What If You Want To Move?

by Peter G. Miller
August 12th, 2008

Imagine that you have a reverse mortgage with a $200,000 balance. Imagine also that your house has declined in value and is now worth $150,000. How much do you owe the lender? Can you be prevented from moving since since the debt is bigger than the home’s value?

Assuming that you have an FHA-insured reverse mortgage, or a HECM (home equity conversion mortgage) as HUD uses the term, you can never owe more than the house is worth. That’s why the HUD reverse mortgage product is a non-recourse loan. The lender cannot go after you, your spouse or your heirs for any unpaid balance. Since the house is worth $150,000 in this case that’s all the lender can get.

The reverse mortgage borrower’s liability is limited under the FHA program because HUD insures the borrower if the lender does not come up with promised money — and HUD also insures the lender if the full value of the loan is not repaid. When I last checked at the beginning of the year, there had been no borrower claims against HUD while lender claims averaged about $18,000 apiece.

The lender gets to call the loan under certain conditions, most importantly a “maturity event,” an oblique term meaning that the borrower died, moved or sold.

HUD has been insuring reverse mortgages nationwide, including in markets obviously in decline. HUD has to do this — it is a federal entity. The result is that if a borrower with a reverse mortgage in a weak market wants to move, he or she effectively has an instant “buyer” in even the worst markets — the reverse mortgage lender backed by that valuable insurance policy from HUD.

Who wins if the borrower simply wants to move and home values have declined? The borrower got the money, the lender got the fees and HUD gets to write a check to the lender for any unpaid loan balance.

For specifics, speak with an independent adviser such as an attorney who specializes in elder law.

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