According to recent statistics, over 10,000 Americans turn 62 each day. In addition, 40% of them (4,000/day) are still paying off one or more mortgages.

In 1987 Congress authorized (a friendlier word than “directed”) the Federal Housing Administration to create a federally insured reverse mortgage program.

The reason was clear-on one extreme, Retiree’s needing capital and/or cash flow in retirement could sell their home, and have 100% of a large pile of cash (but find themselves living under a freeway overpass); the other extreme was to refinance 80% of their home value, but now will be chained to mandatory mortgage payments for (probably) the rest of their lives and the failure to meet that obligation of Principal and interest for ANY reason would cost them their homes.

Neither of these extremes was tenable.

So, in 1987, Congress created the FHA HECM/HELOC mortgage loan program with the specific intent to provide what was seen as a necessary conduit between the two extremes that could allow someone over 62 the capacity to use their home equity to subsidize their retirement without the jeopardy of being forced into 360 mortgage payments or to be able to use this equity without taxation, or risk of default.

Reading the “Preamble” to that Congressional Bill isolated the character of the intentions of Congress who fully recognized the need for such a vehicle. In fact, other countries had either developed their own Reverse program or were discussing it. Today, most modern countries offer a form of equity release for their aging retiree citizenship.

Freeing up equity to provide cash flow, capital, and resources to pay for credit card debts, hospital bills, and other expenses were named. The generalization of (other good uses) was thrown in for good measure but (nevertheless) are still in the preamble of the Law.

Additionally, Congress intended to allow the retiree to benefit from the relief of existing mortgage debt through the use of “Non-Recourse” structures within the HECM. This means the collateral (the house) ONLY stands for the debt, and that no payments would be required during the Borrowers’ life(s). Only if the Homeowner decided to sell, or after the last borrower died would the lien be cured and the debt paid. As if that wasn’t ‘safe” enough? The FHA went further…and stated that if the sum total of debt exceeded the value at any time? All structured benefits would continue unrestricted. The HELOC continues to grow. The Tenure payment options continue to pay out each month in full value, even after the death of the primary Spouse. (Those of you who are familiar with defined benefit pension plans know about the monthly income payment reduction that occurs when the first-to-die occurs. That does not happen with the Reverse mortgage.

Congress built-in additional safeguards for the family after the last parent dies. Typically, with conventional financing? Once the last borrower dies, within 30 days of their passing, the FAMILY would be required to make a mortgage payment. And then, another. And another. And, another…until Probate court (in the absence of a Trust) allows the family to sell the home. Usually, estate homes are sold at 60-80% of fair market value (a loss) due to the urgency and eagerness of the family to get out from under the debt requirements. Many families suffer deep losses of wealth due to the pressure of maintaining the home outside of foreclosure and protecting the equity value of the home from being stolen by attorney fees, court costs, late payment and accruing interest charges that come from a default (and you thought I was referring to the Probate process, didn’t you?) Well that is also a big problem for the family.

But, the FHA HECM HELOC is different. VERY and UNIQUELY different. Instead of being compelled to begin writing checks to the lender to keep the Parent’s home out of foreclosure? The family has 30 days to tell the Lender the last surviving Parent has passed. They will be required to submit proof of death (certificate), and discuss their exit strategy for the home. The Lending Servicing Agency will immediately grant the family a 90-day window to execute their plan. If they need more time? The Agency will grant them an additional 90 days. And an additional 90 days. and yet, an additional 990 days. During this 13 month period? NO PAYMENTS ARE REQUIRED to keep the home out of foreclosure.

 

Of course (and correctly so), The Servicing agency is going to be very flexible with the family. However, they are expecting a diligent effort to cure the lien. The family has 3 essential options;

1. Refinance the current debt (pay it off with estate and/or personal assets, and or debt) and own the home themselves.

2. Sell the home. The beauty of the HECM is the family’s ability to BREATHE without the ongoing pressure to make mandatory payments.

3. If the home debt is greater than the market value? The family simply vacates the chattels (move out all Mom & Dad’s stuff) and hand over the keys to the Servicing agency. and they hold no further responsibility for any of that debt. Neither does the Estate or the Trust. This is the key reason as to why the FHA insurance is so crucial to this program. It relieves everyone of the pressure of ongoing payments. It eliminates undue responsibility. It allows time for clearer thinking and time to plan.

There is no other debt program anywhere that grants such grace and time as the FHA HECM HELOC.

There simply is no substitute.