Reverse Mortgages in Texas: New Uses and Limitations

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1 Reverse Mortgages in Texas: New Uses and Limitations Paul McNutt, Jr. General Counsel Title Resources Guaranty Company Our mission is to provide knowledgeable and responsive underwriting solutions to support our network of title insurance agents across America. Title Resources is dedicated to growing lifelong relationships and maintaining quality through integrity and financial stability. Copyright Title Resources Guaranty Company,

2 What is a Reverse Mortgage? Instead of the borrower repaying the mortgage loan in monthly installments, the lender pays the borrower. This can be done in a lump sum, in installments, or by a line of credit. The loan balance increases over time, and is usually paid when the borrower moves away, sells the property, or dies. 2 What is a Reverse Mortgage? Because of demographic and social trends, we expect reverse mortgages to become increasingly popular in the coming years. 3

3 What is a Reverse Mortgage? Reverse mortgages allow senior citizens to tap the equity in their homes to pay living expenses, rather than pass the equity through their estates. Proceeds of reverse mortgages are not taxable income, and do not affect the borrowers eligibility for social security or most government assistance. 4 Constitutional Basis The Constitution of Texas provides for reverse mortgages under Article XVI, Section 50(a)(7). In November, 2005, a provision was adopted to allow reverse line of credit loans. In November, 2013, an amendment allowed the use of a Reverse Mortgage for a purchase of homestead. 5

4 Constitutional Basis Reverse mortgages are similar to, and are sometimes confused with, home equity loans. However, home equity loans and reverse mortgages each are authorized by different sections of the Texas Constitution. There are separate lists of requirements for each type of loan, although many of the requirements are the same. 6 Reverse Mortgage Requirements A. It must be secured by a lien on homestead property created by a written agreement signed by each owner and each owner s spouse. A recent claim arose when a person claiming to be a spouse alleged she had not been joined. You must be careful to identify the marital status of the borrower and require joinder if you have any evidence of a spouse. 7

5 Reverse Mortgage Requirements B. Either the owner or the owner s spouse must be 62 years of age or older. Although the Constitution allows a reverse mortgage for either spouse being 62, lenders require both as a lender requirement! 8 Reverse Mortgage Requirements C. It must be without recourse for personal liability against any owner or any owner s spouse. D. Advances are provided to the borrower based upon the equity in the borrower s homestead. E. The lender may not reduce the amount or number of advances because of an adjustment in the interest rate. 9

6 Reverse Mortgage Requirements F. No repayment of the loan is required until: 1) the death of all borrowers; 2) all borrowers cease occupying the homestead property for longer than 12 consecutive months without the prior written approval of the lender; or 3) the borrowers don t maintain, pay taxes on, or insure the homestead, commit fraud, or fail to maintain the priority of the lender s lien. 10 Reverse Mortgage Requirements G. If the lender fails to make all advances required under the loan documents following notice and an opportunity to cure, the lender forfeits all principal and interest on the loan. 11

7 Reverse Mortgage Requirements H. The borrowers must attest in writing that they have received financial counseling by an approved credit counselor before making the reverse mortgage loan. 12 Reverse Mortgage Requirements Unfortunately, this financial counseling is allowed to be done by telephone. So you cannot rely on the counselor visiting with the borrower in person, to know their mental status. We have a recent claim that alleged a widow was not competent when she borrowed, made by the daughter who was appointed her guardian. We must be cautious about the borrower having competency to close. 13

8 Reverse Mortgage Requirements Avoiding later claims of invalidity of the loan by children of the borrower is important. A recent claim by a daughter of the widow borrower, who brought a guardianship for her mother, alleging she was incompetent, had the allegation the mother was being duped into sending the loan proceeds to a scam artist. Be certain you visit with the borrower, and if you have any doubt about capacity, stop! 14 Reverse Mortgage Requirements I. The lender must disclose to the borrower in writing the circumstances under which the borrower is required to repay the loan. J. The lender must give the borrower a written notice of the existence of a ground for foreclosure and a specified period of time to make any of the specified cures of the default. 15

9 Reverse Mortgage Requirements K. Requires foreclosure of the lien only with a court order, similar to foreclosing a HEL, unless the default is based on the death of all of the borrowers or the collateral is sold or otherwise transferred. 16 Reverse Mortgage Requirements L. Prohibits advances by means of credit cards or preprinted checks, and prohibits transaction fees on advances. 17

10 History of Use and Cost Most Texas reverse mortgages have been FHA Home Equity Conversion Mortgages, which are insured by HUD. They require two notes of identical size, one payable by the lender agreeing to make the loan to the borrower, and the other payable to HUD. These two notes are further secured by two Deeds of Trust, each securing their respective notes and filed simultaneously. 18 History of Use and Cost Additionally, Fannie Mae has designed a product known as a Home Keeper reverse mortgage. In 2006, it announced that it will now purchase these reverse mortgages in Texas. 19

11 History of Use and Cost Reverse Mortgages can be relatively expensive. Mortgage insurance is required. The three percent limitation on fees imposed on home equity loans does not apply to reverse mortgages. 20 Amount of Title Insurance Allowed Only one mortgagee title policy is issued, to the principal lender. The amount of coverage depends on the life expectancy of the borrowers, and often is the present value of the property, even if the loan is a much smaller lump sum payment at closing 21

