During the National Reverse Mortgage Lenders Association’s Road Show, Erica Jessup, program specialist at the US Department of Housing and Urban Development said complaints about non-borrowing spouses being forced to move out of the home after the HECM borrower passes away are increasing.
“These borrowers were told the loan was assumable, or a loan officer said that it was alright to remove a spouse from title because they could refinance or add the spouse back to title later without any problem,” said Jessup. “We need to get the word out to our loan officers and counselors that they need to thoroughly explain the provisions of our mortgage”.
While HUD couldn’t tell RMD how many complaints they’ve received, it’s enough that HUD has two efforts directed at the issue. First, HUD has drafted a proposed rule which is going through an internal clearance process to amend regulations relating to HECM Insurance. “The proposed rule creates a new definition for the term spouse to ensure that a husband or wife who is not an obligated party to the HECM loan transaction understands the consequences when the HECM borrower dies,” said HUD in an email to RMD.
In addition, the soon to be released HECM counseling protocols will “specifically” advise counselors that if a client considers removing a younger spouse from title in order to be eligible, the counselor should caution the client about possible consequences for the non-borrower spouse. The counselor should also advise a client that the younger spouse may be added to a new HECM loan when he or she has reached the age of 62 via a HECM refinance.
However, the protocols warn that HECM refinancing is not guaranteed, and will depend on the eligibility of the clients and the equity in their property, as well as the availability of HECM loans said HUD. The protocols also caution counselors that during counseling, all parties must be made aware that the FHA-insured HECM cannot be assumed by the non-borrower spouse upon the HECM borrower’s death, or change of primary residence.
“In other words, the HECM becomes due and payable upon the HECM borrower’s death, or when the real estate, which serves as the security for the FHA-insured HECM, is no longer the primary residence of the HECM borrower,” said HUD spokesperson in an email to RMD.
According to Sue Hunt, reverse mortgage program manager at Consumer Credit Counseling Services in Atlanta, agencies are generally already addressing this during the counseling session required by HUD.
“Once a counselor on my team determines that there is a person living in the household, who is under age 62 and not on the deed, they would routinely talk about the effect of repayment of the loan on non-borrowing residents of the home after all borrowers have died or permanently left the home,” said Hunt. “We always strongly encourage non-borrowing residents, especially spouses, to participate in the counseling session.” Hunt added that the majority of lenders also require a non-borrowing spouse to fully participate in the counseling session as well.
Lenders are even taking it a step further according to Sherry Apanay, Executive VP of Generation Mortgage. The company requires all non-borrowing spouse’s attend counseling and execute a disclosure that explains everything to ensure there are no surprises.
RMD spoke with a couple counselors and each said borrowers are usually aware of the risk of having a non-borrowing resident with the HECM because the originator has explained it to them.
“Occasionally this information comes as a surprise to the wife, I can think of only two or three times when the husband said his wife was unavailable or he had already explained all this to his wife,” said Alan Stacy, a counselor with CCCS of Atlanta. “In this case, I counsel just the husband but recommend his wife call me to at least discuss her options.”
According to Stacy, sometimes even after explaining the consequences of removing a spouse from the loan, they decide to proceed.
“In one case I as able to help a couple save their home from foreclosure through my suggestion that only the husband (10 years older) get the reverse mortgage. The wife clearly understood the risks and said she’d be ready to move anyway after her husband died.”
So while HUD is concerned counselors and loan officers are not explaining the provisions of the mortgage well enough, all of our investigation shows the safeguards in place by lenders and counselors are already addressing the issue.
However, the new rule and protocol should help to ensure that these safeguards are being practiced everywhere.