Tenure Reverse Mortgage Payments Can Not be Lowered, Unless…

In his nationally syndicated real estate column recently, writer Lew Sichelman was asked by a 78-year-old reader with a three-year reverse mortgage whether there would be “any condition under which a financial organization issuing a tenure-type reverse mortgage can lower the payments to the customer without the customer’s permission.”

RMD reached out to industry practitioners with plenty of experience in such matters to help Lew answer the question and they delivered what amounts to a two-part “yes-no” answer.

“The lender cannot simply lower the tenure payment,” says Angella Conrard, reverse mortgage advisor, iReverse Home Loans, explaining that “mistakes are made,” and sometimes that does occur. “Payments cannot arbitrarily be lowered, it’s for life,” agreed Cliff Auerswald of All Reverse Mortgage Company.

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However…”The HECM Agreement would permit payments to be stopped under certain conditions,” says Kenneth J. Klawans, President, iReverse Home Loans, LLC, “although” he adds, “I would be surprised if payments were reduced without any communication or notification.” What’s more, says a long-time industry player, “I am guessing that the customer could be delinquent in paying their taxes and insurance and the tenure payments would stop if the servicer notified the borrower of the default.”

“Yes,” says Sherry Apanay, senior vice president, Generation Mortgage Co., “the payment can be suspended or used to pay taxes and or insurance if they go into default, however; the borrower must still be notified.”

Another long-time but shy observer is more definitive. “Most certainly tenure payments can be changed without the consent of the borrower when certain conditions exist. If covenants are violated, such violations can have a direct impact on the line of credit or payouts. For example, if taxes or insurance are not paid, servicers can pay those items and adjust tenure payouts (or the line of credit) accordingly.” He goes on: “This is also true if a servicer must protect the position of the HECM note owner or FHA through payoff of a lien against the home arising after rescission with a higher priority than the HECM first or second lien against the same property.”

Like so many of these questions, it turns out, “the devil’s in the details.”

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  • Notification is much different than permission.  Is notification beyond the periodic statement (ex post facto — i.e., after the reduction) even required?  Out of litigation concern most servicers probably do notify borrowers in advance of (or contemporaneously with) any reduction, suspension, or termination of tenure payouts.  It is also good PR to notify a borrower in advance of a servicer initiated reduction.. 

    Lowering of the tenure payout has nothing to do with either the note owner or the lender unless the servicer is the lender and the lender is the note owner at the time of reduction.

    Tenure payments are not nor have they ever been for life; that is an industry myth.  Payouts for life are an annuity; annuities are portable.  Tenure payments are not annuities and they are not portable nor are they for life.  The payouts are not even based on life expectancy.  They are based on the youngest borrower reaching age 100.  That is a totally different concept.

    These are exactly the kind of answers one would expect from originators.  Servicers would have more experience with such matters but in all likelihood would only be able to represent the position of their employer.

    Is there any condition under which a tenure payout can be lowered WITHOUT the permission of the borrower?  You bet there is; Sherry Apanay is exactly right.  Can it done without prior notification?  If it cannot, someone needs to provide a citation where that rule is specifically laid out.  Sherry seems to believe that it cannot be done without prior notification.

    • “Tenure payments are not annuities and they are not portable (nor again are they for life).  The payouts are not even based on life expectancy.  They are based on the youngest borrower reaching age 100.”

      That said, tenure payments can and will extend beyond age 100 or “for life” so long as occupancy and other borrower responsibilities are met.

      • REVGUYJIM,
         
        And what is your point?  Nothing in my comment or your quotation of it conflicts with or even addresses what you state in your comment.  But that does not mean I agree with your comment nor does it make your comment wrong or right.
         
        You want a rule that specifically says “or for life.”  It does not exist.  You are fighting to make that concept fit, like square pegs into round holes and all that.  Remember square pegs CAN fit into round holes, when the holes are BIG enough.
         
        That said, your second paragraph is still misleading.  Whose life are you referencing?  The age referenced in my comment is specifically stated as being that of the youngest borrower but tenure payouts CAN extend beyond the date of the death of the youngest borrower. So “for life” does not describe the term of a tenure payout.
         
        With that said, you still miss at least one condition.  That is involuntary bankruptcy proceedings.  Tenure payments will be suspended during bankruptcy proceedings despite the borrower(s) doing everything right.  You want a “for life” rule but that is a “marketing condition,” not a loan covenant or loan provision per se.  The loan speaks in terms of covenant violations not in terms of “for life.” 
         
