This post first appeared in the Chicago Daily Law Bulletin in December, 2022
In the right circumstances, I am usually in favor of Home Equity Conversion Mortgages (“HECMs”), also known as Reverse Mortgages.
With an HECM, the mortgagee takes the existing equity on a mortgagor’s property and converts that equity into monthly payments made to the mortgagor. A HECM allows the homeowner to take or convert equity from their home without having the obligation to continue making mortgage payments. It can help homeowners who might otherwise fall into default to remain in their homes.
It can also allow a homeowner to continue to reside in their home with limited obligations, or even purchase a new home to assure a place to live out their remaining days. The interest continues to accrue against the equity in the property and is paid either when the property is sold or the reverse mortgagor passes away.
The drawback is that, if the reverse mortgagor passes away, the mortgagee treats that as a default on the reverse mortgage, and the next step is usually a foreclosure action. And if a reverse mortgagor’s heirs or devisees don’t know about the reverse mortgage, as is sometimes the case, then those heirs or devisees could find themselves on the unfortunate end of a foreclosure proceeding which they didn’t expect.
Reverse Mortgages also require homeowners to pay their real estate taxes, pay their insurance, and advise their lenders that they continue to reside in the home. If any of these obligations are missed, under the terms of the mortgage, that is treated as a default as well, and the lender may foreclose for that reason as well.
I have worked with a number of homeowners lately with Reverse Mortgages who were thrown into foreclosure either because they were no longer able to afford the obligations they continued to have in order to reside in their home or they did not understand how to deal with those obligations.
A Refund and More
A recent client failed to make a real estate tax payment on time.
The lender was notified by the taxing authority and the lender made the payment. Then the client made the payment resulting in a double payment. Because the lender had made the payment, it brought an action to foreclose the mortgage. Upon accepting representation of the homeowner, I found that not only was the homeowner entitled to a refund, but that for years she had failed to take her homestead exemption, her senior exemption, or look into whether she was entitled to a senior freeze for her taxes.
She retained the right to file for a Certificate of Error for only the prior three years of erroneous tax bills where exemptions had not been taken. Fortunately, this client had the wherewithal to cure the amount that had been advanced by the lender, although it did cost her extra money to cover the foreclosure costs.
Some of the funds she expended to cure the shortfall would be repaid by the applications for the duplicate payments and Certificate of Error.
Another client went through a Chapter 13 to cure real estate taxes that had fallen into arrears. After the Chapter 13 concluded, and she paid the next set of taxes, however, the property was the subject of a foreclosure filing. It is unclear as to why the lender would have paid the taxes if they had been paid by the homeowner.
The government, having seen too many people lose their homes after taking on reverse mortgages because they did not understand their obligations, now require an education course before they can take on a HEMC. But as we age, our capacities fail. And while homeowners might prefer to remain in their property until their demise, if they are unable to maintain the obligations under a reverse mortgage or pay them timely, they may find that they have accelerated the reduction of equity in their homes through the HEMC and have now limited their options going forward.