With a regular mortgage, the borrower gets a lump sum of money and makes monthly payments covering principal and interest to repay the loan. In a reverse mortgage, however, the borrower receives payments from the lender. These payments become the loan. The Federal Housing Administration (FHA) insures most reverse mortgages, known as a Home Equity Conversion Mortgages (HECMs), in this country.
Borrowers usually don't have to repay a HECM until they pass away, move, or sell the home. But the bank can also call the loan due if the borrower violates the terms of the mortgage contract, like by not paying taxes or insurance, or failing to maintain the property in good condition. If the borrower doesn't correct the problem or pay the loan back in full after any of these triggering events occur, the bank can then foreclose. Reverse-mortgage lenders have a reputation for foreclosing on elderly homeowners for relatively minor mortgage violations. A reverse-mortgage lender once started a foreclosure because a 90-year-old woman failed to pay the $0.27 needed to get current on her homeowners' insurance.
To protect vulnerable senior citizens in the state, New York legislators passed a law regulating lenders' activities after borrowers default on HECMs. The law requires lenders to notify the state's Department of Financial Services (DFS) about an imminent reverse-mortgage foreclosure. Lenders also have to:
The law takes effect on April 14, 2021, but the DFS is authorized to immediately take any actions necessary to ensure the law's implementation.
Under this law, a lender must notify the DFS when starting foreclosure proceedings against a borrower. The lender must also prove it sent a default notice to the borrower and provide any other information DFS requires. It has to provide proof that HUD gave permission for loan acceleration, too. (N.Y. Real Prop. Acts. Law § 280-d). (This last requirement raises some legal questions, though. While the statute requires proof of HUD's approval prior to loan acceleration, HUD doesn't require approval beforehand if the foreclosure is based on the borrower's death or the sale or transfer of the property. It does require the lender to get approval before accelerating the loan in some situations, like if the property ceases to be the principal residence of the borrower or if the borrower moves out for longer than 12 months because of a physical or mental illness and the property isn't the principal residence of at least one other borrower.)
Once DFS gets the information, it will send a notice about the foreclosure to the borrower. The notice will include information about the borrower's rights in the foreclosure process and contact information for legal service organizations that might be able to help. (N.Y. Real Prop. Acts. Law § 280-d).
Another New York law provides different protections to reverse-mortgage borrowers. The lender or servicer must send a 90-day preforeclosure notice describing the default and how to fix it. It must also provide the opportunity to participate in a meeting, called a "settlement conference," with the bank to discuss ways to avoid foreclosure.
New York law also requires the DFS to issue regulations requiring the lender to participate in mandatory loss mitigation (foreclosure avoidance) procedures. These loss mitigation procedures have to comply with HUD's loss mitigation process and must be updated as needed to maintain compliance. (N.Y. Real Prop. Acts. Law § 280-d).
Previously, state law allowed lenders to make advance payments on obligations, like property taxes, mortgage insurance, and homeowners' insurance associated with reverse mortgages. Under the new law, lenders may only pay premiums or taxes that are in arrears. (N.Y. Real Prop. Acts. Law § 280-d).
As you might be able to guess by the vast amount of regulations surrounding reverse mortgages, especially related to foreclosure, these loans are risky for borrowers. Lenders are usually quick to foreclose reverse mortgages, and the loans are expensive. If you want a HECM, you'll have to complete a counseling session with a HUD-approved counselor before getting one. This fact alone should give you an idea of how complex these kinds of mortgages are and that they're not a good idea for most people.
Before getting a reverse mortgage, you should understand how they work and learn the perils and requirements associated with them. A good place to start is www.aarp.org/revmort. You also need to watch out for reverse-mortgage scams. Unscrupulous lenders often market reverse mortgages with misleading claims and slick advertising. These loans are designed so that the lender eventually gets its money back (and more) or ends up with the home, so beware.
Again, reverse mortgages are complex. Even after attending a required counseling session before getting a HECM, many borrowers still don't completely understand all the terms and requirements of this kind of loan. It's highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out a reverse mortgage.
Lenders must comply with New York's reverse-mortgage laws before starting a foreclosure action. If you're facing a reverse-mortgage foreclosure and think the lender hasn't followed the law, talk to a foreclosure lawyer. If the lender's violation of this law injured you, you may bring an action to recover treble your actual damages, plus attorneys' fees. You might also have a defense to the foreclosure action.