Reverse Mortgages and Homeowner's Insurance Obligations (LONG)

In My Humble Opinion (IMHO)
#1

My wife (of nearly two months) inherited a house from a childhood friend, and moved into it with her sister in 2016. Her sister, using an employee discount from her employer, paid the homeowner’s insurance until some time in 2021. In 2020, the sister was injured on the job, and spent several months in a disabled-but-still-employed status, and eventually was moved off the company’s payroll. This triggered the loss of the discount on the insurance policy, and the policy was cancelled by the carrier. My sister-in-law reports that she bought six months worth of a new policy with a different carrier when the first policy was cancelled. She couldn’t recall if she bought it through State Farm or Farmers (more on that later), and policy paperwork was never successfully transmitted to my wife.

In 2017, my wife entered into an HECM (reverse mortgage, in the common parlance). Her obligations, under the terms of the HECM were to keep property tax payments current and homeowner’s insurance in force. Failure to meet those obligations would cause the loan to be called, and all moneys advanced under the term of the mortgage to be due and payable.

One of the things about having a reverse mortgage is that it seems that EVERY lender who underwrites them is always jockeying to take them from whomever currently holds the note. So my wife has, for several years been getting solicitations to refinance her HECM, with (implied) promises of lower interest rates, and higher withdrawal limits. My wife has responded to one of these solicitations, and is currently approaching the final stages of a refinancing contract.

Today, she was asked to provide the new lender with information about her homeowner’s insurance policy. Well, no problem, right? Sis has been keeping that taken care of, right?

Apparently NOT right. When asked, Sis responded that she bought a six-month policy from an agricultural carrier of some type, but she did that more than six months ago. So, there IS no policy.

Oy.

I called Farmers customer service to see if they could find the policy, and maybe reinstate it, if the lapsed premiums were covered. The CSR wasn’t able to find that any such policy existed, but gave us a number to call tomorrow morning. Not much help.

That was when I found out that she wasn’t sure if it was Farmers or State Farm. So I called State Farm customer service to see what I could see. They found my wife’s name and address in association with a quote request, but no record that a policy had been written or sold. They then transferred me to an agent (not named Jake, more’s the pity), who took our information, asked a few questions, and wrote us a policy, which I quickly bought.

On a semi-related note, last year, the current lender, sent my wife a notice saying that her property tax bill had not been paid (it had), and that she needed to correct the deficiency in order to avoid defaulting on the reverse mortgage (we satisfied their demand for documentation by the required date). I presumed that the lender’s compliance monitoring folks had queried the county tax collector’s office for the status of the tax payment. And I would kind of expect that the monitors would also remain in contact with the insurance carrier, and similarly light a fire under our asses if a homeowner’s insurance policy had lapsed or been cancelled. We have had our asses unwarmed for the past year of possibly not carrying a valid policy.

How much shit are we in? Is the lender within its rights to call the loan due to our inability to document continuous coverage, or is the policy that went into effect tonight enough to shield us from such an action?

Thanks in advance for any knowledgeable responses.

#2

Not a lawyer, am a real estate professional.

You are most likely perfectly fine.

First things first–it should not be a mystery what’s going on with the insurance on this home. There is something called a CLUE report that basically all underwriting goes through. You are entitled to a free copy of your CLUE report once per year through LexisNexis Risk Solutions. If you go to their website and fill out the form (this would more aptly be–either your wife or her sister, whoever would have had their name on the insurance policy), you’ll see a record of any underwriting activity in recent years which will show you which insurance company did the underwriting on the home insurance and then you won’t have to call around guessing.

Secondly, what the lender could essentially do to you if you breach the terms of the mortgage is foreclose. There are a lot of complicated, structured rules on foreclosure, and a foreclosure cannot occur without those taking place–technically what would happen in this case is they would call the mortgage entire balance as due, and then if you couldn’t pay it in a timely manner you would be in default and they’d foreclose. It sounds like no part of this process has begun, and thus as long as things are fine right now (house is properly insured, you’re paying property taxes etc), you can assume nothing like that is going to happen.

