Dan Hultquist
The federally insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), allows the homeowner to retain ownership of the home through the life of the loan. Then, after the last borrower’s death, the heirs can sell the home and recover the equity – the difference between the value of the home and what the homeowner borrowed.
What if there is no equity?
With older HECM loans, there may be no economic benefit to selling the home, refinancing the loan balance, or paying off the reverse mortgage. This is because more money was borrowed over time than the current market value of the home.
Fortunately, neither the borrower nor their heirs are responsible for any deficiency caused by the loan balance exceeding the property’s value. This is because the HECM is a “non-recourse” loan; the borrower and their heirs have no personal liability for the loan balance.
In such cases, HUD allows the borrower or their heirs to dispose of a property by completing and signing a deed in lieu of foreclosure (DIL). This document transfers ownership to the lender or to HUD, who then sells the home, generally at a loss. Borrowers and heirs have historically been unaware of the DIL option, so it is rarely used.
Existing Cash for Keys
In 2017, HUD authorized lenders to give a financial incentive for a signed DIL.1 Lenders would be able to offer up to $3,000 to parties with legal authority to sign a DIL and hand over the keys to a clean (“broom-swept”) home within 6 months of the loan being called due.2 This incentive can also be given to a tenant who must vacate the property following a foreclosure.3
Unfortunately, the current cash for keys program was only implemented for new loans—HECM loans with FHA case numbers assigned on or after September 19, 2017. And as we know, property values for those loans have risen dramatically since then. Few homeowners or heirs would consider giving away equity with a DIL, and so the Cash for Keys program has been rarely used.
New Cash for Keys
HUD recently updated their Cash for Keys program,4 upping the ante, so to speak. I see the revised guidelines as significant improvements and represent much-needed changes to the HECM program. Notable enhancements include:
- Availability for HECM loans with case numbers assigned prior to 9/19/2017
- Incentives for Short Sales as well as DIL and Post-Foreclosure Evictions
- Incentives for up to 547 days after the due and payable date
- Incentives as high as $7,500, plus probate costs not to exceed $5,000
The maximum incentive amount HUD will reimburse will be based on both the incentive type and time frame. I believe these changes, when they become effective on 3/25/24, will finally have the intended impact we wanted from a Cash for Keys program. These impacts may include:
- Reducing the number of unnecessary foreclosures associated with HECM lending
- Preventing unnecessary costs to the FHA Mutual Mortgage Insurance Fund
- Improving public perception issues related to communities with vacant and unkept properties
- Improving public perception issues related to borrowers, their heirs, and future HECM prospects
For more information on reverse mortgage guidelines, please consider purchasing the books Understanding Reverse, and Navigating Reverse, and subscribe to this blog.
Dan Hultquist
1. 24 CFR § 206.125(f)
3. 24 CFR § 206.125(g)(4)