December 2007
Reverse
Mortgages on the Rise
by Chris Burti, Vice President and Senior Legal Counsel - Statewide Title, Inc.
As
Baby Boomers are beginning to enter their 60’s, they are looking at ways to
free up the equity in what is in most cases their single largest
investment…their home. For many years this was often done through a Home
Equity Line of Credit (HELOC). As retirement approaches and income limitations
appear on the horizon, this segment of the mortgage market is increasingly
looking at reverse mortgages as a mechanism to access that equity without an
adverse effect on the budget. Reverse mortgages have not been frequently used
until recently any many are not familiar with the way they are underwritten for
title insurance. Lenders will be requiring issuance of an ALTA Endorsement –
Form 14.3-06 (Future Advance – Reverse Mortgage). A little background
information may be useful before going into the requirements for issuing such an
endorsement.
A
reverse mortgage is used for a loan that is typically made to an elderly couple
over the age of 62 with substantial equity in their home. Because reverse
mortgages have no fixed monthly payments and they are repaid from the estates of
the borrowers after death or upon sale of the property (or upon failure to
maintain the property or pay taxes and insurance), they are a useful financial
tool for homeowners to obtain the desired benefits from the equity in their home
without incurring the burden of a payment during retirement years.
Many homeowners are becoming interested in reverse
mortgages so they can create the desired liquidity or generate an income stream
and yet stay in their own homes. Selling their homes and moving elsewhere are
rarely appealing alternatives to older people. Some writers have expressed
concerns as to whether this is a prudent vehicle for the graying population.
With the greater longevity being experienced by this generation, there is a risk
that the equity may run out before the homeowner is ready to leave. If the
homeowner is dependent on the income stream from the reverse mortgage a crisis
is likely to ensue and at that point a sale of the home may no longer provide a
solution.
An excellent way to evaluate a reverse mortgage is
to compare it to what may be the homeowner’s only real alternative: selling
the home and using the proceeds to buy or rent a new home. The homeowner will
need to determine:
- How much cash selling the home will net.
- The cost to buy and maintain or rent a new home.
- The income that would be earned on any money left over if invested
prudently.
- The availability and acceptability of alternative housing.
Until the homeowners have explored other housing
options, they will not know whether other housing choice may be better than a
reverse mortgage. The homeowners will likely come to one of two conclusions.
Either they will find another housing option that is a lot more attractive than
expected or they will decide that where they now live is the preferable place
for them to continue living. In any event this comparison will make it easier to
evaluate the costs and benefits of a reverse mortgage.
To qualify for most loans, the lender checks the
borrowers’ income to see how much they can afford to pay back each month. But
with a reverse mortgage, there is no requirement to make monthly repayments.
Therefore, the homeowners do not need any minimum amount of income to qualify
for a reverse mortgage. With most home loans, the homeowner’s may lose their
home if they don't make the monthly payments. But with a reverse mortgage, there
aren't any monthly repayments to make. So there is no risk of losing the home by
not making them. Most reverse mortgages require no repayment for as long as the
homeowner — or any co-owner(s) — lives in the home.
Traditionally, when a
home is purchased the homeowners often make a small down payment and borrow the
rest of the purchase price. They typically pay back mortgage loan in monthly
installments over many years. During that time, the debt typically decreases and
home equity increases from the repayment of principal and appreciation in value.
Reverse mortgages, as discussed, have a different purpose than regular home
mortgages do. With a home mortgage, the borrowers use their income to repay debt
and this builds up equity in the home. It's just the opposite with a reverse
mortgage.
The
Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse
mortgage, amounting to an estimated 90 percent of the market. Available since
1989, HECMs are insured by the federal government through the Federal Housing
Administration (FHA), a part of the U.S. Department of Housing and Urban
Development. These loans can be used by senior homeowners age 62 and older to
convert the equity in their home into monthly streams of income and/or a line of
credit to be repaid when they no longer occupy the home. This loan will include
a second deed of trust payable to Secretary of Housing and Urban Development, to
be shown on Schedule B, Part II, of the policy.
Typically the "first" mortgage will reflect the loan amount
(for example, $100,000) and that it secures an amount "up to a maximum
principal amount of . .
." (for example, $150,000). Therefore, the policy itself should
provide in Schedule A description of the deed of trust and in Schedule B-II for
the "second" deed of trust. Both should reflect the amount of the loan
and the maximum principle amount (in this example $100000 and $150,000
respectively).
