Daniel G. Fish ()
The U.S. Department of Housing and Urban Development has just released a letter that will reduce the risk of foreclosures from the debt borne by surviving spouses in reverse mortgages.1 Reverse mortgages are advertised as a financing tool that allows seniors to remain at home for their lifetime. But once the borrower died, their surviving spouses were unexpectedly facing foreclosure.
The way it worked was that younger spouses were advised to quitclaim their interest in the home to their older spouses so that a greater amount could be borrowed. They were assured that they could remain in the property during their lifetime. However, upon the death of the borrowing spouse the survivor was told that the reverse mortgage was due and payable because the survivor was not a borrower under the loan. The surviving non-borrower spouse could not afford to refinance and foreclosure resulted.
Many seniors are cash poor and house rich, meaning that they have few liquid assets but do have equity in their homes. A reverse mortgage (also called a Home Equity Conversion Mortgage or HECM) allows homeowners age 62 or older to tap that equity. Unlike a conventional mortgage where the borrower makes monthly repayments, under a reverse mortgage the borrower receives funds but makes no monthly payments.
The lender is not repaid until the borrower dies or sells the home or moves out of the home. The loan is non-recourse and the lender can only look to the equity remaining in the home at that time. The lender is faced with the risk that the property may decrease in value and be insufficient to repay the full amount originally loaned. HUD insurance protects the lender from that risk.
The loan amount is based upon the equity in the home and the age of the borrower. Older borrowers can receive a greater amount. This is based upon the assumption that an older borrower has a shorter life expectancy and the loan will be repaid sooner. If the property is owned by a couple, the amount that can be borrowed is based upon the age of the younger borrower. If there are two borrowers and one dies, the loan is not accelerated. The second borrower may remain in the property for his or her lifetime.
But what if only one spouse is the borrower and he or she dies? HUD and lenders took the position that a non-borrower surviving spouse had to pay the loan balance or face foreclosure.
‘Bennett v. Donovan’
Robert Bennett was 10 years younger than his wife. When they took out a reverse mortgage Robert Bennett’s name was removed from the deed and his wife became the sole borrower. She died soon after the reverse mortgage was issued. Since Mr. Bennett was not a borrower he was informed that the loan was due and payable.
Bennett v. Donovan2 was a suit against HUD alleging that non- borrowing spouses were statutorily protected from foreclosure. They relied upon the Housing and Community Development Act of 1987, 12 U.S.C. §1715z-20(j):
The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner.
HUD took the position that this statute did not mean what it said. HUD argued that the non-borrower spouse was not protected and that the loan became due and payable upon the death of the last borrower. HUD based its position on 24 C.F.R. §206.27 which states that “[t]he mortgage shall state that the mortgage balance will be due and payable in full if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor…”
Plaintiffs’ suit was dismissed for lack of standing.
That ruling was reversed by the U.S. Court of Appeals for the D.C. Circuit.3 That court thought the statutory language was so clear that it wrote: “The issue on appeal is limited to appellants’ standing. But we admit to being puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.”
On remand the district court granted summary judgment in favor of plaintiffs4 finding that HUD’s regulation was invalid. But the court declined to order specific relief. The court remanded the matter to HUD to fashion appropriate relief consistent with the decision.
The Mortgagee Letter
As a result of the decision on remand HUD issued “Mortgagee Letter 2014-07″ implementing the decision.
Despite the strong language of the circuit court, HUD in its Mortgagee Letter states: “FHA continues to believe that its original interpretation gives full force and effect to the intent of the statute. Nevertheless, recent events have advanced another possible interpretation….”
HUD goes on to hold that the relief will be prospective only “[b]ecause FHA’s traditional interpretation is embedded in existing, legally binding contracts, FHA has no authority to alter it with respect to existing loans.” The change of policy will only be effective for reverse mortgages on or after Aug. 4, 2014.
The new rule will require that the non-borrowing spouse have been married to the mortgagor at the time of closing on the reverse mortgage. There will be no protection for a non- borrower who marries the mortgagor after the closing.
The surviving non-borrower spouse will not be permitted to assume the loan and will not be able to receive the loan proceeds.
Lenders will be required to calculate the amount of the loan by taking into account the age of the non-borrower spouse.
HUD does concede that future non-borrowing spouses will not need to pay off or refinance the reverse mortgage upon the death of the mortgagor spouse:
For any HECM with a case number issued after the effective date of this Mortgagee Letter, in order to be eligible for FHA insurance, the HECM must contain a provision deferring the due and payable status that occurs because of the death of the last surviving mortgagor, if a mortgagor was married at the time of closing and the Non-Borrowing Spouse was identified at the time of closing. Specifically the HECM documents must contain a provision deferring the due and payable status until the death of the last surviving Non-Borrowing Spouse or until another listed event occurs.
Daniel G. Fish is a principal in Daniel G. Fish LLC.
1. Mortgagee Letter 2014-07, dated April 25, 2014
2. 797 F.Supp.2d 69 (D.D.C. 2011).
3. 703 F.3d 582 (D.C. Cir. 2013).
4. 2013 U.S. Dist. LEXIS 140440 (D.D.C. Sept. 30, 2013).