Mortgage Concepts: Reverse mortgage obligations

Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators (MLOs). This video breaks down the obligations reverse mortgage borrowers need to fulfill to avoid a default. For course credit toward renewing your NMLS license, visit firsttuesday.us.

Unlike a traditional mortgage, a reverse mortgage doesn’t require a borrower to make regular monthly payments. They do, however, have other equally important obligations to fulfill.

To remain in good standing on a reverse mortgage, the borrower or surviving eligible non-borrowing spouse needs to:

keep the property as their principal residence;
maintain hazard insurance on the property in an amount acceptable to HUD and the lender;
keep the property free of liens, unless subordinate to the reverse mortgage;
keep the property in good repair; and
pay property taxes, hazard insurance, ground rents and assessments in a timely manner.

The borrower’s failure to meet all of these requirements constitutes a default on the reverse mortgage.

If the lender determines the borrower does not have the capacity to pay for property taxes, hazard insurance and flood insurance premiums from their existing income, the lender may mandate a set-aside from the principal limit to pay for these items. This is called the lifetime expectancy set-aside (LE set-aside).

The LE set-aside is calculated based on the current property taxes, hazard and flood insurance premiums, and the estimated life expectancy of the youngest borrower.

When the LE set-aside has been depleted, the borrower is responsible for making the payments. If the borrower does not make the payments, the lender is required to make payments on behalf of the borrower and add that cost to the principal balance of the reverse mortgage.

You’ll see two LE set-aside options:

a fully-funded LE set-aside on either fixed rate or adjustable rate reverse mortgages; and
a partially-funded LE set-aside on an adjustable rate reverse mortgage.

The underwriter determines which of the two is appropriate when the LE set-aside is mandatory.

The borrower may not cancel a mandatory LE set-aside, and all other property charges are still the responsibility of the borrower.

A borrower who has the capacity to pay the property taxes, hazard insurance and flood insurance premiums may:

volunteer to have an LE set-aside
choose to have the lender pay the property charges, or
choose to pay for all property charges independently.

The borrower’s choice to have payments made from their disbursements is permanent — they may not change their decision later.

A borrower may not elect for the lender to make payments on their behalf, as no further disbursements are provided to the borrower beyond the lump-sum initial draw. Even if this election is made, the responsibility reverts back to the borrower once the mortgage balance has met the principal limit.

The lender needs to complete an annual analysis of LE set-asides, and notify the borrower within 15 days of the analysis if the set-aside is exhausted or there is an insufficient balance to pay property charges for the next year.

The lender is then to provide 30 days’ written notice to the borrower and HUD of a property charge due once a set-aside is depleted. The lender’s notice needs to contain a recommendation that the borrower speak to a HUD-approved housing counselor about property charge payments.

Note that this election may not be treated as an escrow account. The payments are set aside from the principal limit — made and added to the borrower’s loan balance at the time the payments are due. The lender may not hold the payment in a separate account in trust for the borrower.

Unlike a traditional mortgage with an interest-bearing escrow account, there is no interest payment made to the borrower on any of the amounts paid by the lender under this agreement.

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