With one issue in the recent lawsuit filed by AARP against the Department of Housing and Urban Development essentially resolved, the other issue has yet to be fully addressed.
Both issues have to do with reverse mortgages that end up in foreclosure. The first issue, involving HUD’s non-recourse policy, was essentially resolved when HUD rescinded guidance earlier this month that previously required an arms-length transaction for a home with a reverse mortgage to be sold, meaning heirs would owe the full value of the loan, rather than market value of the home, when repaying the loan. This outcome, AARP argued, went against HUD’s non-recourse policy.
The second issue, however, involves the wording of a reverse mortgage statute that was created around the time of the HECM program’s inception, which AARP alleges has been misinterpreted.
According to the statute: “The terms ‘elderly homeowner’ and ‘homeowner’ mean any homeowner who is, or whose spouse is, at least 62 years of age or such higher age as the Secretary may prescribe.” Further, the statute states: “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 obligation 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 has interpreted the term homeowner to mean only a borrower (or borrowers) who are on the title of the home. However, AARP alleged that non-borrowing spouses should be able to assume the loans. In some cases where a borrowing spouse dies or leaves the home, AARP alleged, the non-borrowing spouse has been unjustly foreclosed on.
“It’s poor drafting,” says Peter Bell, National Reverse Mortgage Lenders Association president. “This section was drafted in a poor way.”
Following the lawsuit, Rep. Barney Frank (D-Mass.) and Rep. Luis Gutierrez (D-Ill.) wrote a letter to HUD encouraging that the AARP interpretation be used. “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.
If the term “homeowner” is taken to mean the borrower or borrower’s spouse, the language suggests that a HECM borrower could marry after taking out the loan, and could leave the house to his or her surviving spouse, regardless of age or HECM eligibility. Allowing off-title spouses to assume reverse mortgage loans could lead to reverse mortgages becoming very unpredictable from a lending and investor standpoint.
Written by Elizabeth Ecker