In
1996, Fannie Mae developed the Home Keeper® reverse mortgage as a conventional
market alternative to the HECM. The borrower may choose to receive the funds
from these loans in fixed monthly payments for life, or as a line of credit, or
in a combination of monthly payments and line of credit. The deeds of trust
secure the repayment of the debt, which is continually increasing including
accruing interest, up to a stated maximum principal amount; but repayment is
limited to the fair market value of the property, if less.
With a reverse mortgage,
the lender lends money with no repayments. Therefore, the debt increases as the
borrower gets more cash and as more interest is added to the loan balance. As
the debt continues to grow, equity shrinks, unless the home's value is
appreciating at a higher rate. When reverse mortgages become due and payable,
homeowners may owe a lot of money with little or no equity. Yet, that is exactly
what informed borrowers intend. Their goal is to "spend down" their
home equity while they live in their homes, without having to make monthly loan
repayments.
There
are exceptions to the case of reverse mortgages having rising
debt and falling equity. If a home's value appreciates rapidly, the equity will
actually increase over time. Or, if there is only one loan advance and no
interest is charged on it, the debt would never change and the equity would
increase as the home appreciates. This is not the expected case and will not be
likely to be experienced often.
The
Reverse Mortgage Endorsement (ALTA Endorsement Form 14.3 - 06 Future Advance -
Reverse Mortgage, 06-17-06) provides 4 primary coverages:
1. Future advances will have the same priority as if disbursed at closing.
2. Variable rates of interest will not affect validity, enforceability or priority.
3. Compounding of interest (interest on interest) or capitalizing unpaid interest will not result in a loss of priority for increases in the unpaid principal balance (like negative amortization).
4. The failure of the mortgagors to be at least 62 years of age at Date of Policy.
Lenders
will typically require ALTA Endorsement Forms 8.1 and 9 as well. The effective
date of the policy will be the date and time of recordation of the first
mortgage. Premiums will be quoted and title insurance provided for the maximum
principal amount of the loan.
The
deed of trust must contain "Maximum Principal Amount". In North
Carolina, reverse mortgage priority is governed by Article 21, Chapter 53 of the
North Carolina General Statutes, N.C.G.S. 53-255 – 53-272 (effective 10-1-91).
Maximum amount of principal and interest accrued secured by the deed of
trust must be shown on the recorded deed of trust (which is usually 150% of the
original loan amount). The attorney must verify that the borrowers are 62 or
older. The Attorney must verify that the DOT complies with the future advance
statute (NCGS 45-68 et seq. or NCGS 45-81 et seq.). Home Equity Conversion
Mortgage loans will include a second deed of trust payable to Secretary of
Housing and Urban Development, to be shown on Schedule B, Part II, of the
policy.
The requirements in schedule B of the Commitment will typically appear something like the following:
In
order to issue the ALTA Endorsement – Form 14.3-06 (Future Advance – Reverse
Mortgage) the attorney must verify that the borrowers are at least 62 years of
age, that the deed(s) of trust (one to the lender, one to HUD) comply with North
Carolina’s future advance statute (NCGS 45-68 et seq. or NCGS 45-81 et seq.),
that the deed of trust to be insured contains provisions identifying that it is
a Reverse Mortgage in compliance with the Act as well as the maximum amount to
be secured.
Hap’s Holiday Message 2007
Once
again, it is hard to believe that another year is ending.
The calendar year 2007 will soon be history.
In
looking back over this past year and, specifically, at the national real estate
market, we are pleased to recognize that
How
do we view the future and in particular the year 2008?
We do not have a crystal ball, but we feel that we can anticipate the
following:
·
We will in all likelihood see much refinancing of existing variable
interest rate loans in 2008, as these adjustable rate mortgages are being
reassessed when they become due for renewal.
·
Even though interest rates are not at the low level that we saw several
years ago, they are still at an affordable rate, even for first-time buyers.
In this regard, we may experience a slight increase in residential real
estate closings.
·
As the large group of baby boomers age, we expect to see an increase in
the number of Reverse Mortgages.
Statewide
Title, Inc. has a longstanding adherence to the highest standard of fair conduct
to the consumer. As a further
continuation and affirmation of these high principles, Statewide Title and the
North Carolina Land Title Association have formally adopted the following
principles set forth by the American Land Title Association.
·
To engage only in business practices that are lawful and consistent with
a high standard of ethical behavior.
·
To encourage a culture of compliance within their organizations for
federal and state laws that govern the title insurance business and for these
principles.
·
To treat consumers in a fair and ethical manner.
·
To provide consumers with timely and comprehensive information regarding
their policies, services, products and prices so as to enable consumers to shop
effectively among providers of title-related services.
·
To encourage and assist consumers to be educated purchasers of title
insurance and title-related services.
