Fox Business: Reverse Mortgage Heirs Need Not Worry

Fox Business Network addresses a question this week from a reverse mortgage borrower who is worried about her heirs and how they will repay the loan or respond to a foreclosure of the home.

Explaining to the borrower that the heirs will not owe more than the home is worth at the time of sale, Fox Business’s debt advisor says the borrowers need not worry about repayment for this reason.

The advisor writes:

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It’s very sweet of you to worry about your children. But I think you’re worrying unnecessarily.

After only two years, the balance due couldn’t have risen tremendously. If your kids are concerned about keeping your home, they can pay off the balance by buying the place now instead of letting the mortgage consume more equity.

If they can’t afford to buy your house now, they may be able to in the future. No one can predict what the future will look like for your kids.

As for a foreclosure: A foreclosure happens when a debtor doesn’t satisfy a loan agreement secured by real estate. In your case, the sale of the home will satisfy the loan agreement in full. Hence, there will be no foreclosure. This is not something that you need to worry about with a reverse mortgage. Your reverse mortgage is a nonrecourse loan that is secured by your home. The deed to the house is all that is needed to satisfy the contract.

Should your home be worth more than what is owed on the reverse mortgage at the time of your death, your heirs will have the option to sell the home, pay off the reverse mortgage and pocket the remaining equity. Conversely, if there is no equity left in the home after your death, your executor needs only to turn over the deed to the home, and the contract for the reverse mortgage loan is satisfactorily fulfilled.

Read the full Q&A at FoxBusiness.com.

Written by Elizabeth Ecker

Editor’s note: A previous version of this article incorrectly identified the source of this column as Fox Business News. The source is Fox Business Network. RMD regrets the error. 

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  • The author does not seem to realize that at termination for anything other than transfer of title in the collateral, HECM termination will always result in foreclosure unless the borrower or the estate [including the heir(s), trust(s), or beneficiary(ies) of that trust(s)] of the borrower pays off the loan for the agreed amount due through sale, short payoff, deed-in-lieu-of-foreclosure, or extends payoff or takes other action approved by the servicer.  

    • I am not sure what you are saying. Are you saying that the children will owe more than what the house is worth at termination? Are you saying that all reverse mortgages end in foreclosure?? 

      • Ms. Walsh,

        As to all HECMs ending in foreclosure, please notice the keyword in the third line of the first sentence, “UNLESS” (caps added here for emphasis). Before 2009, far fewer terminations resulted in foreclosure than are occurring today and will also be occurring for some time into the future.  (Because of your comment, I started to edit the comment before rereading it which turned out to be a very poor decision since it did not need any change based on your response.)  

        There is not a single thought in the entire comment which concludes what will happen at termination regarding the specific reverse mortgage being addressed by the reporter.  However, there is clearly a thought about what COULD happen which explains why the reporter was wrong for not addressing NOW that the balance due could be greater than the value of the home at termination.

        Many originators do not realize that foreclosures occur in the mortgage industry just because the borrower or the heirs just cannot make a decision.  That is true no matter if the home is underwater or not.  As to how often that has occurred in the over 183,000 HECM terminations to date, I have no access to that information.

  • So much for the KISS principle. I think he got the gist of it across under the circumstances in spite of some technical/procedural issues but sometimes too much information only further confuses and complicates the issue.  I would have liked to hear him suggest that the children could help keep the interest accrual paid down on a periodic basis as a substitue for “buying” the house.  The reason being that there are certain property tax advantages associated with owner occupancy in addition to more favorable mortgage financing options.
    We ought to be talking to the Fox guy instead of each other and that goes for all the other “enlightened ones” who weigh in on subjects they are not well versed in.

    • hecmvet,

      Equity is one of the simplest ideas to comprehend but one of the most misunderstood and misapplied ideas there is in our industry.  Equity is never about total lien balances due alone.  Yet we hear and read all of the time that in the traditional mortgages that as payments are made equity rises.  Of course that completely ignores the most significant factor in computing equity for the last quarter of a century, the value of the home.

      Why should the children “pay down” the accrued interest?  They would be taking their own personal equity to pay down something that might never impact the estate of their parent.  For example, what if home value was $200,000 at termination and the mortgage would have been $300,000 but the children paid down $50,000 so that the actual balance due was $230,000?  The children threw away OVER $50,000 of their personal estates to accomplish what?  Why was it necessary or a particularly good idea?

      I disagree.  Before talking to the “Fox guy” we should have talked to one another about these great ideas he would be given.

      KISS sometimes boils down to just one S and that S does not stand for Simple.

    • Mr. Jackson,

      Below is the reason I gave at Linked In why I feel this article is balanced but it has nothing to do with any conclusions about reverse mortgages.  The one reason is that the author recommended to the questioner to seek the advice of an estate adviser.

      “The author got it wrong in saying: ‘It’s very sweet of you to worry about your children. But I think you’re worrying unnecessarily. After only two years, the balance due couldn’t have risen tremendously.’ But that is only one-half of what the borrower should be looking at in estate planning where foreclosure is a possibility. Current estimated home value is also needed. 

      If the borrower is now 75 years old (per HUD, the average age of the youngest borrower during fiscal years 2010 and 2011 was 72.9 years old) and the HECM was a fixed rate Standard with an interest rate of 5%, the balance due started at 68.1% of the maximum claim amount (“MCA”). In two years the balance due would be 77.1% of the MCA. 

      If the MCA was equal to the appraised value at closing and current home value is only 90% of the MCA, that means there is only 12.9% of the MCA remaining as equity. That is not much equity left. So foreclosure as to heirs should be a concern of the borrower whether a mortgage is nonrecourse or not. But the author did not mention the issue of current home value at all. 

      The one thing this author got exactly right was to recommend that the borrower see an estate adviser.”

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