In a March 24 letter addressed to Department of Housing and Urban Development Secretary Shaun Donovan, two members of Congress urge the agency to change its policies regarding reverse mortgage loans.
Sent by Rep. Barney Frank (D-Mass.) and Rep. Luis Gutierrez (D-Ill.), the letter doesn’t specifically name the AARP lawsuit against HUD, but it addresses the same issues.
“We are writing to request that HUD modify existing policies regarding FHA reverse mortgage (HECM) loans so that the surviving spouses of mortgagors who took out such loans can continue to live in their home after their spouse dies, and so that such spouses and their heirs can pay off these loans based on the current value of the home,” said the letter.
HUD has since rescinded guidance on its non-recourse policy for HECM borrowers, to clarify that a borrower or the borrowers’ heirs will never owe more on the loan than the property is worth. An outstanding issue in the lawsuit, which AARP continues to pursue, is the issue of the non-borrowing spouse and whether that spouse is entitled to assume the loan if his or her name is not on the title.
Under current HUD guidelines, when a mortgagor dies, a surviving spouse not named on the mortgage can’t continue to live in the home under the terms of the mortgage. The spouse has 30 days to repay the loan (or take action toward repayment or sale of the home), and if not, the home must be sold or a deed in lieu provided.
“Such treatment seems inconsistent with the language of Subsection 255(j) of the National Housing Act, which states that a surviving spouse—even if not on the mortgage—can continue to live in the home, with the reverse mortgage staying in place,” said the letter. Further, the Congressmen ask HUD to clarify that surviving spouses not on the HECM mortgage be allowed to assume the reverse mortgage loan and stay in the home.
The idea of allowing a non-borrowing spouse to stay in the home and assume the loan may sound good for borrowers, but the industry worries if it’s actually possible.
“I could see how it could negatively impact the FHA fund,” says Ryan LaRosse, CeLink chief operating officer, “as the non-borrowing spouse could be significantly younger—and may not even be 62.”
Under such a rule, HUD would have to hold onto the loan until the significantly younger borrower passes away or moves out of the home.
“You have no way to know if [the borrower] will possibly marry [after they take out the loan],” says John Lunde, president of Reverse Market Insight, of the implications of allowing a non-borrowing spouse to assume a HECM loan. “There’s no way to make that work.”
Frank and Guitierrez state a different opinion in the letter: “We believe that HUD can revise this guidance to protect HECM borrowers and their families by making policies consistent with these prior expectations, in a manner that does not pose a risk to the FHA fund.”
Written by Elizabeth Ecker