Reverse mortgage subordinations clarified

A few months ago, we addressed the topic of encouraging borrowers to ask their lenders "what's possible" in recasting their home loans. Some consumers who have owed more than their home was worth have been able to get their prepayment penalties waived when attempting to refinance to more affordable rates and terms.

We also supported seniors who approached their lenders about "subordinating" their loans to allow a senior to obtain a reverse mortgage. By doing so, the senior is able remain in the home when they otherwise would have been forced to move.

We offered an example that drew questions, comments and concerns from reverse mortgage lenders. Federal Housing Commissioner David H. Stevens issued a mortgagee letter to all reverse mortgage lenders attempting to clarify the subordination rules for Home Equity Conversion Mortgages (HECMs), which is the nation's most popular reverse mortgage program.

While the letter appeared to clarify the issue, some lenders wrote to us believing no secondary liens are permitted on reverse mortgages. Others say existing liens, yet no new liens, are allowed.

Our case involved an 81-year-old couple who took out a second mortgage two years ago to help their daughter buy a home. The daughter agreed to make the payments on the loan. Unfortunately, she lost her job and was no longer able to make the monthly payments. As a result, the homeowners became delinquent on both their first mortgage and their second mortgage. They subsequently received a notice of foreclosure on their first mortgage.

The couple inquired about a reverse mortgage. The only way it could work was to have the lender with the second mortgage agree to subordinate or "remain in second place" in the lien line.

While it is rare for a lender with a second lien on a property to agree to "remain in second place" by allowing a new loan -- especially a reverse mortgage -- to take over the first lien position, the couple had been longtime customers and needed the help to make the deal work.

Here's how the reverse mortgage solved the dilemma: The couple's home value was $235,000 and encumbered by a first mortgage in the amount of $140,000 and a second mortgage of $60,000. After fees, the couple was eligible for a reverse mortgage of $171,000. When the reverse mortgage closed, the first mortgage was paid off and the remaining $31,000 brought the second mortgage current and also bought down a significant portion of the balance. ...CONTINUED

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