I don’t want to get a mile deep into the specifics because it’s probably not necessary, and while I’m familiar with the process I also am not a lawyer so don’t want to give a false impression about reliability–but suffice to say taking adverse action legally requires the lender to do a series of steps. Your wife has to be notified at each of these steps, and will generally be given a chance to rectify the situation to prevent the steps continuing almost to the very end.

Additionally–homeowner’s insurance being required for a mortgage (this is true of basically any mortgage, not just HECMs) is indeed a thing, your lender is supposed to be notified the moment it lapses and you are technically in violation of your mortgage agreement at that point and they could send you a notice of default at that point. However that is highly unlikely, what they usually do is send you a letter telling you to fix it, what they often sometimes do is buy a lender policy and insure it to protect their interest in the home, they are allowed to do this if you let your insurance lapse. They then add the cost of that policy into your payments.

Since many of the fees and interest on an HECM are deferred into the HECM balance until the borrower dies, moves out or sells the property, it isn’t impossible that this has already happened and you (your wife) has been paying for the lender insurance already–this is usually bad and more expensive than conventional homeowner’s insurance. While I would normally suspect you would be aware if such a thing had occurred, since it sounds like documentation issues are afoot and there wasn’t awareness/documentation of the previous insurance, I can imagine it is possible notices of this lender insurance being issued were misplaced or lost as well. Either way, losing the house/mortgage are not a serious risk, and the lender has to go through notices and steps to make that happen.

It is possible you’re accumulating unnecessary costs on the HECM in the form of more expensive lender issued insurance.

#3

Thanks, Martin_Hyde. That certainly helps. I’ll check out that LexisNexis Risk Solutions thing in the morning, and see if we need to take steps to have any lender-bought insurance cancelled.

#4

Update: As reported elsewhere, my wife passed away on May 10. Since the HECM was issued in 2017, and she married me in 2022, I rather suspect that I do NOT fall into the category of “Qualified Non-Borrowing Spouse,” and I will need to pay the HECM lender the balance due.

The trustee of her revocable trust has not yet notified the lender of my wife’s death. Is there a deadline by which she is obligated to do so?

#5

I’m terribly sorry for your loss.

The HECM is an FHA program created by a 1988 law, under that law after the last borrower has deceased or left the property the loan balance is obligated to be paid within 30 days.

Speaking outside the bounds of what the law says–I believe all that is likely to happen from similar scenarios I’m familiar with is once the bank finds out your wife has passed, whenever that is, they will send a demand letter with a 30 day warning, basically asking for the loan’s balance to be satisfied. At that point the situation will have to be dealt with.

If the heirs or the estate intend to sell the house to satisfy the loan, then the lender has to give a 90 day window to allow for that–and that window can be extended out another 90 days in perpetuity as long as there is a good faith effort being made to sell the home.

If the heirs of the estate wish to remain in the home but don’t have enough cash to satisfy the balance of the loan, they can get a new loan to pay off the balance of the reverse mortgage. One of the interesting things with the HECM program is the balance of the reverse mortgage, for these purposes, is the lesser of the balance outstanding and 95% of the appraised value of the home. If the home’s appraised value is $100,000 and the loan balance outstanding is $125,000, the heirs only have to come up with $95,000 to satisfy the loan. The heirs never have to pay more than 95% of the appraised value to satisfy a reverse mortgage (it is still considered essentially a new sale in this scenario.)

The ability to potentially purchase a home at 95% of its appraised value could be an economic opportunity for whomever the heir(s) are (I’m not sure if that is you, the sister, or someone/something else.)

#6

Got it.

The house is, so far as I know, the only asset in her revocable living trust, and she had intended for the sole beneficiary of the trust to be her nephew.

#7

Actually, I’m a little nonplussed at the concept that the balance CAN exceed the appraised value. Her available withdraw limit was never more than 50% of the appraised value.

#8

Welp. All questions of what the reverse mortgage will do have been rendered moot. Her revocable trust (now irrevocable) explicitly states that upon her death the house will be sold, and the proceeds distributed to her nephew.

The HECM is not mentioned in the trust document, so it’s existence doesn’t control anything.