In a new twist, lenders are utilizing reverse mortgages as a substitute – or in some cases, as a compliment to – modifying loans for borrowers having difficulty repaying their loans. The underlying logic is that for many borrowers, including those that have been fortunate enough to receive loan modifications, will still face difficulty repaying their mortgages.

Towards this end, lenders have generally taken one of two approaches. The first involves simply issuing a reverse mortgage for the remaining loan balance, such that the borrower doesn’t have to worry about making additional payments on a mortgage that he can’t afford. Sometimes, the balance of the loan is first reduced, such that the reverse mortgage qualifies for FHA reverse mortgage guidelines. This step is crucial for underwater mortgages, where the borrower’s equity is already negative. Under the second approach, the lender would simply issue a reverse mortgage to the borrower but pocket the proceeds itself. After the borrower passes away, the lender assumes control over the property. Typically, the borrower’s heirs can purchase it back by repaying the reverse mortgage.

Both of these approaches reflect the desperation of lenders, who are are increasingly faced with mortgages that are worth many times the value of the respective homes with which they are associated. Lenders evidently have concluded that selling the properties would involve considerable time and expense, and in many cases would bring in less than what the property was appraised before. Since reverse mortgage are based on appraised value – and not sale value – lenders are able to avoid recognizing the true decline in the property.

If you’re currently having trouble making mortgage payments, and are concerned that even loan modification wouldn’t be enough to forestall foreclosure, this strategy is worth broaching with your lender. Granted, it remains the exception and not the norm, but it doesn’t hurt to ask. In addition, borrowers under the age of 62 are not eligible for FHA-insured reverse mortgages, which could pose a problem from the lender’s standpoint, since a private reverse mortgage carries significant risks. Still, many lenders are eager to avoid foreclosure, because of the legal and financial burden it carries. Accordingly, they may be willing to work with borrowers to develop more creative solutions.

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