The Home Equity Conversion Mortgage (HECM) loan program is administered by the U.S. Department of Housing and Urban Development (HUD). Typical HECM loan closing documentation includes a first mortgage in favor of the HUD–approved first mortgage lender and a second mortgage in favor of HUD. The HUD Mortgage (second mortgage) cannot be considered satisfied by the release of the first mortgage. Title remains unmarketable until the second mortgage on the subject property is released of record.
Comment 1 HECM loans are one form of reverse mortgages. This Standard addresses only HECM mortgages.
Comment 2 The two mortgages may secure separate notes, one to the primary lender and one to HUD. Therefore, it is necessary to obtain a discharge of both mortgages. It is rare that HUD advances any funds under its second note. However, under the HECM program HUD may advance funds to the borrower under its note if the first mortgage lender fails to perform its obligations under its loan documents and fully advance funds due to the borrower. It is this possibility that leaves title unmarketable until the second mortgage is released.
Comment 3 The second mortgage in favor of HUD recites that it is given to secure payments which the Secretary may make to, or on behalf of, the Borrower pursuant to Section 255 of the National Housing Act (42 USC 1715z–20) and the underlying loan agreements between the parties. That Section provides that these advances, as made by HUD, shall not be included in the debt due under the first note unless either (a) the first note has been assigned to HUD or (b) HUD accepts reimbursement from the first lender. Thus, where HUD has advanced funds to the Borrower under the terms of the HECM program those funds are secured by the second mortgage unless there has been either: (i) and assignment of the first mortgage to HUD or (ii) reimbursement for those advances by the first mortgage holder to HUD.
Comment 4 Pursuant to its agreement with HUD, the institutional first mortgage lender is obligated to notify HUD’S national servicer when the first note and mortgage have been satisfied. The servicer then normally processes the cancellation of the second note and issues a release for the HUD mortgage. Unfortunately, as with mortgage releases in general, the system breaks down if the release of the HUD mortgage is not recorded. A title examiner may seek assistance in obtaining the necessary release of the HUD mortgage by contacting either the first mortgage lender or HUD through its national program servicer at the HUD website. So long as HUD can verify that:
(a) the first mortgage note and mortgage have been paid in full, and (b) HUD has not expended any funds under its second note, as described in comment 1 above, HUD will issue a satisfaction of the HUD note and release the HUD mortgage.
Comment 5 Practitioners should also be aware that in the context of a foreclosure of the first institutional mortgage, or any other senior lien, the existence of the HUD second mortgage, as a lien in favor of the United States, will require that the United States be made a defendant and mandate a foreclosure by sale pursuant to 28 U.S.C. 2410(c). However, there will be no statutory redemption in favor of HUD as 12 U.S.C. 1701k provides that there shall be no right of redemption in favor of the United States where its interest derives from the issuance of insurance under the National Housing Act, as amended, 12 U.S.C. 1701 et seq.
- This standard was added.