Walking Away from Reverse Mortgage

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.

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.