Non-Borrowing Spouse Update Brings New Challenges to Reverse Mortgages

While recent updates to rules regarding non-borrowing spouses of reverse mortgage borrowers may appear beneficial for consumers on the surface, they bring about several underlying challenges, suggests a recent column from Jack Guttentag, The Mortgage Professor.

The issue of the non-borrowing spouse has been a topic of debate and increasing litigation between the Department of Housing and Urban Development (HUD) and AARP, which filed a lawsuit against the federal agency in 2011 for foreclose actions taken in the event of a Home Equity Conversion Mortgage (HECM) borrower’s death.  

In response to the ongoing series of lawsuits, in April HUD devised changes to the HECM program that will protect non-borrowing spouses, allowing them to remain in their home even after their borrowing spouse has died, provided they are married to the borrower at the time of loan closing, among other requirements.

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But now, as those updates approach their effective case number date of August 4, the HECM program will encounter some obstacles.

“Effective Aug. 4, more sand will be thrown in the HECM gears, thanks to a misguided lawsuit by AARP against the Department of Housing and Urban Development, and a misguided change in HECM rules by HUD in response to the lawsuit,” Guttentage writes.

The new rules carry two major costs, Guttentag notes, with one being that seniors with younger spouses are required to purchase tenure protection for them whether they need it or not. 

The second cost is more “insidious,” Guttentage suggests, as NBSs cannot draw funds under the HECM even if they have their tenure protected. 

“A borrower in anticipation of death, however, can draw the full amount of any unused credit line, including the line obtained from conversion of monthly payments, which then becomes accessible to the NBS,” he writes. “This is a horror show waiting to happen that will seriously endanger the integrity of the program.” 

Read The Mortgage Professor’s column.

Written by Jason Oliva

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  • I politely disagree with the professor’s assessment of the
    NBS issue. I have personally originated a large number of reverse mortgages
    over a dozen years and a tiny fraction of those involved NBS’s. Mind you, this
    was during a time when it was much easier to originate a loan with a NBS. These
    days I simply choose to not do transactions in which there is a NBS (which I
    still rarely come across). Having only penetrated a pathetic 2% of the market as an
    industry, I believe this represents such an infinitesimal sub-set of the available
    market that it is a waste of time even worrying about it. Mr. Guttentag, as the
    proverbial Chicken Little, described this new world of NBS issues as “insidious”
    and a “horror show waiting to happen”. Please, can anyone provide any
    compelling, factual data to support such a horrific conclusion as is drawn by
    Mr. Guttentag? In my opinion the more insidious activities lie with individuals
    and companies who cleverly and dishonestly push seniors into higher margin
    loans coupled with higher fees, driven by greed without regard to the future
    implications on the very borrowers they claim to be helping.

  • Jack,
    Some reverse mortgage lenders already advocate establishing of LOC’s with minimum upfront draws and allowing the growth to occur for future withdrawal suggesting that the witdrawal must be made before death. Not sure how the NBS situation is any different.

    • sudden or accidental death? we don’t all get advance warning. If HUD is going to adjust PLF’s to account for younger participants then the younger should be entitled to the same rights as the eligible borrower. The problem is, we should have never started down this road to begin with….The lawsuit brought by AARP should never have prevailed.

  • While Jack’s article is oddly constructed, he gets the facts of the AARP case substantially correct. Yet he ignores the fact that HUD lost in court but claims it will appeal that decision.

    To say that I disagree with Jack’s assessment of the credibility of the case is a vast understatement. The legal reasoning behind the case is sound whether the HECM borrowers or the NBSs were deceived into doing what they did or not. The issue is whether a NBS can be displaced by the death of a borrowing spouse or not. Under 12 USC 1715z-20(j), the Court of Appeals correctly found NBSs cannot be displaced.

    Personally I find the subsection repugnant as being not only fiscally irresponsible but also a misguided socialist concept fully supported by the Aging in Place dogma. Yet it is to this day, the law of the land; thus to that extent, I fully support the findings of the Court of Appeals.

    As to all HECMs with case numbers assigned after August 3, 2014, Mortgagee Letter 2014-07 will soon be the law of the land as to those HECMs and any related NBSs under the new powers of the HUD Secretary holds under 12 USC 1715z-20(h)(3) [commonly referred to as the Reverse Mortgage Stabilization Act of 2013]. Thank goodness for a socialistic administration which has finally but LEGALLY struck down a socialistic provision in the law; you don’t find that very often.

  • I hate to say this but the whole subject about the NBS has been and will be one of the more confusing rules implemented.

    I agree, there will be many challanges with the new ruling and many questions un answered. I know I have many questions I have not been able to get answers on and I am sure many of you have as well.

    The challenges come because HUD has not made the ruling clear to the industry and this will play havoc on all of us come August 4th. I would not put it past HUD to issue another mortgagee letter before August 4th on the NBS ruling??

    John A. Smaldone

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