When a borrower seeks a reverse mortgage, they are still getting a loan that uses the house as collateral. Instead of making payments toward paying off the loan, they receive distributions (like a line of credit) from the lender.
If a lender goes out of business and is unable to service the loan – and is therefore unable to make those distributions to the borrower – what happens? Is the house considered an asset for the defunct lender and can it be sold right out from under the borrower?
No – that will not happen, and here is why. When a borrower gets a reverse mortgage, they sign two Security Deeds (that’s what most borrowers consider the “mortgage”) – one to the lender, and then one to HUD, the US Department of Housing and Urban Development. With reverse mortgages, the lender must have cash to service the loan because they are likely obligated to make monthly payments or provide a line of credit to the borrower. If the lender fails, FHA insures those obligations, so the house will not be lost.
Loan officers who have access to reverse mortgage products would benefit from working with a residential loan closing attorney who thoroughly understands the way the programs are structured and can explain everything to borrowers in a way they will understand.