The Title Insurance Company’s Key Role in a Reverse Mortgage
By Cynthia Kern, Esq.
November 4, 2009
Reverse mortgages, which pay monthly or lump-sum amounts to borrowers while accrued interest is compounded over time, have become an increasingly popular option for seniors in today’s economy. Despite drops in property value over the last two years, many seniors (and baby boomers) who have reached the reverse mortgage eligibility age of 62 still have significant equity in their properties and are using it to assist with living expenses, real estate taxes, or medical costs.
Approximately 90% of all reverse mortgages are Home Equity Conversion Mortgages (HECM) regulated by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). As a federal program, HECM reverse mortgages exploded in scope and availability with the passage of financial stimulus legislation in 2008 and 2009. With these changes, and the accessibility of proprietary loans with no lending limits through primary market banks, there are far more people who qualify for and seek reverse mortgages.
Because loan policies provide insurance to reverse lenders that their valid mortgages are in first lien priority, title companies must make sure that the various reverse mortgage requirements relating to title are met. For example, title companies must verify the age of every borrower and confirm that the fee owner of the property does in fact reside there as a primary residence. In addition, borrowers who have owned their properties for decades free and clear of any mortgages may not be aware of liens and encumbrances affecting their title. For example, the title report obtained by the lender in contemplation of a reverse mortgage may reveal old mortgages that were paid but never satisfied of record, Environmental Control Board (ECB) violations that have become judgments, or mechanic’s liens from home repairs - issues which may take substantial time for the title company to clear prior to closing the reverse mortgage.
A unique aspect of HECM reverse mortgages is that they are insured under the FHA insurance program, which means (i) the borrower is ensured receipt of all of their payments under the loan, regardless of whether the bank fails, and (ii) the lender is ensured receipt of the full amount of the loan balance regardless of whether the balance of the loan exceeds the property’s market value. In order to secure this additional insurance, a "mirror image" mortgage naming HUD as the mortgagee is recorded immediately behind the reverse mortgage. Title companies unfamiliar with the HECM program may balk at recording two mortgages that appear to double the indebtedness on the property while only issuing one loan policy.
In New York, one main benefit of all reverse mortgages is their exemption from mortgage recording tax. In order to take advantage of this exemption, title companies must make sure that a properly-prepared and executed Section 252-a Affidavit is attached to the mortgage (or both mortgages, with a HECM loan) attesting to the pertinent terms and validity of the reverse mortgage. Without the 252-a Affidavit, the mortgage(s) will be rejected for recording and the title company will be exposed to liability for any liens recorded against the insured property in the intervening period.
Reverse mortgages offer a lifeline to eligible seniors who are "property rich, but cash poor", but they are complicated instruments. It is important to select a title company well-versed in closing and insuring them.
Cynthia Kern, Esq. serves as In-House Counsel at TitleVest, a Manhattan-based provider of title insurance and related real estate services. An affiliate of 1031Vest and InsureVest, TitleVest’s clients include many of the leading law firms and institutional lenders who enjoy outstanding service and free access to TitleVest’s arsenal of proprietary web-based tools such as ACRISasap™, Legal Form Generator™, Interactive Online Reports™, ACRIStracker™,and UCCtracker™. For more information, visit www.TitleVest.com .