Reverse mortgage ‘subordinations’ clarified

I have supported seniors approaching their lenders about “subordinating” their loans to allow a senior to obtain a reverse mortgage. By doing so, the senior is able to remain in the home when they otherwise would have been forced to move.

An example offered in a previous column drew questions, comments and concerns from reverse mortgage lenders. David Stevens, the federal housing commissioner, issued a mortgagee letter to all reverse mortgage lenders attempting to clarify the subordination rules for Home Equity Conversion Mortgages, the nation’s most popular reverse mortgage program.

While the letter appeared to clarify the issue, some lenders wrote to us believing no secondary liens are permitted on reverse mortgages. Others say existing liens, but no new liens, are allowed.

Our case involved an 81-year-old couple who took out a second mortgage two years ago to help their daughter buy a home. The daughter agreed to make the payments on the loan. Unfortunately, she lost her job and was no longer able to make the monthly payments. As a result, the homeowners became delinquent on both their first and second mortgages. They received a notice of foreclosure on their first mortgage.

The couple inquired about a reverse mortgage. The only way it could work was to have the lender with the second mortgage agree to subordinate, or remain in second place in the lien line.

While it is rare for a lender with a second lien on a property to agree to remain in second place by allowing a new loan – especially a reverse mortgage – to take over the first lien position, the couple had been longtime customers and needed the help to make the deal work.

Here’s how the reverse mortgage solved the dilemma: The couple’s home value was $235,000 and encumbered by a first mortgage in the amount of $140,000 and a second mortgage of $60,000. After fees, the couple was eligible for a reverse mortgage of $171,000. When the reverse mortgage closed, the first mortgage was paid off and the remaining $31,000 brought the second mortgage current and also bought down a significant portion of the balance.

Some reverse mortgage lenders argue that the scenario differs from what Stevens’ letter addresses. The borrower did not obtain new subordinate financing in order to make the reverse mortgage work. In this case, the second lien holder executed a subordination agreement, whereby they agreed to take a subordinate position to the first and second liens created by the HECM.

While it is prohibited for the borrower to obtain subordinate financing as part of the transaction, in this case the transaction was permissible because it was an existing lien holder who agreed to a subordinate position behind the HECM.

The homeowners chose a Federal Housing Administration-insured Home Equity Conversion Mortgage with a fixed rate of 5.56 percent. HECMs generate about 85 percent of all reverse mortgages. Other private reverse mortgage “jumbo” funds have virtually evaporated given the credit crisis.

The FHA, a component of the U.S. Department of Housing and Urban Development, has also become more of a primary player in the “forward” or conventional mortgage markets.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their homes. Funds obtained from the reverse mortgage are tax-free.

If you are a senior and are struggling with the expenses that are allowing you to remain in your home, take the time to research a reverse mortgage. While it is sometimes difficult to persuade existing lien holders to subordinate to a reverse mortgage product, it has been done.