12 Amount of Title Insurance Allowed Under P-45C, the policy may be issued for either: % of the total advances to be made according to a plan established by the original loan agreement; or 2. The maximum amount that may be secured by the lien of the insured mortgage, as estimated by the lender according to written lender instructions; or 3. In the case of an FHA insured loan, the Maximum Claim Amount as established by FHA. 22 T-43 Endorsement Under P-45A, to issue a mortgagee policy for a reverse mortgage, we must issue the T-43. There is no charge for this endorsement. 23

13 T-43 Endorsement The following is a summary of the provisions of T-43: 1) Liability is limited to the amount of the proceeds of the loan actually disbursed. Liability increases with each additional advance. 2) All advances have priority as of the date of the policy (with limited exceptions). 24 T-43 Endorsement 3) The lender is insured against loss due to the unenforceablity of the deed of trust because of any of the following: a) The failure of each owner and each owner s spouse to sign the deed of trust. b) The failure of at least one of the spouses to be at least 62 years old. c) The failure of the owners to sign a written attestation that they received financial counseling on the same day that they sign the note and deed of trust. d) The failure of the title company to provide the borrowers with a copy of the notice describing the circumstances under which the loan must be paid. 25

14 T-43 Endorsement 4) Except as provided above, T-43 does NOT insure the lender against loss arising out of consumer protection laws or the failure of the loan documents to comply with the constitutional requirements. 26 P-45 Requirements for T-43 P-45B prohibits giving Express Insurance (i.e., P-39 coverage) as to the matters provided by the T-43 Endorsement. 27

15 P-45 Requirements for T-43 P-45D allows the deletion of any coverage under Paragraph 3 T-43 if the underwriter does not consider the risk insurable. P-45E requires that you must close the reverse mortgage at the office of the title company in order to give the coverages provided by subdivisions (ii) through (iv) of paragraph 3 T-43. As most lenders require all of T-43, you have to close in your office to insure normally. 28 P-45 Requirements for T-43 P-45F provides you must be furnished with government issued photographic identification showing that the owner of the land or the spouse of the owner of the land is at least 62 years old. Otherwise, you must delete subdivision (ii) of Paragraph 3 of T

16 P-45 Requirements for T-43 P-45G provides you must have the owners sign an affidavit that they received the required financial counseling regarding reverse mortgages. You must delete subdivision (iii) of Paragraph 3 of T-43 if it is not executed on the same date as the note and mortgage. 30 P-45 Requirements for T-43 P-45H provides you must give the owners a disclosure from the lender as to when payment of the reverse mortgage may be required, and get a receipt acknowledging that they have received the disclosure. You must delete subdivision (iv) of Paragraph 3 of T-43 if the receipt is not executed in your office on the same date as the note and mortgage. 31

17 Underwriting Requirements A. Close the transaction only at the offices of a Texas title agent or company. B. Receive governmental issued identification of the borrowers showing they, or one of them, is over age 62 years of age when you close, and that they live in the property being insured, and it is their current residential homestead. 32 Underwriting Requirements C. Have the borrowers sign in your presence, and acknowledge the Deed of Trust, and have them sign the lender s promissory note. D. On the same date, have the borrowers sign in your presence a document, prepared by the lender, that states they have received the required financial counseling before the loan was made. 33

18 Underwriting Requirements E. On the same date, give the borrowers a copy of the lender prepared Disclosure of when payment may be required, and get a receipt for it. 34 Frequently Asked Questions 1. Can a reverse mortgage be used to refinance a home equity loan? Yes. This is specifically authorized by the Texas Constitution, and is an exception to the once a home equity, always a home equity rule. 35

19 Frequently Asked Questions 2. May a borrower obtain a reverse mortgage if the borrower obtained a home equity loan within the preceding twelve months? Yes. The prohibition on two home equity loans within the same year does not apply to reverse mortgages. 36 Frequently Asked Questions 3. Will we accept a power of attorney for use in a Reverse Mortgage transaction? Sometimes. The risks associated with accepting powers of attorney are heightened when the power of attorney is used for the purpose of encumbering an elderly person s homestead. We look at this issue on a case-by-case basis, and require our written approval to use a POA. 37

20 Frequently Asked Questions 4. Will we insure over an abstract of judgment on a Reverse Mortgage? Our underwriting requirements on this issue are the same as with insuring over abstracts of judgments on home equity loans. 38 Frequently Asked Questions 5. The borrowers are not in good health, and cannot travel to our office. Can we send a closer to their home and have them sign the documents there? Rarely, if ever. P-45 requires that subsections (ii), (iii) and (iv) of paragraph 3 of Endorsement T-43 be deleted if the loan does not close at the office of a title company. 39

21 Newly Asked Questions The parties are contemplating purchasing a home using a reverse mortgage. Is this insurable? Yes, under the recently adopted Constitutional amendment these loans are now insurable. The same T-43 Endorsement is required, so the parties must close at the office of the title company. 40 Thanks for Attending! 41