This executor was referred to Brian by a legal advocate at AARP. She is the heir of a beautiful classic Sears home that was upside down on a reverse mortgage.

All reverse mortgages are backed by HUD (FHA), which means that if a lender experiences a loss in foreclosure or anticipates a loss, they have the option to transfer the loan to HUD, which will cover any losses for the lender. It’s important to note that the FHA insurance associated with the loan is for the lender's protection, not the borrower’s.

Understanding the behind-the-scenes processes is crucial to realizing how funds can be recovered, even when it seems like there is none available.

In this case, the lender transferred the loan back to HUD upon recognizing that they would incur a loss due to default. They assessed the value of the house against the amount owed on the loan. The property's value was less than the loan balance, meaning it was "upside down."

The trigger for this analysis was the death of the borrower. With a reverse mortgage, the loan automatically goes into default upon the borrower's death, allowing the lender to foreclose immediately. Unlike a traditional mortgage, there is no recourse for the borrower or heirs regarding any deficiency resulting from a foreclosure.

As soon as this loan became eligible for foreclosure, it was sent back to HUD, which had a couple of options:

Option 1: Start the foreclosure process on the mortgage with a loan balance of $148,000. The property value was estimated at around $110,000, so if the home goes to sheriff's sale and an investor buys it for $110,000, HUD would incur a loss of about $38,000.

Option 2: Rather than initiating the foreclosure process and managing all the associated work, HUD chose to sell the loan to an investor (not another bank) and take the loss immediately. The loan was likely sold for around $90,000, but this transaction isn’t recorded in the public domain like a typical sale. The only public record is that HUD transferred the loan to a new "lender," who then filed for foreclosure for $148,000.

In most cases, these investors do not sell the home at auction. Instead, they typically retain the property after foreclosure with the intention of “flipping” it to a retail buyer.

Thus, the investor ends up with a home purchased for approximately $90,000 that is worth $165,000 to a retail buyer, without needing to do any renovations. This results in a gross profit margin of $75,000. Unfortunately, after the foreclosure process is complete, the heirs have no leverage to recover any of this profit.

However, it’s important to remember that prior to the final foreclosure date, the estate still owns the house, and there are several options available to recover some of the funds. We will provide an update on the outcome of this case once it is resolved.