Reverse Mortgage Foreclosure and Default Rules

Default Versus the Loan Coming Due

Two letters can use the same phrase, "due and payable," for very different reasons. "Due and payable" means the full loan balance must now be repaid. What led there makes a large difference to the choices that remain.

The federal HECM regulation, 24 C.F.R. § 206.27(c), sorts these events into two groups.

The loan simply comes due. Under 24 C.F.R. § 206.27(c)(1), the balance becomes due and payable in full if a borrower dies and the property is not the principal residence of at least one surviving borrower, or if a borrower conveys all of his or her title and no other borrower keeps title. The rule has a stated exception: due and payable status is deferred for an Eligible Non-Borrowing Spouse when the requirements of the Deferral Period are met. Nobody did anything wrong in these cases. The loan has reached the end the borrower agreed to at closing, and the federal statute itself requires that repayment be deferred until the homeowner's death, the sale of the home, or other events the regulations specify, 12 U.S.C. § 1715z-20(j). How the rules treat a spouse who is not on the loan is explained in the page on reverse mortgages and non-borrowing spouses.

The loan comes due because a duty was not met. Under 24 C.F.R. § 206.27(c)(2), the balance becomes due and payable in full, upon approval of the HUD Commissioner, if any of these occur:

• the property stops being a borrower's principal residence for reasons other than death, and is not the principal residence of another borrower;
• for longer than 12 consecutive months, a borrower does not live there because of physical or mental illness, and the property is not the principal residence of another borrower;
• the borrower does not provide for the payment of property charges as the regulations require; or
• an obligation of the borrower under the mortgage is not performed.

This second group is what people usually mean by "default." Federal truth-in-lending rules reflect the same split: a reverse mortgage is generally repaid only after the consumer dies, transfers the home or stops living there, "other than in the case of default," 12 C.F.R. § 1026.33(a).

The distinction matters because a default can often be fixed. When the loan comes due because a duty was missed, the borrower may be able to correct that condition and keep the loan going. When the last borrower has died, there is no condition to correct, and the choices turn to paying off or selling the home.

What Actually Counts as a Default on a HECM

The duties behind a default are the same ones the borrower agreed to at closing, and the site's page on HECM requirements lists them with HUD's other rules. The CFPB's general explanation of what a reverse mortgage is says homeowners are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep the house in good condition. It also says interest and fees are added to the loan balance each month and the balance grows.

The CFPB's notice-of-default answer groups the situations that lead to a default letter, including:

• Failing to pay property taxes. Property taxes are among the property charges the answer names.
• Failing to pay homeowners insurance. The answer treats unpaid taxes and unpaid insurance together.
• Failing to keep the home in good repair. The regulation states the same duty directly: "The borrower must keep the property in good repair," 24 C.F.R. § 206.27(b)(5).
• Failing to occupy the home as the principal residence. The CFPB describes a principal residence as where the borrower lives for a majority of the year.

The regulation spells out the insurance duty in more detail. Under 24 C.F.R. § 206.27(b)(2), the borrower must insure all improvements on the property against the hazards the lender requires insurance for, including fire and flood, and must at a minimum insure against loss by floods to the extent the Commissioner requires, whether or not the lender imposes a flood insurance requirement. The same section says the borrower must provide for payment of property charges, 24 C.F.R. § 206.27(b)(6), and must not join a real estate tax deferral program or allow other liens on the property unless they are subordinate to the HECM, 24 C.F.R. § 206.27(b)(3).

On the consequence, the CFPB's answer for borrowers who cannot pay property taxes or homeowners insurance is direct: HECMs require that the borrower keep current on both, and failure to pay either may lead to foreclosure. The ongoing tax and insurance duties are explained in more depth in the guide to reverse mortgage property taxes and insurance.

For a family member reading this on a parent's behalf, the letter usually names which of these duties the servicer believes was missed. That one detail decides which of the paths below applies.

Unpaid Property Taxes or Insurance, Step by Step

For an unpaid tax bill or a lapsed insurance policy, federal rules set the path. Seeing the steps in order can make the timeline feel less like a cliff.

Step 1: The charge goes unpaid. Not providing for payment of property charges is one of the events that can make a HECM due and payable under 24 C.F.R. § 206.27(c)(2)(iii). This is the point where the CFPB's guidance to pay right away, or to reach a counselor or attorney right away, does the most good.

Step 2: The lender's notice and 30 days to explain. For a borrower who pays property charges directly, rather than through a set-aside or the lender, 24 C.F.R. § 206.205(e)(2) sets what follows. The lender may pay the charge and charge the borrower's account if HECM funds are available. When no HECM funds are available, the lender must notify the borrower in writing, and notify the Commissioner, within 30 days of learning of the missed payment, and the borrower has 30 days to respond and explain what happened. The lender may provide any permissible loss mitigation the Commissioner makes available through notice. If the borrower is unable or unwilling to repay what the lender advanced for property charges, the lender submits a due and payable request.

