Walking Away from Reverse Mortgage

Pros and Cons of Walking Away From Home with a Reverse Mortgage

My mom has a reverse mortgage via World Alliance Financial. My mom is getting older and unable to manage the home by herself. What is the penalty, if she walks away?

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Highlights


  • World Alliance Financial was a major player in the reverser mortgage market.
  • FHA HECM reverse mortgages are non-recourse loans.
  • Consider the downside of leaving a house that requires no monthly mortgage or rent payment.

Thank you for your question about your mom’s reverse mortgage with World Alliance Financial and what consequences she faces if she chooses to walk away from the home.

World Alliance Financial

Your mom took out her reverse mortgage with World Alliance Financial. At one time, World Alliance Financial as one of the major players in the reverse mortgage industry, having funded over $4 billion in reverse mortgages.

Quick tip

  Contact one of Bills.com's reverse mortgage providers for a no obligation, no-hassle reverse mortgage quote.

Anyone watching TV a few years ago (who did not flip channels as soon as a commercial came on) likely saw the famous actor Robert Wagner advertising World Alliance Financial’s reverse mortgage product, under the name the Senior Lending Network. Wagner touted a World Alliance Financial reverse mortgage as a way for seniors with equity in their home to enjoy life and improve their financial security.

In 2009 World Alliance Financial stopped taking reverse mortgage applications. However the fact that they are no longer functioning as a reverse mortgage originator does not affect any existing borrowers. Her situation would be the same if she had taken out a reverse mortgage from any of the other major reverse mortgage providers in the industry, such as Quicken’s One Reverse or American Advisor’s Group (AAG).

What Happens When You Walk Away from Reverse Mortgage

You did not mention whether your mom has any equity in her home. I assume that because she is considering walking away from the home that she could not sell it for more than the balance on her reverse mortgage. If she does have equity, she certainly should sell the home and pocket the difference between the sale price and what she owes.

HECM

It is likely that the reverse mortgage your mom took out was an FHA HECM reverse mortgage. An HECM is the most common type of reverse mortgage. With an HECM a borrower cannot be held responsible for any difference between the home’s sale price and the balance she owes on the reverse mortgage, called a deficiency balance.

Non-recourse

HECM reverse mortgages are non-recourse loans. If a borrower has a HECM reverse mortgage, then the lender cannot pursue the borrower for any deficiency balance. The only recourse the lender has is to sell the property and keep the proceeds. No matter how large the deficiency balance, it is the lender that is on the hook for any drop in the property’s value, if the borrower walks away from the reverse mortgage.

Drawbacks to Walking Away from Reverse Mortgage

Before you mom walks away, however, she should consider all of the possible consequences. Her reverse mortgage gives her the protection of staying in the home for the rest of her life, as long as she maintains the property and pays the property taxes. If it would be cheaper for her to pay for the upkeep on the home than it would cost her to live elsewhere, that is a strong reason to stay put.

Your mom should also consider whether she wants you or anyone else to inherit the property. If she were to pass away, you or any heir would likely have to get a loan to pay her reverse mortgage lender and stay in the home. However federal law makes it so that you or any heir that wants to own the property must pay either the mortgage balance or 95% of the appraised value of the mortgaged property, whichever is less. If property values have fallen in her area, but are expected to rise, buying a home for 95% of its appraised value is a good deal.

Recommendation

Your mom can probably walk away from her home without any financial responsibility, even if her home is worth less than the balance on the reverse mortgage. Leaving the home and no longer needing to maintain the property may be very appealing to her, but she should proceed carefully, after weighing all the pluses and minuses.

She should:

  • Verify her World Alliance Financial reverse mortgage loan is a non-recourse loan, which it likely is.
  • Consider how important it is for one of her heirs to have a chance to keep the property
  • Compare her future housing costs to what it would cost her to pay for upkeep and property taxes on her home. It could be cheaper to stay than move.

A lifetime of housing at no cost other than upkeep and property taxes should not be given up lightly.

3 Comments

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  • 35x35
    Apr, 2013
    james
    This is an interesting one. At the end of the day a reverse mortgage is still a mortgage, that cannot be voided.
    0 Votes

  • 35x35
    Feb, 2012
    Andrew
    My mother took out what you refer to as the conventional HECM FHA reverse in December of 2005. She lived in an over 55 townhome community in NJ and although she had no debt, the only income she had was social security. The house was appraised at $290,000.00 back then and Financial Freedom loaned her 205,000. She died suddenly this past September, 2011, with approx. 50,000.00 left in the reserve which stopped immediately of course. The way her Last Will and Testament reads the estate is to be divided 50/50 between my sister and myself, neither of us who want the property. The first thing Financial Freedom did a month after her death was to do their own appraisal which was for $190,000.00. This past December I hired my own private appraisal company and they appraised it at $170,000. Regardless, both appraisers came up with a figure substantially lower than the 2006 appraisal. Being executor of the estate I just was notified via certified mail that the amount due was approx. $224,000.00. In this particular township in New Jersey where the bulk of the population live in over 55 communities, the foreclosure rate rose 30% in 2011! So regardless of either appraisal, the bids are coming in on similar properties at $120,000.00. This is township-wide. My questions are these: 1) When you say to walk away (which we have no choice but to do; I failed to mention both heirs are on SSDI), do you literally notify the lender that that is your intention? 2) I also read about offering the lender a "deed in lieu of foreclosure" but I'm told it will cost me $5000.00 in legal fees which we don't have. The legal fees being for our attorney! But is this a viable solution that does not require legal assistance? 3) If we do "walk out", what are our responsibilities to the condo association? Up until the end of March 2012 I have covered the maintenance fees, gas, electric, water, and of course the quarterly taxes. How do I handle this? The taxes are over 1200.00 a quarter aside from all the other expenses and upkeep. Do I just mail the keys to Financial Freedom and also offer them the possibility of the deed in lieu of foreclosure? And what about the utility companies, the tax bureau and condo association? Do I notify them that I have walked away from the property and put it in the hands of the lender? They are waiting for a reply from me no later than March 20. The house is now vacant and I am even not sure whether to reply to them or not because their wording is very questionable. Does any reply basically say that you are willing to finance the property, refinance it? The paperwork for the loan names the borrower as my deceased mother. No one else. So how would a default affect my credit rating and/or my sister's? In 2009, I had no recourse but to go into bankruptcy in order to help subsidize my mother with 50% of my monthly income from Social Security. It was the first bankruptcy that was fully granted the same day I appeared before the panel of "judges." So obviously, they were empathetic when I shared my reasons with them. So, in your opinion, what's next? I never thought that an inheritance could wind up being a negative rather than a positive!
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      Consult with a New Jersey lawyer who has probate experience to learn exactly how to notify the HECM lender that neither heir will seek a mortgage to purchase the property, and that the estate is abandoning the property. This notification should go to the lender, HOA, and the utilities serving the property.

      The surrender of the property and any other losses incurred by the estate's creditors will have zero impact on the executor or heirs. Any creditors suggesting otherwise state the law improperly.
      3 Votes