Reverse Mortgage

[LLCoolJ]

My parents have been to an attorney and have passed the means test, however the one thing their attorney isn't sure about is their reverse mortgage. They took a lump sum reverse mortgage several years ago on the house they have lived in for 40+ years. Reading the fine print of their reverse mortgage paperwork it says that if they declare bankruptcy they are in default. What does this mean? If they declare Chapter 7, what happens to their house? Can they continue to live in their house? Has anyone had any experiences with Reverse Mortgages and Chapter 7?

TIA

[BKOnce]

No. If they file BK, lender will issue "Payment Default/Demand Notice" for full loan balance still owed or else.... forclosure possibly.

[LLCoolJ]

Thanks again for the reply BKOnce, but if I could follow up?...

I don't understand a reverse mortgage completely, but basically I think my parents borrowed against the equity in their home. They received $80K(est) for a house appraised at $120K(est). In return I guess the bank gets the house when my parents pass away. This was several years ago. Right now, I don't think the house would sell for $80K, perhaps it would, but I don't believe so. What is the advantage to the lender to foreclose on their home? Nothing has changed as far as their agreement, they would still get the home when my parents pass away. It would seem to me, the last thing Countrywide needs is ANOTHER home to try and sell...

Suppose the bank does foreclose, would their be anythng stopping me from purchasing it and letting them live their till they pass on? This is the house I grew up in and want to do anything to keep my parents in this house.

TIA

[BKOnce]

First, any/all lender NEVER want to own a house or piece of land sitting empty for nothing! They are banks, and their purpose is only want to make (interest) money$$! It appears as property to you, but appears as big $note$ making money to them only.

Second, once you stop paying interest payments, they will try sell and find another buyer to lock in new loans to make money$$ again!.. or at least they can pay off the loans/cash$ they borrowed before from other capital investors that had pouring into your parents' hands already.

Third, if they just file BK now, trustee will let the house foreclose since parents have no income, then you wait & come in at auction date, bid the house, have enough cash/finance ready and buy back it at cheaper price (better) rather than pretending now as a new owner to buy it now (at much higher prices?)

[keepmine]

If they mauntain the mortgage payments, nobody will toss them out. Are they current? Do they have the income to continue to pay the note?

[BearChaser303]

Second, once you stop paying interest payments, they will try sell and find another buyer to lock in new loans to make money$$ again!.. or at least they can pay off the loans/cash$ they borrowed before from other capital investors that had pouring into your parents' hands already

Maybe it varies between lenders, or states, or something but my understanding re reverse mortgage is that the borrower is never required to make any payments, although they have the OPTION to do so? My parents have a reverse mortgage, and as far as I know have never made a single payment on it. I have no clue though what happens in the case of bankruptcy.

[emoney]

Your question requires a legal review of the documents your parents signed in their reverse mortgage and it depends on the state that your parents live. Please have your parents get a legal opinion they understand on their situation.

For a quick answer to your question here goes: Many loan documents have a default provision in them about BK. Since BK is legal right the provision is against public policy and is not worth the paper it is written on. It is there to scare persons into not filling BK.
If in the state your parents live homesteads are exempt from claims of creditors then your parents home is secure.
regards,
emoney

[HHM]

That is an interesting question.

First question, do your parents have any equity in the house.

Second, what did they do with the money.

A BK on a reverse mortgage is probably rare (i.e the reason for taking a reverse mortgage is to have cash to live on, invest, etc...it is a way to fund retirement), so I am not surprised that an attorney would need to research the issue. I suppose the problem is that your parents, in some sense, no longer own the house.

My GUESS is that if you parents file BK, the bank has the legal option to foreclose as a result and there would be no legal mechanism to stop the foreclosure (and the legal right is not just based on the BK default provision, there is probably a provision for preservation of value). So the next issue is practical, whether the bank would choose to exercise that foreclosure option. Unfortunately, there is no way to tell. And common sense does not apply to foreclosure, there is a reason foreclosures are at record levels, lenders ARE foreclosing on properties...so don't rely too much on the line of thought that "banks don't want the home" (that statement is true on a factual level, but most lenders are required to foreclose under the securitization agreements they have with the investors in the mortgage note).

[emoney]

These is some lack of knowledge of the working of a FHA insured reverse mortage. First you can take the proceeds in a lump sum at closing or in a monthly payment. You always own the the house, but the interest accures untill you no longer live in the house. Said another way you do not have to make any payments on the mortgage. At that time whoever owns it can sell it and pay-off the mortgage or if the proceeds are too low then the mortgage company gets a payment from FHA for the shortfall.
The only downfall is the cost to close which is about 7.5% of the mortgage.
regards,
emoney

[deafbroke]

A reverse mortgage is when you recieve monthly payments for your equity in your home. Banks will pay you to borrow your equity.

I assume the default would release the bank from having to pay the monthly payments, and that the amount paid to the reciptients would be deducted from the equity they borrowed.

not sure. Just a guess. but check with a real estate attorney in your state and also look at the mortgage agreement.