Death is always a disruptive occurrence, and in the realm of financial planning, it can be a critical point at which surviving heirs need to make some key decisions regarding the fate of a decedent’s estate and assets. For someone who had a reverse mortgage on his or her home at the time of death, the actions of heirs can be very consequential in the financial futures of their own family, as well as the strength of the Home Equity Conversion Mortgage (HECM) program in some cases, which is one of the reasons why clarity and understanding by the reverse mortgage industry surrounding post-death issues is so vital.
This is according to a trio of prominent reverse mortgage industry educators in a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Virtual Annual Meeting & Expo in late 2020. Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR) was joined by Jim McMinn, sales training manager at Longbridge Financial and Craig Barnes, corporate education leader at Reverse Mortgage Funding (RMF) to clarify issues that they have encountered in their ongoing educational efforts in the reverse mortgage industry.
What happens to LOC, LESA or payment after death
When it comes to determining what happens to unused funds in a line of credit (LOC), life expectancy set aside (LESA) or payment after a borrower’s death, the answer is relatively straightforward but the question tends to crop up in educational conversations about reverse mortgages. This is according to Craig Barnes.
“I often [respond] to a question about what happens [with another] situation: where a borrower with a HELOC of $50,000 only used $20,000 and sold the house,” Barnes says. “They don’t get a check for that $30,000, it’s the same idea: it’s just equity. That is one that we get all the time. What happens to the LESA funds if the borrower passes away or sells the home, prior to those LESA funds being used up? Well, it’s just additional equity.”
If those unused funds never get charged to the loan balance then they are simply left over as additional home equity for the heirs, Barnes says.
“It’s the same with tenure or term payments that may not have been made,” he says. “The same with an unused line of credit. If after the death or after the sale of the home, it’s just additional equity for the heirs.”
Barnes also added a humorous anecdote about a question that some reverse mortgage educators get due to a simple misunderstanding of a commonly used word in relation to the product category.
“I will quickly tell you one of my oldest jokes that I have been asked multiple times here is if the borrower chose a tenure payment, what happens in the 11th year? So, for any of those who are new, the 11th year doesn’t matter,” Barnes explains with a laugh. “It’s tenure, not 10-year.”
Disposition of the property
In terms of the ways in which heirs can dispose of a reverse mortgage property, sometimes the issue is not inaccurate information but simplified information. Going into greater detail on a core concept can help illuminate a greater level of understanding about a financial instrument that has a lot of inherent complexity, according to Dan Hultquist. For instance, saying that an heir can either choose to sell the home or give it back to the lender is technically true, but additional detail would be likely to yield greater understanding for an heir’s options, he says.
“As an heir, it boils down to your answers to two critical questions,” Hultquist says. “Number one: is there any equity left? And number two: do you want the home? Your answers to those two questions will determine what you want to do with the house. Depending on the answers, you might choose to pay off the loan.”
If a deceased borrower had used their reverse mortgage for financial planning purposes without having borrowed all that much, or if they were letting the line of credit grow for some other use, then the loan balance might be at a manageable enough level for an heir to simply pay off the loan balance and retain ownership of the home, Hultquist says.
“If the balance is larger, [the borrower can also] refinance the loan balance,” Hultquist says. “And in some cases in a post-death transition, then you can actually receive a discount if you’re upside down, using that 95% option.”
An heir may also choose to sell the property for a monetary gain if equity remains and the heir decides they don’t want the property, he says. Sometimes, though, an heir who doesn’t want the property any longer will just allow the property to fall into foreclosure, which can be problematic not just for the industry, but for the government, Hultquist explains.
“Sadly, many heirs just walk away, and they just let it foreclose which hurts our industry, and hurts FHA,” he says. “We want to encourage signing a deed in lieu of foreclosure, to make sure that it’s a seamless process and doesn’t hurt our industry.”
“12 months to sell the home”
Having 12 months to sell the home after a borrower permanently leaves the property is another component that is technically correct, but a more robust explanation about the details behind that point would be beneficial for all involved parties, according to Jim McMinn.
“The first thing is that the executor or heirs, they need to contact [the servicer] and let them know what their plans are: if they’re going to sell the house, they then have six months to sell the house,” McMinn says. “They can get two 90-day extensions, that brings us up to that one year timeframe. But, those extensions are not guaranteed.”
Making that particular distinction is important so that those having to make a decision about the property are best informed about the mechanisms, and how they exactly work, McMinn says.
“There are a lot of myths floating out there about when the payment is due, and I can see how it’s evolved,” McMinn says. “I’ve had experiences where the heirs would call me after a family member died. They’re mourning trying to deal with all this, and their neighbor tells them that the loan is due and payable immediately.”
This, of course, is not the case and just exacerbates the distress that a family is likely feeling at the loss of a loved one.
“So they’re in a panic, and we’ve got to have people telling them that they’ve got a year automatically,” he explains. “We really need to filter that through and make sure that they understand exactly what it is.”
HUD-required language in a condolence letter can also cause some confusion, since it states that the loan must be paid in full within 30 days, McMinn says.
“That sets that panic in motion,” he says. “However, it does go on to say that extensions can be granted beyond this date. So really, it’s a matter of talking to the servicer, letting them know what [the heir’s] plans are, understanding that they do have that six month timeframe, and that two 90 day extensions can be granted, but again, not guaranteed.”
There’s also one key piece of information that Barnes hears directly from servicers that can help the whole situation progress more smoothly.
“Make sure that the heirs know to stay in communication with the servicers,” Barnes says. “That’s the biggest thing I hear all the time [from them] is ‘tell us what’s going on and what you’re doing.’ When they know, then they can work with the heirs or maybe the borrowers, whatever the case may be. But that is the one thing: just don’t go dark on the servicers.”
