., Inc., 200 So. 3d 221 (Fla. Dist. Ct. App. 2016); Nationstar Mortg. LLC v. Goeke, 2017 NY Slip Op 04521, 151 A.D.3d 1237, 57 N.Y.S.3d 223 (App. Div.))
Other courts determined that the non-borrowing spouses are not borrowers. (Wash.-Jarmon v. OneWest Bank, FSB, 513 S.W.3d 103 (Tex. App. 2016); Nationstar Mortg. LLC v. Carey, No. 9274-MA, 2014 Del. Ch. LEXIS 248 (Ch. Nov. 26, 2014)) These courts base their decisions on the content of documents presented for review. The courts examined whether the signatures were in the documents, whether the disclosures about the surviving spouse’s rights were included, what was the borrower definition in the loan documents.
Firms should obtain and analyze information about non-borrowing spouses. It is also important to remember that the non-borrowing spouses might be eligible for certain loss mitigation options which are described in FHA Mortgagee Letter 2015-15 and Fannie Mae Reverse Mortgage Loan Servicing Manual, Chapter 4.
The second issue relates to tax and insurance defaults. Under 24 C.F.R. § 206.205, the mortgagee may make property payments for the mortgagor and charge them to the mortgagor’s account. The funds advanced for these payments can be added to the loan’s principal balance. These requirements do not take into consideration the local tax law exemptions or protections. For example, Philadelphia recently proposed legislation that would prevent servicers from bringing foreclosures on tax defaults if borrowers are in a repayment plan with the city. Firms should ensure that local tax law updates are on their radar as they may relate to the reverse mortgage foreclosure due to tax defaults.
Additionally, the HEMC program contains requirements which pose significant curtailment risks related to commencement of the foreclosure action; orders of the foreclosure bid appraisal; and obtaining a marketable title. Failure to meet any established timelines might result in curtailment assessed against the firm.
To mitigate risks associated with reverse mortgage foreclosures, firms should consider enhancing their internal training programs to specifically cover reverse mortgage foreclosure proceedings and implement or update workflows for reverse mortgages. Additionally, firms should keep a close eye on legislation and case law in their state that may have an impact on how reverse mortgage foreclosures are handled.
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