Being prepared in advance is key. The more the borrower and their heirs understand in advance, the smoother the resolution of the HECM loan and property will go when the last borrower passes away.
Upon notification of the last borrower’s death, the servicer is required by HUD guidelines to send a Demand Letter to the property address and heirs (if they are known at the time). The letter will contain HUD-required language. While servicers want to work with heirs to give them as much time as possible to satisfy the loan, there are strict HUD timelines they must meet. Servicers have a limited amount of flexibility otherwise they face stiff financial penalties.
So, let’s break down the timelines. The borrower’s estate has 30 days, or 45 days in some states, from the date of the Demand Letter to satisfy the debt or provide a letter of intent outlining their intentions for the property and loan. Will they pay off or refinance the loan and retain the home, sell the property (a short sale may be available), or execute a Deed-in-Lieu of foreclosure? Cash for Keys may also be available.
When the servicer must refer the loan to foreclosure counsel to begin foreclosure proceedings depends on state law. Servicers must achieve the first legal foreclosure action on or before six months after the last borrower’s death or default. What is the “first legal” foreclosure action? That depends on the state. It could be a complaint filing, notice of default filing, or publication in a newspaper. This means servicers must refer the loan to foreclosure counsel around 90 days after the death or, in the case of a non-death default, the date HUD approves calling the loan due, to allow counsel time to prepare what is required to achieve the first legal action.
What if probate is required? Probate is the legal process of administering a deceased person’s estate and it must be completed if required in the jurisdiction. Earlier referral to the foreclosure attorney will occur in states where opening probate is required to meet first legal or where default letters are required to season more than 30 days before foreclosure can be initiated.
When do foreclosure fees start accruing to the loan balance? Fees begin to accrue when the loan is referred to foreclosure counsel.
Are extensions of foreclosure available? Two 90-day extensions of foreclosure are available to heirs IF they provide proof that they are marketing the property or obtaining financing or sourcing other funds to pay the loan off. HUD must approve the extension request(s) and, if approved, the foreclosure proceedings and related fees will be suspended until the expiration date of the extension(s). If an extension is not requested and approved prior to when the loan is referred to counsel, foreclosure fees will accrue to the loan until the extension is approved.
HUD does not allow any additional or special extensions of foreclosure simply to allow time for probate; heirs must provide evidence that they are working to refinance or pay off the loan in full, sell the property or execute a Deed-in-Lieu. Probate can be expensive and take time – it can be a few months to years depending on the presence of a Will, the size of the estate and the ability to locate beneficiaries so acting quickly is important.
What if the servicer misses the first legal timeline? They are penalized by HUD in the form of a “debenture interest curtailment,” on average approximately $15K per loan, so the impact is severe even if the timeline is missed by only one day.
How to avoid common pitfalls:
Loan officers should NOT advise borrowers they will have 12 months to pay off the loan or sell the home – this is not accurate and leads to misunderstandings. Loan officers SHOULD advise borrowers that their heirs need to contact the servicer as soon as possible following the borrower’s death or other events of default to find out what is required to obtain an extension. To obtain the most amount of time available under HUD’s guidelines:
- Heirs should report the last borrower’s death immediately to the servicer using the phone number on the account statement;
- The estate should send initial documentation to the servicer ASAP – a death certificate, Will, trust and probate documents.
- Borrowers and/or their heirs must act promptly when a loan is in default for any reason, and keep the servicer updated.
- Borrowers are encouraged to discuss end-of-life planning with their heirs before the last borrower passes away, so heirs are prepared in advance.
- If probate is required, the estate must not delay in opening probate. It’s critical to identify the person who has the legal authority to act on behalf of the Estate to make decisions and sign documents as soon as possible.
- To execute a Deed-in-Lieu of foreclosure, the property must be in broom-swept condition, cleared of all personal belongings, all fixtures and appliances must be in place, and there can be no other liens on title other than the 1st and 2nd reverse mortgage.
- Before completing a transfer of title to the property, the servicer must have either received funds to pay off the loan in full or an approved short sale or Deed-In-Lieu has been completed.
- Until the loan is paid in full, the property is sold, or a Deed-In-Lieu of foreclosure is recorded, the estate is responsible for paying all applicable property charges (taxes, insurance, HOA dues and assessments, etc.)
- We invite loan officers and their borrowers to watch an educational video titled “Preparing your Heirs: What happens with my Reverse Mortgage when I pass away?” at reversedepartment.com.
(Editor’s note: The following was submitted by Celink)
