Case Study: A Reverse Mortgage, a 90-Day Clock, and the Loan That Saved the House

The Situation

Margaret had lived in her Sacramento home for 37 years. In 2015, at age 79, she took out a reverse mortgage to supplement her Social Security income and cover medical expenses. The reverse mortgage allowed her to stay in her home without making monthly mortgage payments, with the balance due when she died, sold the property, or permanently moved out.

When Margaret passed away in June 2023, her three adult children, David, Susan, and James, inherited the home through her revocable living trust. The reverse mortgage balance at the time of her death was approximately $312,000. The home's current market value was approximately $610,000, leaving net equity of approximately $298,000 that would pass to the three siblings after the reverse mortgage was satisfied.

The 90-Day Problem

Reverse mortgage servicers are required to notify heirs after the borrower's death and initiate the "due and payable" process. Federal regulations give heirs a specific window to resolve the reverse mortgage, typically 30 days from the first notice with the option to request two 90-day extensions, for a total of up to 6 months in most cases. However, the practical reality is that servicers vary in how aggressively they enforce the timeline, and the HUD-mandated deadlines can move quickly.

David, the successor trustee, received the servicer's notice in late June 2023. The notice indicated that the balance was due and that the heirs needed to either sell the property or pay off the balance within the required timeframe. The servicer would begin foreclosure proceedings if neither occurred.

Susan wanted to keep the home, which she had grown up in. David and James were open to selling but were concerned about the foreclosure risk if a quick sale could not be arranged. The home needed to be sold or the reverse mortgage paid off, and the clock was running.

The Loan

David contacted North Coast Financial within a week of receiving the servicer's notice. He explained the situation clearly: trust-held property, reverse mortgage that needed to be paid off quickly, three beneficiaries. Susan would ideally keep the home; she was willing to buy out David and James at a fair price and move in.

North Coast Financial evaluated the property and the trust documentation. The reverse mortgage was a known and payable lien; the lender would be paid off at closing. The loan structure was a trust loan, with the trust as borrower and a deed of trust recorded in favor of North Coast Financial as a second position lien. The reverse mortgage servicer's lien would be paid first from the loan proceeds and released.

Loan amount: $580,000 (paying off the $312,000 reverse mortgage and providing $268,000 for Susan to partially buy out her brothers, with the remaining balance settled from her personal savings)

Rate: 10.5%, 1.5 points origination, 12-month term

• Origination: $8,700
• Monthly interest: approximately $5,075

The Closing

The loan funded 13 business days after the initial call. At closing, the reverse mortgage servicer received a payoff of $312,000 and released their lien. David and James each received $134,000 in partial equity distribution through escrow. Susan assumed responsibility for the trust loan and moved into the home within two weeks of closing.

The foreclosure timeline was entirely avoided. The servicer received their payoff, closed the loan, and the family never dealt with any further collection activity. The recorded trust loan replaced the reverse mortgage as the senior lien on the property.

Outcome

Susan refinanced the trust loan into a conventional mortgage six months later. Her conventional rate was significantly lower than the trust loan rate, and her new monthly payment was manageable given her income as a nurse. She filed the BOE-19-P and preserved the Prop 19 exclusion. The home's assessed value is well below the market value, saving her significant property taxes annually.

David and James received their initial equity distribution at closing and received a small final distribution when Susan's refinance closed and the trust wound down. The estate was fully administered within eight months of Margaret's death, an unusually efficient outcome given the complexity of the reverse mortgage situation.

The home is still in the family. The foreclosure clock that had been running since the servicer's notice was stopped the day the trust loan funded.

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