Reverse Mortgages (NPNs) Pros & Cons

14 Replies

We're looking at a tape consisting mostly of defaulted reverse mortgages. The borrowers have passed away and no heirs have showed up to take care of the estates. Most  are underwater but some have equity. All are vacant.

We've never acquired reverse mortgages before and are reaching out to our various sources to learn more and understand the risks. I thought I'd reach out to the group as well to see if someone could share their experiences.

What are the pros & cons of reverse mortgage NPNs?

It seems like the risks are low:

The payoff increases with time

Borrower has passed with no heirs to interfere since oftentimes the estates are insolvent

Vacant

Cons:

The rare heir who might raise issues after you purchase the defaulted reverse mortgage

Dealing with probate (we already do this regularly on other loans)

Having less tools to work with a borrower (not really our business model)

Higher chance of getting an REO (not an issue for us either)

Other thoughts out there?

This Is from a well known fund in your area that starts with a K, I'm assuming.  I bid on about 50 recently but only ended up with a few as their pricing expectations are ridiculous as usual.  

The nice thing is we were given interior inspections at bid time, so able to discern the conditions and better able to determine value.  Thank goodness for that, as some were complete disasters which I would have otherwise bid on.  

The Pro is that you're essentially getting an REO at a discount, as most are well under way through foreclosure. The Con is you have to report back to HUD on the status, but is not that arduous, just a quick quarterly update. The other Con is these were inhabited by an elderly person on a fixed budget, so there is a ton of deferred maintenance.

I agree with @Chad U. on the deal points and condition of the property. I bought a half dozen HECMs a few years ago and resold them as REO after foreclosure or quitclaim deed. One of the caveats is that many times the interiors still have a HUGE amount of trash from the deceased borrower, especially if not heirs are around to clean up , so factor in a generous trashout budget. These loans should include an aged inspection report for the interior with winterization and those juicy photos of trash in every room. Also look for heirs to see if they are willing to QCD the property to you to mitigate foreclosur expenses, especially if you are looking to take the property and sell REO. 3 out of the six loans I purchased had the kids deed the property over.

Also, check with your servicer to see if they will board the loan. FCI does not, but Madison and a few others will. Since there are no future payments to manage, you could technically self service, but I always like to have a servicer on my side. 

@Bob Malecki oh yes, I forgot to mention their entire life belongings left behind.  One I have budgeted $3K to clear out.  They must have been a hoarder or close to it.  

@Chad U. @Bob Malecki Gentleman, thanks for your input!

This is in line with what we've been hearing from our other sources, especially about the interior condition of the property.

Yes, it's the company that starts with the K. We were thinking about hitting them up to do interior inspections so it's good to know that you were able to.

@Andy Mirza

Unfortunately they will not allow you to do interior inspections beforehand due to liability concerns. So you'll need to rely on the reports which is another drawback, since they are about one year old, as these were done when HUD owned the loan.

Interesting that they are putting the tape out there again, I may resubmit some of my bids to see if they'll take them this time.  

Well at least the aged HUD inspection reports show what is inside and provide a clue as to how much will be needed to budget for trash out.

This is actually a complicated issue, I guess I would ask a couple of things:
1. Are these FHA insured notes.
2. What actually are your goals?
The rules on how beneficial this can be for you, can be very different if it is insured or not insured by FHA. Most Reverse mortgages are insured, but the rules can be drastically different.
Secondly I am not sure what your goals are here. Do you want to acquire the properties, if so are  you wanting to flip t hem or rent them out. I say t hat  because it almost sounds like you are trying to get a better rate of return on interest.
I am uniquely qualified to answer many questions on this subject, but there are many subjects going on here, from  pricing of the notes, to estate issues, to foreclosure issues, legal rules and  contractual rules many of which could  come from FHA. I do not know everything, but I have contacts where I can get answers.
Feel free to contact me if you like, I would always like to get to know another person who buys notes. I have call for that from time to time, I would glad to help.

My understanding is that they were insured by FHA and that our seller bought these loans from HUD. Post sale of the notes, the seller will need updates on the disposition of the assets so that they can report this to HUD.

We have a liquidation model for our funds so we'll sell these to a 3rd party at foreclosure sale or take them back as REOs and sell those on the market.

I wanted to provide an update with our experiences. 

We bought 2 reverse mortgages also known as HECMs (Home Equity Conversion Mortgages). We were able to get interior photos before we bid on the NPNs because the homes were vacant.

Yes, these will require a lot more rehab than normal because they weren't updated or in some instances weren't well maintained at all.

For one, the process has been pretty easy. No one contested the foreclosure so it was more like a normal, uncomplicated probate proceeding.

The other one is proceeding more slowly only because one of the potential heirs is now deceased, which is requiring further title research before we can move for judgement. Again, similar to a typical probate situation where you have to spend extra time sorting through probate issues.

The plan will be to go to sale and most likely take these back as REOs to renovate before selling.

I plan to buy more HECMs in the future. As long as you provide an extra cushion for the additional rehab and are comfortable with taking on an REO from long distance, buying reverse mortgages can be profitable.

@Andy Mirza

Nice

We looked at some as well recently from K and the issue we ran into was their values were way off. On one they had a BPO that said $90k but on tape but $175k and ignored their BPO

Pluses are what Chad mentioned - getting pre-reo at discount but usually the interior is a disaster and budget a lot for rehab if that’s your cup of tea

@Chris Seveney The two HECMs we bought were from K. The values were the opposite for us on those (our values same in higher than theirs), which is why it worked. We had to sift through a bunch of others and couldn't agree on price for those.

That segues into a whole other topic of dealing with sellers in negotiating bids. K has some things that make it more difficult to reach deals than with our other usual sellers but we were able to make other trades with them.