We
thank all of our customers for your loyal support over this past year!
We wish to continue to earn your business in the future!
Merry Christmas
to all!
Harold
K. (Hap) Roberts
President
Statewide Title, Inc.
Dirt Tales From The Deed Vault
by
John Dillard, Vice President and Legal Counsel, Statewide Title, Inc.
This month we look again at the doctrine of Insurable
Title and how damages are calculated and paid when title losses occur.
Jimmy Homeowner and his wife Rebecca thought they had
found the perfect home after months of looking.
It was on a nicely landscaped lot with several shade trees in the back
that made a nice border between their house and the houses behind them.
His realtor even told him she could save them a great deal of money by
using “her” attorney who could “tack onto” an existing title policy.
Not only would the Homeowners be able to close quickly they would save a
lot of money by not having to pay for a full title search.
The couple closed on the home and lived blissfully
for a few years until Jimmy came home from work one afternoon to discover survey
stakes in his back yard that came almost to the edge of the patio.
He called his neighbor who lived behind him to see if
he knew anything about why the stakes were in his yard and was informed that the
neighbor was selling his home and moving away.
The new buyers had gotten a survey as required by the bank.
Jimmy called the attorney who had closed his purchase and was advised he
had title insurance and should file a claim with them.
Jimmy promptly did so and the title company hired an attorney to examine
the title. The title examination
disclosed an error in a deed a couple of links back in the chain of title.
In that deed the grantors purportedly conveyed a tract of land they had
conveyed earlier and had forgotten about. Unfortunately
for Jimmy that tract comprised most of his back yard.
The title company wrote Jimmy a check for $15,000 and
told him the claim was settled. Jimmy
told him he wanted them to try to do something to get his land back and if they
couldn’t do that, the money they tendered was not sufficient to cover his
loss. After all, he had lost most of
his back yard and on a $300,00.00 purchase the amount they were offering
wasn’t sufficient. And he had used
most of his vacation in dealing with this problem and he wanted to be
compensated for that too.
Should the title insurer have tried to defend the
title to the property Jimmy lost? And
is there anything he can do about the amount of damages they paid him?
To find the answer to these questions we must look at well established
law in these areas. Item 6 of the
ALTA Policy (10-17-92) summarizes the Company’s options with respect to the
insured in the event a loss has been determined to be compensable.
The first is to pay the amount of the insured’s loss.
The second, is to elect to defend against pending litigation and upon
losing, pay the amount of the loss plus litigation costs.
The third option is to settle with the insured or with parties other than
the insured. The fourth is to take
some affirmative action to clear the title defect.
The fifth course of action is to purchase an indebtedness or judgment
affecting the insured property.
The courts have held that if an insurer follows one of the above courses
of action they have satisfied their legal obligation to the insured and they
cannot be required to do anything further. Martinka
v. Commonwealth Land Title Insurance Company 836 S.W. 2nd 773 (1992).
Under the terms of the title policy the Company
clearly had the right to settle and pay for the loss as opposed to filing an
action to quiet title.
The next question to consider is if the title company
chooses to settle the loss as opposed to defending title what measure of damages
should be applied? According to A.J.
Appleman, Insurance Law and Practice, §5201 a policy of title insurance is
an agreement to indemnify against actual monetary loss or damage suffered by the
insured. It
is not a covenant against encumbrances or defects (emphasis added).
In order to be compensable, the
loss or damage must arise from a risk insured against under the terms of the
policy. The question then becomes how are those monetary losses calculated?
Burke Law of Title Insurance, §13.3 (1986) states “the
liability of the Company where there has been a total failure of title is the
lesser of the fair market value of the insured property or the face amount of
the policy”. This principle has also been adopted by the courts in determining
the measure of damages to apply where there has been a partial failure of title.
Allison v. Ticor Title Ins. Co., 907 F2d 645 (7th Cir. 1990).
Under the term’s of the standard ALTA title insurance policy and existing title insurance law it was the title company’s prerogative to choose to pay monetary damages rather than quieting title for the Homeowners’. And although the measure of damages they calculated may not have met the insured’s expectations, it nevertheless was a proper application under current title insurance policy law.
This example illustrates another shortcoming of relying upon insurable title and one of the inherent risks in tacking onto existing title policies. Remember, title insurance is not a covenant against title, but merely a contract of indemnity. It does not cover incidental damages or losses the insured may suffer, nor may it fully compensate the insured for loss due to the manner in which losses may be calculated under the policy.
MERRY
CHRISTMAS
From the
STATEWIDE
TITLE FAMILY