By JIM VEALE
Jim: Many people have heard the term nonrecourse used by the Federal Housing Administration (FHA) in regard to a loan. Marilu, what does the FHA mean by nonrecourse? Marilu: With nonrecourse loans, the borrower usually secures the amount due with specifically named property. If the borrower fails to repay the debt, the only thing that the lender can obtain from the borrower to satisfy the amount due is the property that secured that loan. An FHA insured reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), is nonrecourse. With HECMs, the only thing that secures the mortgage is the home. The most a borrower can owe on a HECM is the lower of the amount due, or the net proceeds that would come from the sale of the home in an arm’s length transaction. The FHA, that is a part of the U.S. Department of Housing and Urban Development (HUD) also requires the homeowner or heirs to pay the amount due in full if they want to keep the home. On recourse loans, the lender can not only obtain any property that secures the loan, but if the loan is still not paid in full, the lender can also obtain a deficiency judgment allowing collection of the remaining amount due in any legal manner. HECMs are nonrecourse, meaning the lender cannot obtain a deficiency judgment against either the borrower or the heirs so the only property that would be at risk is the home. Jim: Can a borrower get rid of recourse debt using a HECM? Marilu: Absolutely. The proceeds of a HECM must be used first to pay off any mortgages and liens against the home, but any remaining proceeds can be used for any other purpose the borrower chooses. Paying down or paying off recourse loans can be a very good use of HECM proceeds. To the extent that a recourse debt is paid off by the proceeds of a HECM, the amount paid is changed from recourse to nonrecourse. This can be a very important financial decision in avoiding financial difficulties. Also, many baby boomers have their own business, Jim, can this help them? Jim: To be eligible for a HECM, the borrower must be at least 62 years old. Because of the recent financial crisis, many people have postponed retirement. Some who are in business for themselves have business debt. Generally business debt is recourse and usually the business owner is the borrower or guarantor. Practically, that means not only are the business assets at risk, but so are all personal assets such as the home. By using HECM proceeds to operate the business, the owner is not only limiting risk to the home but all required periodic payments of interest and principal are eliminated. Normally the owner is spending money and time to satisfy the requirements of business lenders such as providing accountant review or audit reports, applications, etc. annually. Once in place, a HECM eliminates all of this time, hassle, and administrative cost. If the HECM line of credit is selected, the owner can pay down the HECM and borrow as needed. While business credit is tight and demands are increasing even on Small Business Administration (SBA) loans, a HECM can provide peace of mind and in many cases cost savings. Marilu recently attended a Certified Financial Planner meeting at UCI where several folks were very interested in the idea of using this technique. However, readers should always seek competent legal advice as to their specific situation. If these strategies are of interest to you or someone you know, please call us at (800) 620-0065. * Jim Veale is a California CPA and real estate broker with a master’s degree in business taxation from the University of Southern California. He serves on the Congressional Relations Committee of the industry trade association, the National Reverse Mortgage Lenders Association. He is a Senior Vice President and Director of Origination Recruitment at Security One Lending, Inc., Department of Corporations license number 603F982, an equal opportunity lender. Marilu Veale is a loan officer and a California real estate broker. She is not only a retired paralegal but earned her degree in paralegal studies from an American Bar Association approved program. She has been in the industry for over five years, oversees the activities of other loan officers, and is a very knowledgeable reverse mortgage originator herself. If you have questions or are interested in obtaining a reverse mortgage, a personalized reverse mortgage analysis, prior articles, or more information on reverse mortgages, please call Jim at (800) 620‑0065 or visit www.activatingequity.com.
