Photo by Karolina Grabowska from Pexels
The Effects from Covid on Reverse Mortgages
By Edward Brown and Mary Jo LaFaye
With the Covid crisis still looming , much attention has been focused on conventional loans where monthly mortgage payments are required . Recently , laws have been passed on both local and national levels to ensure homeowners are not evicted for nonpayment on FHA loans .
Relatively little attention has been geared toward reverse mortgages during the Covid virus . Why is that ? At first glance , the simple answer is that no monthly payments are required for reverse mortgages ; thus , there is no risk for a foreclosure for nonpayment of a mortgage . However , one needs to go deeper to understand that there could be a potential risk to the homeowner of losing their house in certain circumstances but for the foreclosure moratorium .
Under normal circumstances , the borrower on a reverse mortgage does not have to worry about foreclosure by the lender because no monthly payments are required ; the loan balance just keeps increasing as interest accrues over time and is only required to be paid back upon the death of the last remaining borrower , move out by the borrower , or death of the non borrowing spouse if the borrowing spouse predeceased them . The borrower ’ s only requirement for yearly payments are real estate taxes and insurance , HOA dues if applicable , plus maintenance and utilities . If the borrower fails to pay these , technically , they are in default and the loan may be called . This could lead to a foreclosure . In addition , the house may not be left vacant or abandoned .
For those borrowers who take a lump sum reverse mortgage and whose income is estimated to be too low to maintain the real estate taxes and insurance , they may be required to have a Life Expectancy Set Aside [ LESA ]. LESA is similar to an escrow account that is set aside for future real estate taxes and insurance and is based on the life expectancy of the borrower . These future expenses are deducted from the lump sum provided by the reverse mortgage company and held by them . The funds in the LESA become part of the loan balance once the lender disburses them to pay the property charges on behalf of the borrower . Thus , those borrowers who have LESA , for all intents and purposes , would not typically face foreclosure during their expected lifetime .
Many conventional borrowers have requested deferments from their lending institution as they fell on hard times with the loss of income during Covid . The need for deferment requests are all but eliminated for reverse mortgages .
There has been a tremendous push toward applying for reverse mortgages by homeowners . There are many reasons for this ; historically low interest rates mean that a borrower can obtain a much larger reverse mortgage , as the interest that gets added to the mortgage every year is less than in a high interest rate environment . Thus , the lower the interest rate , the better it is for the homeowner and , consequently , the less risk for the mortgage company .
65