        The best way to “bring out” the life issue in my meager opinion is by saying:  “Tenure payouts will last as long as no applicable loan covenants are violated and no borrower voluntarily changes the payout arrangement.  Based on that understanding, the tenure payouts could last as long as the date of death of the last surviving borrower who still holds an interest in the home as of the date of death of that borrower.”

        Remember a HECM does not terminate if a borrower, even the youngest borrower, gifts or sells their interest to another borrower.  As to gifting or selling to non-borrowers and its impact on tenure payouts, that is well beyond the scope of this comment.

      • REVGUYJIM,
         
        And what is your point?  Nothing in my comment or your quotation of it conflicts with or even addresses what you state in your comment.  But that does not mean I agree with your comment nor does it make your comment wrong or right.
         
        You want a rule that specifically says “or for life.”  It does not exist.  You are fighting to make that concept fit, like square pegs into round holes and all that.  Remember square pegs CAN fit into round holes, when the holes are BIG enough.
         
        That said, your second paragraph is still misleading.  Whose life are you referencing?  The age referenced in my comment is specifically stated as being that of the youngest borrower but tenure payouts CAN extend beyond the date of the death of the youngest borrower. So “for life” does not describe the term of a tenure payout.
         
        With that said, you still miss at least one condition.  That is involuntary bankruptcy proceedings.  Tenure payments will be suspended during bankruptcy proceedings despite the borrower(s) doing everything right.  You want a “for life” rule but that is a “marketing condition,” not a loan covenant or loan provision per se.  The loan speaks in terms of covenant violations not in terms of “for life.” 
         
        The best way to “bring out” the life issue in my meager opinion is by saying:  “Tenure payouts will last as long as no applicable loan covenants are violated and no borrower voluntarily changes the payout arrangement.  Based on that understanding, the tenure payouts could last as long as the date of death of the last surviving borrower who still holds an interest in the home as of the date of death of that borrower.”

        Remember a HECM does not terminate if a borrower, even the youngest borrower, gifts or sells their interest to another borrower.  As to gifting or selling to non-borrowers and its impact on tenure payouts, that is well beyond the scope of this comment.

      • REVGUYJIM,
         
        And what is your point?  Nothing in my comment or your quotation of it conflicts with or even addresses what you state in your comment.  But that does not mean I agree with your comment nor does it make your comment wrong or right.
         
        You want a rule that specifically says “or for life.”  It does not exist.  You are fighting to make that concept fit, like square pegs into round holes and all that.  Remember square pegs CAN fit into round holes, when the holes are BIG enough.
         
        That said, your second paragraph is still misleading.  Whose life are you referencing?  The age referenced in my comment is specifically stated as being that of the youngest borrower but tenure payouts CAN extend beyond the date of the death of the youngest borrower. So “for life” does not describe the term of a tenure payout.
         
        With that said, you still miss at least one condition.  That is involuntary bankruptcy proceedings.  Tenure payments will be suspended during bankruptcy proceedings despite the borrower(s) doing everything right.  You want a “for life” rule but that is a “marketing condition,” not a loan covenant or loan provision per se.  The loan speaks in terms of covenant violations not in terms of “for life.” 
         
        The best way to “bring out” the life issue in my meager opinion is by saying:  “Tenure payouts will last as long as no applicable loan covenants are violated and no borrower voluntarily changes the payout arrangement.  Based on that understanding, the tenure payouts could last as long as the date of death of the last surviving borrower who still holds an interest in the home as of the date of death of that borrower.”

        Remember a HECM does not terminate if a borrower, even the youngest borrower, gifts or sells their interest to another borrower.  As to gifting or selling to non-borrowers and its impact on tenure payouts, that is well beyond the scope of this comment.

      • REVGUYJIM,
         
        And what is your point?  Nothing in my comment or your quotation of it conflicts with or even addresses what you state in your comment.  But that does not mean I agree with your comment nor does it make your comment wrong or right.
         
        You want a rule that specifically says “or for life.”  It does not exist.  You are fighting to make that concept fit, like square pegs into round holes and all that.  Remember square pegs CAN fit into round holes, when the holes are BIG enough.
         
        That said, your second paragraph is still misleading.  Whose life are you referencing?  The age referenced in my comment is specifically stated as being that of the youngest borrower but tenure payouts CAN extend beyond the date of the death of the youngest borrower. So “for life” does not describe the term of a tenure payout.
         
