FHA reverses course on ‘trailing spouse’ issue

The reverse mortgage industry has been forced into an abrupt U-turn just when it seemed the highway was clear for spouses who were not part of older reverse mortgage contracts.

The Federal Housing Administration, a section of the U.S Department of Housing and Urban Development, recently rescinded an option on its popular Home Equity Conversion Mortgages (HECMs) originated before August 4, 2014 that allowed “non-borrowing spouses” to stay in the home once the borrowing spouse died.

Technically, when the above situation occurred, the lender could assign the reverse mortgage to HUD under a mechanism called the Mortgagee Optional Election (MOE). However, HUD recently announced there would be no more MOE, saying the option poses too great a risk to the overall health of its mortgage insurance fund.

Now, a reverse mortgage reverts back to the old rules: It becomes due and payable once the borrowing spouse dies or moves out. If the surviving spouse does not pay off the reverse mortgage (perhaps by refinance or other assets) and the loan heads to foreclosure, lenders could extend foreclosure proceedings. For example, if heirs are actively involved attempting to refinance or sell the property, lenders have allowed three, 90-day extensions before foreclosing.

What is confusing and frustrating for borrowers and lenders is that eliminating MOE throws the “before August 4, 2014” borrowing-spouse back into limbo. The courts have given the non-borrowing spouse an interested ear in the past, yet who really wants to spend the time and money to litigate?

Some lawmakers are not pleased about the muddled message. Congresswoman Maxine Waters (D-CA) sent a letter to HUD Secretary Julián Castro, expressing concern that many seniors are facing foreclosure, or will face foreclosure, due to the previous HUD protocol for the HECM program as they have affected non-borrowing reverse mortgage spouses.

“HUD has taken a number of steps in order to address this issue, but has fallen short of providing meaningful relief or transparency in its decision-making process,” Waters wrote.

Why is the trailing spouse such a huge issue in reverse mortgages? 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 of funds to the borrower. 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. The new guidelines solidify that.

AARP, the group formerly known as the American Association of Retired Persons, provided the trailing spouse spark by filing lawsuits against HUD. The AARP cases (Bennett et al v. Donovan; Plunkett et al v. Donovan) are against HUD regarding its policies for the HECM, the country’s most popular reverse mortgage program.

In a capsule, the unresolved cases involved a surviving spouse who wanted to stay in her house after her husband died. Both women had not been listed on the loan. The judge ruled in favor of the lender because under the loan contract, the loan became due if the property was not the principal residence of one surviving borrower. AARP filed suit on behalf of the trailing spouses and the cases have yet to be resolved.

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. Reverse mortgages 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.

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.

What’s next? Hopefully compromises will be struck and there will be more MOE or another alternative for surviving spouses on reverse mortgages written before August 4, 2014.