Step 3: Help may be available. HUD's Avoiding Foreclosure page says FHA offers several loss mitigation programs and informational resources to assist FHA-insured homeowners and HECM borrowers facing financial hardship or unemployment whose mortgage is either in default or at risk of default. "Loss mitigation" means steps meant to resolve a default without foreclosure. Whether a program fits a particular borrower depends on that borrower's facts and the servicer's review, and a housing counselor can explain what may apply.

Step 4: The lender tells HUD. The regulation says the lender must notify the HUD Commissioner within 30 days when one of the § 206.27(c)(2) conditions has occurred, 24 C.F.R. § 206.125(a)(1). A default-based due and payable status takes effect only upon the Commissioner's approval.

Step 5: The borrower gets a due and payable notice. After notifying HUD and receiving approval when needed, the lender must notify the borrower, and the Eligible Non-Borrowing Spouse, estate or heirs as applicable, within 30 days that the mortgage is due and payable, 24 C.F.R. § 206.125(a)(2).

Step 6: A 30-day window opens. From the date of that notice, the regulation gives 30 days to take one of the actions described in the next section, including correcting the condition, 24 C.F.R. § 206.125(a)(2).

A hypothetical illustration shows how this can look in practice: a widower on a fixed income misses a property tax installment after his wife's death, receives a default letter, and calls a HUD-approved counselor that week. His situation is the same one the regulation describes, and calling early leaves every step above still open.

Once the Loan Is Due and Payable: Your Options

The 30-day notice described above is the moment the rules lay out the choices. They apply to the borrower after a default, and to an estate or heirs after the last borrower's death. Under 24 C.F.R. § 206.125(a)(2), the lender must give the applicable party 30 days from the date of notice to do one of the following:

• Pay the balance in full. This means the outstanding loan balance, including accrued interest, mortgage insurance premium and any amounts the lender advanced, 24 C.F.R. § 206.125(a)(2)(i).
• Sell the property. The sale price may not be less than an amount the Commissioner sets by notice, which cannot exceed 95 percent of the appraised value, with the net proceeds applied to the balance, 24 C.F.R. § 206.125(a)(2)(ii). In plain words, the home does not have to sell for the full loan balance if it is worth less, but it must sell for at least the price HUD's notice allows. The same rule says closing costs may not exceed the greater of 11 percent of the sales price or a fixed dollar amount the Commissioner sets by Federal Register notice, and that "sell" includes a transfer of title by operation of law.
• Give a deed in lieu of foreclosure. This means signing the home over to the lender instead of going through foreclosure, 24 C.F.R. § 206.125(a)(2)(iii). Its conditions appear in the section on how a foreclosure ends.
• Correct the condition. The borrower may fix the problem that made the loan due, for reasons other than the death of the last surviving borrower, 24 C.F.R. § 206.125(a)(2)(iv). For an unpaid tax bill, that means the charge is paid. For repairs, the CFPB suggests asking the servicer for a written list of the required repairs.
• Other paths. The rule also lets an Eligible Non-Borrowing Spouse correct the condition that ended the Deferral Period, and allows other actions the Commissioner permits by notice, 24 C.F.R. § 206.125(a)(2)(v) and (vi).

Occupancy problems sometimes begin with paperwork rather than a move. The CFPB says reverse mortgage borrowers are required to certify each year that the home is their principal residence and that their contact information is up to date. The CFPB says a borrower who did not receive the annual certification, or did not return it, should contact the servicer and ask what steps are needed to verify that the home is the principal residence. How the balance grows over time, and why it affects these choices, is covered in the guide to reverse mortgage loan balance growth.

Reinstatement, Even After Foreclosure Starts

The worry behind many calls is that once foreclosure papers are filed, nothing can be done. For a HECM borrower, the regulation keeps a way back open, with three exceptions. To reinstate means to fix the default and put the loan back in good standing, as if it had not been called due.

Under 24 C.F.R. § 206.125(a)(3), even after a foreclosure proceeding is begun, the lender shall permit the borrower to correct the condition that made the mortgage due and payable and to reinstate the mortgage, and the mortgage insurance continues in effect. The lender may require the borrower to pay the costs it incurred to reinstate, including foreclosure costs and reasonable attorney's fees, and those costs are paid by adding them to the outstanding loan balance.

The same rule names three cases in which the lender may refuse reinstatement. The lender may refuse if:

1. the lender has accepted reinstatement of the mortgage within the past two years immediately preceding the current notification to the borrower that the mortgage is due and payable;
2. reinstatement will preclude foreclosure if the mortgage becomes due and payable at a later date; or
3. reinstatement will adversely affect the priority of the mortgage lien.