        With that said, you still miss at least one condition.  That is involuntary bankruptcy proceedings.  Tenure payments will be suspended during bankruptcy proceedings despite the borrower(s) doing everything right.  You want a “for life” rule but that is a “marketing condition,” not a loan covenant or loan provision per se.  The loan speaks in terms of covenant violations not in terms of “for life.” 
         
        The best way to “bring out” the life issue in my meager opinion is by saying:  “Tenure payouts will last as long as no applicable loan covenants are violated and no borrower voluntarily changes the payout arrangement.  Based on that understanding, the tenure payouts could last as long as the date of death of the last surviving borrower who still holds an interest in the home as of the date of death of that borrower.”

        Remember a HECM does not terminate if a borrower, even the youngest borrower, gifts or sells their interest to another borrower.  As to gifting or selling to non-borrowers and its impact on tenure payouts, that is well beyond the scope of this comment.

  • Besides the “forced placement” of an insurance policy (where the HECM servicer pays for homeowners insurance coverage when the borrower does not), and servicer payments of property taxes when the borrower does not, remember that there is still the potential limitation on access to any remaining funds or payments when the loan balance reaches the Maximum Claim Amount.

  • >>That is involuntary bankruptcy proceedings.

    I thought it was “voluntary” bankruptcy.

    Its been a couple years, but the last time I read that portion of the
    note, Tenure Payments and/or the Credit Line, can be suspended if the homeowners declare bankruptcy, regardless of if it’s a chapter 7 or
    13.  I can understand suspending payments for a chapter 7, but not the
    13, especially if the chapter 13 is organized as a 100% repayment plan.

    • Mr. Denton,
       
      As to representations, the borrower throughout the loan application related docs signifies whether or not they are in the midst of bankruptcy proceeds or if they intend on starting such proceedings within a year.   
       
      The loan agreement (at 4.4 in the one we use) states:  “Lender shall have no obligation to make further Loan Advances on or following the date that a petition for bankruptcy of Borrower is filed.”  Note it does NOT identify the filer (voluntary or involuntary) just the filing itself.  The risk is no different if the petition is filed by the borrower or the creditors. 
       
      I am not legal counsel BUT what difference does it make if it is a 100% workout or a 30% workout?  You seem to attach some significance to that.  The risk can be the same IF the workout fails. 

      However, it is better to allow attorneys specializing in this area to address this question than you or me.
       

  • Hey guys, this is from an outsider:  What happens if my home is destroyed, swept away, etc?  Do my tenure payments end?  Any residual payments due me?  Thanks

  • Tenure payments are made as long as your home is your primary residence.  You’ll use your homeowners insurance to restore the property, and move back into it when it’s finished.  Meanwhile, you’ll stay in a Motel, or with family, but your home continues to be your primary residence during that time.

  • In reviewing these comments I am again reminded of why everyone originating a reverse mortgage should be required to have a special license.  Yes, a reverse mortgage is just a mortgage but it has many unique characteristics.  I am fully aware that as an industry we have more than enough changes occurring at this time.  But we need to push to require our industry to get ahead of the next crises. 

    • Without question it is those features which make it unique but the same is true with other distinct mortgages.  If you met their originators, there is little doubt they feel the same about their products as we do ours.

      While a unique license would be nice, there is no agency stepping forward with the authority to demand it.  Would the industry support it?  Like you, I would.  Is the NRMLA CRMP exam rigorous enough to be the exam for licensing purposes?

    • Without question it is those features which make it unique but the same is true with other distinct mortgages.  If you met their originators, there is little doubt they feel the same about their products as we do ours.

      While a unique license would be nice, there is no agency stepping forward with the authority to demand it.  Would the industry support it?  Like you, I would.  Is the NRMLA CRMP exam rigorous enough to be the exam for licensing purposes?

  • Thanks for the responses.  I have seen houses disappear at the beach on Fire Island, they are literally under water.  And, houses that are part of a landslide will never be reoccupied.
    So, I am guessing that the tenure payments will stay with the lender in those cases and for those reoccupied in 12-24 months the payments would have continued.
    BTW: some people do not have homeowners insurance.

    • dduck12,

      They would have homeowner’s insurance if they had a HECM.  It is required.  Yes, there are insurance defaults but that is because it is being paid for through the servicer and borrowers have not reimbursed the payor.

    • dduck12,

      They would have homeowner’s insurance if they had a HECM.  It is required.  Yes, there are insurance defaults but that is because it is being paid for through the servicer and borrowers have not reimbursed the payor.

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