Congress authorized the Federal Housing Administration (FHA) to develop a program for reverse mortgages in 1987 for the purpose of helping seniors tap the equity in their homes. The loan requires no payments while the borrower remains living in the house, so the usual reason behind most foreclosures -- failure to keep up with mortgage payments -- is largely absent. However, foreclosures of reverse mortgages do occur through steps similar to a standard foreclosure.
Reasons for Reverse Mortgage Foreclosure
Like any mortgage, a reverse mortgage comes with requirements. The requirements for a reverse mortgage insured by the FHA are delineated in Title 24 of the U.S. Code of Federal Regulations (CFR). Section 206.27(c) states the loan comes due when the borrower dies, moves for a period of 12 consecutive months, sells the home or fails to fulfill one of the required obligations. The list of obligations, listed in Section 206.27(b), includes maintaining hazard insurance and keeping the property in good repair.
Avoiding Most Foreclosures
The FHA does not want to foreclose on elderly borrowers it is intended to help. Toward this end, the reverse mortgage regulations under Section 206.205 provide the lender with options to help resolve unpaid taxes and hazard insurance by allowing the lender to pay these charges and add the cost to the outstanding loan balance. Likewise, once a borrower dies, the regulations provide heirs with six months to repay the loan, with an additional two extensions available, providing the family with a full year to repay the loan before initiating foreclosure.
A Foreclosure is a Foreclosure
All foreclosures are regulated under state law. By and large, these state laws do not distinguish between a traditional, forward mortgage and a reverse mortgage. Therefore, a lender or servicer processes the foreclosure of a reverse mortgage in the same manner it would a traditional mortgage. Twenty states require the lender to use a judicial foreclosure process -- this is a lawsuit. Five states mandate a nonjudicial process -- which is a series of notices mailed, recorded, published and/or posted. Twenty-five states allow the lender to choose the process.
Reversing the Foreclosure
State law generally specifies how deep into the foreclosure process a borrower can go before he hits a point of no return -- a point at which the lender is not required to allow him to stop the foreclosure by repaying past due payments. In a reverse mortgage, however, if a foreclosure is begun because the borrower failed to live up to a condition such as maintaining hazard insurance or paying property taxes, Section 206.125(a)(3) of the CFR requires that the lender allow the borrower to correct the problem at any point before the foreclosure process is completed.