In plain words, under the first case a borrower who reinstated after an earlier default within the two years before the current notice may not have the same option again. The second and third protect the lender's ability to enforce the loan later and its position as the first lien on the home.

Reinstatement is a real option, and asking about it early is reasonable. It is not available in every case, though, and a foreclosure cannot always be stopped. An attorney can say how the rule applies to the facts, and a housing counselor can help work out whether the condition can be corrected in time.

How a Foreclosure Ends, and What Is Not Owed

The regulations set an outer edge on timing. Under 24 C.F.R. § 206.125(d)(1), the lender shall begin foreclosure within six months of the due date the regulations define, or within such additional time as the Commissioner approves. The rule allows for law that delays it: where the laws of the place the home sits, or federal bankruptcy law, do not permit foreclosure to begin then, the lender begins within six months after that prohibition ends, 24 C.F.R. § 206.125(d)(2).

A deed in lieu of foreclosure can end things more quietly. Under 24 C.F.R. § 206.125(f)(1)(i), to avoid the delay and expense of foreclosure, the lender shall accept a deed in lieu from the borrower or another party with the legal right to dispose of the property, provided it is filed for recording within 9 months of the due date and the lender is able to obtain good and marketable title. In exchange, the lender cancels the loan documents, delivers them to the borrower and satisfies the mortgage of record, 24 C.F.R. § 206.125(f)(2). The regulation also lets the Commissioner provide a financial incentive, in an amount the Commissioner determines, when the property is deeded within 6 months of the due date, 24 C.F.R. § 206.125(f)(1)(ii).

The protection that matters most to a frightened family is about what is not owed. Under 24 C.F.R. § 206.27(b)(8), the borrower has no personal liability for the outstanding loan balance, the lender enforces the debt only through sale of the property, and the lender may not obtain a deficiency judgment against the borrower if the mortgage is foreclosed. A deficiency judgment is a court order to pay the gap between what a home sells for and what was owed. On a HECM, if the home brings less than the balance, the borrower does not owe the difference. The federal statute requires the same limit, 12 U.S.C. § 1715z-20(d)(7), and the CFPB states it simply: neither the borrower nor the heirs will have to pay back more than the home is worth.

The statute measures that limit against what the lender recovers from the net sale proceeds of the home or from the insurance benefits HUD pays, 12 U.S.C. § 1715z-20(d)(7), and if the loan is assigned to HUD, the borrower is not liable for any difference between the insurance benefits paid and the balance, 24 C.F.R. § 206.27(b)(9). These protections describe HECMs; a reverse mortgage that is not FHA-insured follows its own contract, as the comparison of HECM and proprietary reverse mortgages explains.

Where to Get Help Now

Picking up the phone can be the hardest part, especially for an older homeowner who feels embarrassed about a missed bill. The help described here exists for exactly this situation, and the earlier the call, the more of the options above are still open.

The CFPB's guidance, covered in the first section, comes down to acting quickly: pay right away if possible, after finding out where the payment goes, and if not, reach a reverse mortgage housing counseling agency or an attorney right away. The CFPB also says a reverse mortgage housing counselor can help a borrower find the option that fits the situation.

These are the official contacts the supplied federal pages name:

• HUD-approved housing counselor: (800) 569-4287, or TTY (800) 877-8339. HUD's Avoiding Foreclosure page says HUD funds free or very low-cost housing counseling nationwide, and that counselors can help borrowers understand the law and their options, organize their finances and represent them in negotiations with the lender if needed. HUD's HECM program page gives the same number for finding a reverse mortgage counselor.
• Area Agency on Aging: (800) 677-1116. The CFPB says these agencies generally have information about state and local programs that may help pay missed property charges, and about programs that help older homeowners with repair costs.
• FHA Resource Center: (800) 225-5342. HUD says the lender has to follow FHA servicing guidelines and regulations for FHA-insured loans, and that if the lender is not cooperative, the borrower can contact the FHA Resource Center by phone or by email. HUD asks callers to have the full names of everyone on the loan and the property's full address, and says the 13-digit FHA case number from the loan settlement statement may speed things up.
• An attorney. The CFPB names an attorney alongside a counseling agency for a borrower who has received a notice and cannot pay.

The caution from the first section bears repeating once, calmly: HUD warns that if a firm claims it can stop a foreclosure immediately and the homeowner signs a document appointing it to act for them, the homeowner may be signing over the title to the property and becoming a renter in their own home. A HUD-approved counselor is free or very low cost, by HUD's own description, and can be reached before anyone is paid anything.