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Yes, you can work with the bank on modifying the loan to reflect the fair market value That's because none of the heirs has any personal liability for the loan which means the bank could not get any more from the heirs than from anyone else. The bank's only recourse is to foreclose and sell the property. A foreclosure costs money and typically no one bids at the foreclosure sale resulting in the bank having the risk of ownership and then paying closing costs, including a 6% brokerage commission to sell the property later. Thus, who is their best bet to limit their losses? That would be the heirs! So, yes, the bank is likely to work out a modification with the heirs to reduce the principal balance to its fair market value and/or reduce the interest rate because doing that with the heirs is a far better business option for them than going through the foreclosure route.
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Thanks for following up. Yes, the same would apply. No one has any personal liability for a reverse mortgage. And, the lender wants to get the most value for the property as possible given that they can't pursue anyone for any shortfall. Thus, they have every incentive to make a deal with the heirs because that's their best bet to maximize their recovery.