Tom Kelly: ‘Trailing spouses’ can remain in reverse-mortgage homes
There’s usually a reason both spouses do not sign a reverse mortgage – age.
A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. The loans are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.
Most of surviving spouses who remain in the home after one spouse dies were part of the reverse mortgage agreement when it was first signed. However, many were left out of the document, usually because they were too young to qualify or because including them would have meant a reduced amount. Now, more and more of these trailing spouses who were never vested in the reverse mortgage want to stay in the home without paying off the underlying reverse mortgage.
In fact, a few filed lawsuits that caused enough anxiety that the Department of Housing and Urban Development caved to the controversy.
The nation’s most popular reverse mortgage program – called the Home Equity Conversion Mortgage – has been due and payable upon the death of the last surviving borrower, the sale of the home, failure to reside in the property and the failure to pay required taxes and insurance.
A new, “alternative interpretation” of Federal Housing Administration guidelines will extend the reverse mortgage to any trailing spouse (known as “non-borrowing spouse” by FHA) if the persons were married at the time the reverse mortgage was originated.
While FHA, a component of HUD, continues to believe that its original interpretation of those guidelines “gives full force and effect” to the intent of the reverse mortgages, lengthy, expensive lawsuits have not only scared many lenders out of the industry, but the lawsuits also have limited how reverse mortgage funds can be distributed. The lawsuits have centered on the trailing spouse wanting to stay in the home after the spouse who signed up for the loan has died or is no longer living there.
As of Aug. 4, the HECM will be extended (FHA’s “deferral period” of repayment) if the non-borrowing spouse:
• Had been the spouse of a HECM borrower at the time of loan closing and has remained the spouse of such HECM borrower for the duration of the HECM borrower’s lifetime.
• Has been properly disclosed to the lender at origination and specifically named as a non-borrowing spouse in the HECM documents.
• Has occupied, and continues to occupy, the property securing the HECM as the principal residence of the non-borrowing spouse.
For the past several years, FHA has pointed out the ways for the estate of the deceased HECM borrower to satisfy the HECM loan obligation. For example, non-borrowing spouses were to refinance HECMs upon the death of their mortgagor spouses in order to retain the homes. Stringent conventional loan guidelines have made that option more difficult, and that pressure has rebounded to squeeze the reverse mortgage industry.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
This is not the end of the non-borrowing spouse controversy. Next will be the spouse that comes on the scene months – maybe years – after the original reverse mortgage closes in the name of a then-single person.
After the borrower dies, the spouse files a lawsuit to stay put. He/she was even part of the original deal but the legal action will make future reverse mortgages more expensive for everybody.
Tom Kelly has been a professional journalist for 36 years. He served the Seattle Times for 20 years, many as real estate editor.