Proceed with Caution
A Title Agent’s Guide to Reverse Mortgages
Since the Federal Housing Administration (FHA) introduced the Home Equity Conversion Mortgage (HECM) in 1989, reverse mortgages have experienced a normal ebb and flow in the finance market. While changing federal regulations have impacted the demand for reverse mortgages, we may see an increase in reverse mortgage transaction in the coming months as the economy continues to battle a downturn.
According to the Consumer Financial Protection Bureau (CFPB), reverse mortgages make up about 1 percent of the traditional mortgage market – so reverse mortgages may be unfamiliar to both title industry professionals, as well as to the typical borrower who is likely to take out such a mortgage only once in their lifetime. Because this loan product was designed for retired homeowners, reverse mortgage transactions are frequent targets for elder fraud and financial abuse. These transactions call for extra time, preparation and caution, so here’s a primer on reverse mortgages and tips for navigating these tricky transactions.
What is a reverse mortgage?
A reverse mortgage allows the borrower to use the equity on their homes for immediate needs without requiring regular repayments, providing an income stream to those facing unexpected challenges, or who simply want to enjoy the fruits of their equity.
A reverse mortgage may be:
- An HECM insured by the FHA;
- Non-FHA insured (called a proprietary reverse mortgage); or
- A special-purpose reverse mortgage offered by the state or local government.
Of these, the FHA-backed HECM is the most common type.
Lender guidelines for issuing reverse mortgages are strict, which can impact the title process. The most basic requirements are that the borrower must:
- Be 62 years of age or older;
- Hold title to their home;
- Use the home as their primary residence; and
- Have substantial (at least 50 percent) equity in the home.
How is a reverse mortgage repaid?
While the borrower may repay the loan in a more conventional method, this is not what was anticipated in the development of this product. Typically, the lender is repaid on a reverse mortgage when the property is sold, or when the borrower permanently leaves their residence. Should the borrower die with the mortgage still encumbering the property, the borrower’s heirs have the option to either pay off the loan or surrender the property to the lender in full satisfaction of the loan.
The loan will be fully satisfied either by the amount owed on the loan, or the value of the property, whichever is less. This means that if the loan amount exceeds the value of the home at the time of the borrower’s death, the heirs will not be left with a deficiency to address through the borrower’s estate.
How can title agents smoothly complete a reverse mortgage transaction?
The intricacies of lender and borrower requirements necessitate more time and caution than purchase loan transactions. Here are some common scenarios and ways to approach them:
Age requirement: If a spouse is under the age of 62, they can be listed as a non-borrowing spouse. For property held in a trust, lenders look to the beneficiary of the trust to determine eligibility for a reverse mortgage. When the primary beneficiary of the trust dies, the mortgage becomes due and payable. Title professionals must verify that the age requirement is met by examining a government-issued ID.
Title: Title can be either directly in the borrowers’ names or in a living trust. If title is held in a living trust, you must ensure that the trustee has the power to encumber the property, and that the primary beneficiary is of the appropriate age. Upon the death of the primary beneficiary(ies), the mortgage must be paid, or the property surrendered to the lender. For this reason, it is important that the trustee also have the power to transfer property outside of the trust. A reverse mortgage cannot be taken out by a business entity.
- Property type: The property secured by a reverse mortgage can either be an owner-occupied, single-family residence, or a one- to four-unit, multifamily property. On a multifamily property, the borrower must reside in one of the units as their primary residence. Manufactured homes and condominium units used as a primary residence can secure a reverse mortgage.
- Amount of loan: There are restrictions on what percentage of the equity can be loaned to the borrower, which will vary by the type of the reverse mortgage. In addition, if the reverse mortgage is an HECM, there is a limit on the size of the mortgage, regardless of equity percentages. For 2022, that limit was $970,800.
Can a power of attorney (POA) be used in a reverse mortgage transaction?
In general, yes. The POA must give the appropriate powers to the attorney-in-fact and must be properly executed. To protect against potential abuse, the best practice is to reach out directly to the principal under the POA to confirm they are aware of the loan and have agreed to this. When available, remote online notarization is an ideal route.
What about other liens?
As with any loan transaction, any other lien or mortgage showing on title must be paid and released prior to insuring the new reverse mortgage in first position.
If it is an HECM, note that there will be two new liens on the property. The first lien will be the insured mortgage/deed of trust. The second mortgage/deed of trust, which will be in favor of the Department of Housing and Urban Development (which oversees the FHA), should be shown as an exception on the final policy or policies.
Final thoughts
Due to the complexity of reverse mortgage requirements, these transactions can require a little more time, both for preparation and for the closing. Also, because retirees are fully aware they are targeted for fraud and abuse, and because reverse mortgages get a fair amount of negative press, Doma agents are likely to be asked for advice that must be obtained from an appropriate real estate professional. When in doubt, please always reach out to your Doma underwriting counsel at [email protected].