Irrevocable Trusts and the Reverse Mortgage Opportunity

January 6th, 2010 | by Reva Published in FHA, News, Reverse Mortgage | 130 Comments

Irrevocable trusts can now be used for reverse mortgages, according to Paul N. Lovegrove Esq., President of Attorney Trust Review.

While traditionally reverse mortgages have not been permissible if the home is in an irrevocable trust, Lovegrove says there is no basis for the policy, adding that there is, “Nothing in the HECM guidelines that says you can’t use an irrevocable trust.”

Although lenders cant sell a reverse mortgage with an irrevocable trust to Fannie Mae, the recent growth of Ginnie Mae’s HMBS program has provided an opportunity for HECMs.

Lovegrove, an attorney who has been closing reverse loans for thirteen years and performs trust reviews for many lenders, including MetLife, proposes drawing up an agreement to the irrevocable trust that is agreed upon by all parties as a way to comply with the guideline.

An irrevocable trust may also not qualify for a reverse mortgage if one of the current beneficiaries does not meet HECM guidelines, amongst other things. All current beneficiaries of a trust must be HECM eligible for a HECM to be done on the home.

In addition, irrevocable trusts can pose a problem when the trust does not allow invasion of the principle by the settler. However, a lump sum distribution deposited into a bank account controlled by the estate can help solve this issue.

Lovegrove thinks that banks are not doing reverse mortgages on irrevocable trusts because they “never thought they could.” But Lovegrove adds, “By saying we can’t do it that’s closing out a lot of potential business that’s out there.”

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http://www.northcarolinareversemortgage.me rainmand

>>Lovegrove thinks that banks are not doing reverse mortgages on irrevocable trusts because they “never thought they could.”

That's why I never did them – I was told from the beginning they weren't compatible with HECM's. Fortunately, I've only encountered one Irrevocable Trust – all the rest have been Revocable and only one of those wasn't HECM compatible (but it was modified accordingly and made “compatible”).

Approximately 40% of my files have a Living Trust associated with them, and the only painful part is copying every page, including revisions and addendums. I wish we would do it like the Forward folks and use a Summary letter.
patriciawhitlock

The first time I did a Reverse Mortgage on a property in an irrevocable trust, I didn't understand why it COULDN'T be done – and after some discussion with risk management at the bank and the title company, everyone agreed it was do-able. I have done several since then, though lately lenders are requiring a lump sum draw deposited to an account controlled by the trust.
http://www.northcarolinareversemortgage.me rainmand

>>though lately lenders are requiring a lump sum draw

Which Lenders have you used, Patricia? That'd be helpful information for all of us. When I researched this subject (several years ago), all the Lenders quickly told me “no”. It'd be nice to have access to at least one Lender that'd say “yes”.
patriciawhitlock

B of A in the past, more recently MetLife. What I have done is send a copy of the trust to underwriting in advance of the app, who then sends it to a reviewer like Mr. Lovegrove for comment.
lancejackson

We've known these could be done for a long time, and have done many through BofA. My understanding is that most lenders won't do them because they require an amendment be added to the trust (or they relied on legacy underwriting guidelines and never took the time to research the subject). You can't amend an irrecovable trust, but the amendment is not a HUD requirement.
paulnlovegroveesq

Although the amendment is not a HUD requirement, the trust must contain certain language in order to be HECM eligible. If the trust does not contain the language, an amendment is necessary. With regards to irrevocable trusts which cannot be amended there are other ways we can proceed in order to meet HECM guidelines and I would be happy to discuss them with your lender(s). In addition all lenders should outsource their trust reviews. In house trust review exposes the lender to unnessary risk, in addition a service like Attorney Trust Review may be able to convince lenders they can do loans on files they normally would reject with in house review.
http://twitter.com/reversenews Reverse Closer

Lets not forget that contrary to the believe a “Irrevocable Trust” can be revoked if the beneficiaries all agree to it. Unlike a revocable trust where the grantor has to revoke it. Some clients have trusts that are no longer meeting their needs and if they want to revoke or cancel the trust, they can.
lancejackson

Right – on a rare occasion an amendment must be executed (for example if the trust doesn't allow the property to be mortgaged). But some lenders (like Wells Fargo) require an unecessary amendment on every deal (at least they used to). We have our trusts reviewed by our title insurer and the ultimate lender.
paulnlovegroveesq

I disagree. HECM guidelines require certain language to be in the trust. 99% of trusts do not contain this language. An amendment should be signed by the settlor and trustee incorporating the HECM language. Also a title company only reviews a trust to determine is said trust owns the property and not if it meets HECM guidelines. If it turns out that the trust does not meet HECM guiidelines and the lender is forced to buy back the loan. The lender will have no recourse against the title company. If the lender were to use a service like Attorney Trust Review. they would recieve a attorney opinion letter regarding the trust as well as an amendment containing the required HECM language. And if down the road it turns out that the trust was not HECM eligible and the lender is forced to repurchase the loan. the lender will have recourse against the attorney.

