Reverse Mortgages and Delinquent HOA Assessments
Reverse mortgages are a fairly new financing tool for homeowners. In FHA terms, reverse mortgages are Home Equity Conversion Mortgages (HECM). Owners of single-family homes, 2-4 unit properties, post-1976 manufactured homes, condominiums, and townhouses are eligible for an HECM. Co-ops do not qualify. Basically, HECMs are designed to pay the borrower the remaining equity in his/her home and, if the loan is not repaid when the owner dies or abandons the property, the property is foreclosed to repay the lender.
In order to qualify, the homeowner must be at least 62 and have enough equity in the property. Until this year, these were the only underwriting requirements. Lenders now will conduct financial review of every reverse mortgage borrower to assure that he/she has the financial wherewithal to continue paying mandatory obligations, such as property taxes, insurance and HOA assessments, as required in the Loan Agreement. If a lender determines that a borrower may not be able to keep up with property taxes and insurance premiums, it will be authorized to reserve a portion of the loan proceeds to cover these charges in the future. Generally, none of the reserve funds will be allocated to cover unpaid HOA assessments. (This is in alignment with current practices that exclude HOA assessments from monthly impound payments with home loans.)
A borrower can choose to receive reverse mortgage proceeds all at once as a lump sum, in fixed monthly payments, as a line of credit, or a combination of these. The amount of funds a borrower can receive depends on his/her age (or the age of the youngest spouse when there is a couple), appraised house value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500. In general, the older one is and the more equity in the property, the more money will be loaned.
The proceeds from a reverse mortgage can be used for anything, including additional income for daily living expenses, home repair or modification, health care, debt reduction, etc. Interest is not paid out of the loan proceeds, but instead compounds over the life of the loan until repayment occurs. A HECM will be in first position, meaning that it is superior to all other liens (including the Association’s lien for unpaid assessments) except governmental liens (e.g., for property taxes or federal taxes).
Many borrowers immediately draw all of the available loan funds after closing, and there will be no further payments from lender to borrower. Thus, unless a reserve fund is established, there may be no proceeds available for property expenses, especially if there are other liens. If the borrower has fully drawn the loan proceeds and does not pay taxes/insurance/ HOA fees, the loan is in default under the HECM security instruments and the lender many times will place insurance on the property and will pay property taxes to avoid a tax lien foreclosure. If there is a delinquent HOA assessment account, the loan servicer should be informed (in writing) and asked to pay the assessments due on the borrower’s account or, at the very least, to pay the full account from the escrow that will occur after the lender takes possession and then sells the property. Such requests are handled on a case-by-case basis. If a lender who is eligible to foreclose delays the foreclosure sale, this should be pointed out since the delay is prejudicing the Association.
If the lender does not voluntarily pay assessments before it finalizes its foreclosure sale (i.e., the trustee’s sale), a homeowners association typically has no legal basis to require the lender to cover the assessments or to hasten the foreclosure sale. The homeowner remains personally liable, however, and a judgment for assessments can be obtained and collected from the borrower’s assets. All too often, there are no assets and, in some cases, the borrower has left Arizona, leaving the association with no affordable recourse to pursue payment of a judgment.
Note that some of the information for this article is from the National Reverse Mortgage Lenders Association [reversemortgage.org].
Written by: Carolyn B. Goldschmidt