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Reverse Mortgage Default Event and the Importance of Monitoring Property Conditions

As you may know, a reverse mortgage is an agreement where a senior homeowner relinquishes the equity in their property in exchange for monthly payments. So what happens if the homeowner passes away? The lender must go through a foreclosure process to obtain possession of the home. The decedent’s heirs will have 90 days to redeem the property from the lender. If the heirs do not take any action, the lender will become the property owner. It has become increasingly common for a reverse mortgage servicer to hire a third party who regularly monitors the condition of the property to ensure there are no obvious signs of impairments. Lenders have learned the hard way what can happen to their investment if the city begins to file liens on properties that are not up to code. What can start off as a small $100 violation can quickly snowball into a loss of hundreds of thousands of dollars. Do you remember when I wrote about the $850 city violation in Florida that turned into a nearly $4,000,000 lien? Read more about that here.

Unfortunately, these issues are not always caught in time. Let’s look at this example which we recently came across. The homeowner had taken out a reverse mortgage in 2010. Sadly, he passed away in September 2019. Three months after his death, the city began sending Abatement Liens which were filed to assess the expenses incurred by the city to abate and remove unsafe and unsanitary conditions. Over the course of the next two years, seven Abatement Liens were filed totaling over $5,600 pre-interest.

In January 2020, the Code Compliance Department filed a Lis Pendens to determine if the property was substandard and should be demolished.

A Final Order was filed in February 2020 confirming the property to be substandard and must either be demolished or repaired by 03/06/2020; otherwise, a $100 per day penalty would be assessed until either demolished or repaired. The order notes that the city is authorized to demo the property on 04/07/2020.

A Privileged Lien was then filed in March 2020 stating that the allotted time for the owner to demolish or repair the property had expired. It also notes that the homeowner didn’t pay the $100 per day penalty which has now been imposed as a lien on the property.

It is unclear if the heirs of the decedent’s estate were ever notified of the city violations, or if the notices were simply ignored. This is a perfect example of why it’s so important for lenders to ensure their investments are regularly monitored or they may face a severe loss as in this case here.