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Sent from my Verizon Wireless mobile phone
prescottcole

Watch out for Medicaid. Remember, most homes are exempt for purposes of qualifying for Medicaid. The suggestion of breaking out of an irrevocable trust with a lump sum distribution deposited into a bank account controlled by the estate can lead to trouble. Any equity borrowed from a home in the form of a lump sum may be counted as an asset for the purposes of long-term care Medicaid eligibility. If a borrower looses his or her ability to qualify for Medicaid benefits, the borrower (or would-be heirs) may come to believe that the reverse mortgage was a costly mistake. I believe that advising the conversion of an exempt asset (the home) into a non-exempt asset (the home after you use a reverse mortgage to take out a lump sum) runs a risk of a down the line malpractice or financial abuse lawsuit, so be sure your clients fully understand the Medicaid implications.
http://www.northcarolinareversemortgage.me rainmand

>>99% of trusts do not contain this language

That's an inaccurate statement. 99% of the Living Trusts I've submitted are 100% compatible with HECM's – and I've funded lots of HECM's with Living Trusts.
lancejackson

I'll leave this to the experts! I'm not a trust expert. Our lenders and title company ensure that our deals are done in compliance with HUD requirements, and we follow their guidelines.
The_Critic

Living trusts before the death of the trustor are generally revocable, not irrevocable. That is why there are rarely any problems with them.
michaelpinter

This is great news. Are there any other lenders that are allowing irrevocable trusts besides B of A and metlife?
Paul N. Lovegrove, Esq

the fact that you were able to close these loans does not mean they were done correctly. The language in a trust allowing the Trustee to mortgage the property is not enough, HECM guidelines call for certain language that are not in 99% of trusts simply because when most trusts are drafted they do not consider a Reverse Mortgage.
http://www.northcarolinareversemortgage.me rainmand

>>the fact that you were able to close these loans does not mean they were done correctly

Yes it does, because in addition to Title's review of the Trusts, every Trust was conditioned for an Attorney Opinion Letter.

The Attorney Opinion Letter by itself ensures they were done correctly. Those Professionals know exactly what is acceptable and what is not.
paulnlovegroveesq

If you are taking the extra step to have a attorney review the trust to determine if it meets HECM guidelines (which is a sound and smart policy) The attorney should be recomending that the trust be amended to add the exact HECM language found in the statute. It is a simple procedure and can save the lender from potential problems down the road.
paulnlovegroveesq

The article contained an error when it stated that the proceeds should be put into an account controlled by the estate. It is my position that a lump sum distribution placed into an account controlled by the TRUST would be acceptable. In this case the trust controls the asset (as they did with the house) and the Trustee is under a fiduciary duty to comply with the terms of the trust.
prescottcole

A lump some distribution in a trust (revocable or irrevocable trust) would trigger a look-back, and possible (more likely than not) ineligibility for Medicaid long-term care benefits.
paulnlovegroveesq

If the asset of a trust is shifted to an account controlled by the trust why would that trigger a look back? If the trust owned shares of stock and decided to sell the stock and deposit the proceeds into an account controlled by the trust there would be no look back. What is the difference?
michaellink

Has anyone done a HECM in an Irrevocable Trust lately? My rep with Wells and BofA both said that they will not do Irrevocable Trust.

They said that Fannie won't do them so they won't do them.
paulnlovegroveesq

I was wondering if you had time to think about the example I posed on the lump sum distribution to be controlled by the trust and trustee. do you still feel this will trigger a look back and if so why?
http://www.northcarolinareversemortgage.me rainmand

>> My rep with Wells and BofA both said that they will not do Irrevocable Trust.

I've confirmed Bank of America does them.
hinnis

Would the lender accept an amendment to an irrevocable trust made by a Trust Protector, in accordance with the Trust Protector's powers under the trust instrument? Also, if the provisions are not too long, could you post sample provisions? Thank you.
paulnlovegroveesq

Yes, so long as the power is specifically granted in the trust it would be acceptable.
prescottcole

To paulnlovegrovessesq
You ask if a trust settled from a lump sum reverse mortgage w/d will trigger a Medicaid look-back. Here’s what I think. The money taken out of the home through a loan would be a countable resource in the month of receipt. If the trust is an irrevocable trust it will be subject to a 60 month look-back. If the trust is revocable, then there wouldn’t be a look-back. Instead, the amount of the w/d would be considered to be an available non-exempt assets which will keep the individual from being able to qualify for Medicaid. I’m basing this on California’s Dept. of Public Health’s policy letter on the matter. Other states may have other interpretations. California’s All County Welfare Directors letter No 08-17 (April 25, 2008) SUBJECT: HOME EQUITY CONVERSION PLANS AND REVERSE MORTGAGES reiterates the California policy pertaining to home equity conversion plans and reverse mortgages. It states that, “According to the Medi-Cal Eligibility Manual, Section 9D, loans requiring repayment and which are not exempt under Title 22, CCR §50533 (like student loans, fellowship, educational loans) are considered property in the month of receipt rather than income (Title 22, CCR §50483).” Please let me know if you disagree and I’ll look into it further.
Prescott Cole
amylconnors

Does anyone have a sample Ammendment that MetLife has approved for an Irrevocable Trust?
bryan

If the property is in a irrevocable trust I presume that this is to protect the estate from medicaid claims.

Can irrevocable trust funds, deposited by family members, assist the elderly purchaser with equity to make up the 40% balance needed to complete the purchase when a HECM Reverse Mortgage is used for the other 60% of property purchase.
bryan

If the property is in a irrevocable trust I presume that this is to protect the estate from medicaid claims.nnCan irrevocable trust funds, deposited by family members, assist the elderly purchaser with equity to make up the 40% balance needed to complete the purchase when a HECM Reverse Mortgage is used for the other 60% of property purchase.
http://pulse.yahoo.com/_GYQDDBGP67RNVTP34EB46E4G7Q Schrode

Hi Patricia, I have a question for you on reverse mortgages. If a home is in an living trust, and the settlor (my father) is named as the only one allowed to mortgage the property, can I take out a reverse mortgage against my life estate in the property? My father has passed away and I hold a life estate in the home. The home is in California.

Irrevocable Trusts and the Reverse Mortgage Opportunity

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