Non-Borrowing Spouse Confusion Continues for Reverse Mortgage Borrowers

The U.S. Department of Housing and Urban Development updated reverse mortgage regulations in 2014 to make it easier for non-borrowing spouses to stay in their homes after the death of the borrower, but problems and confusion over these loans continue.

Just last month, a Florida court superseded federal law and ruled in favor of a reverse mortgage lender and not a widow whose Home Equity Conversion Mortgage-borrowing spouse had passed away, concluding that she must vacate the home.

And last year, the issue received the attention of two U.S. Senators — Republican Marco Rubio and Democrat Catherine Cortez Masto — who sent a letter to HUD Secretary Ben Carson asking for more information about an apparent change to the definition of “mortgagor” under National Housing Act.

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On the ground level, originators are frequently left with the task of making sure non-borrowing spouses understand their rights within the loan. To begin the process, many rely on HUD’s protocol for these situations.

Melinda Hipp, a branch manager with Open Mortgage, LLC in San Antonio, Texas, said HUD’s procedure is thorough, requiring non-borrowing spouses to complete the loan counseling program and sign the counseling certificate with the borrower. She added that her company, Open Mortgage, does more extensive training internally on how to work with a non-borrowing spouse.

“You want them to understand the paperwork, but you can’t guarantee that they will pay attention,” she said, noting instances where non-borrowing spouses were not concerned with the details.

Harlan Accola, national director for reverse mortgages at Madison, Wis.-based Fairway Independent Mortgage Corporation, said he also does a great deal of pre-loan counseling with non-borrowing spouses and urges the write-up of proper legal documents detailing what happens after the borrower dies.

“So many people do not have the proper legal documents done,” he said. “They don’t do it because it’s expensive, but it’s less expensive than probate.”

He said after origination he proactively keeps in touch to later refinance and add the non-borrowing spouse to the loan as soon as they reach 62; many non-borrowing spouses are too young to qualify for a reverse mortgage at the time of origination.

Laurie MacNaughton, a reverse mortgage specialist with Atlantic Coast Mortgage, LLC in the Washington, D.C. area, called the 2014 changes a “rude awakening,” as many originators thought the problems would be over. After struggling to negotiate the terms with the servicer herself for her first post-2014 clients, she began to send non-borrowing spouses to an attorney. MacNaughton makes these potential difficulties known to the client at the beginning of the loan.

“It’s tricky,” she said. “Just because [the loan was originated] after 2014 doesn’t mean they are a shoe-in. I tell them, ‘If your spouse predeceases you, make me your first phone call,’ and I immediately refer them to the attorney I’ve trained specifically to deal with this.”

All originators interviewed said the loan servicer needs to be contacted as soon as possible after the death of the borrower, either by the non-borrowing spouse, an attorney, or another representative.

They also noted that non-borrowing spouses need to understand that they can remain in the home only if the borrowing spouse dies, not if the borrower is moved to a nursing home or care facility.

“Communication is the solver of all problems, and it’s especially true in the reverse mortgage world,” Hipp said.

Written by Maggie Callahan

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  • Ms. Callahan,

    In light of Mortgagee Letter 2015-15 why do you claim the following: “Just last month, a Florida court superseded federal law and ruled in favor of a reverse mortgage lender and not a widow whose Home Equity Conversion Mortgage-borrowing spouse had passed away, concluding that she must vacate the home.”

    First, let us get clear about what federal law says and does not say. The only LAW dealing with this issue is 12 USC 1715z-20(j) which states in part: “Safeguard to prevent displacement of homeowner —
    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.”

    This provision was litigated in a federal district court and then in the Federal Third Circuit Court of Appeals in a case known as Bennett vs. Donovan [703 F.3d 582 (D.C.Cir.2013)] and financed in large part by AARP; however, HUD did not choose to appeal the decision of the appellate court to the US Supreme Court. Instead HUD issued two distinct Mortgagee Letters in a step to mitigate further losses in the MMI Fund. In Mortgagee Letter 2015-02, HUD mandated that if an eligible non-borrowing spouse meets specific requirements, not only at closing but throughout the loan as well as meeting timely additional requirements following the death of the borrowing spouse, that spouse can defer payment of the balance due until that spouse no long meets the covenants in the HECM. If the HECM has a case number assigned after August 3, 2014, the lender must follow the rules in Mortgagee Letter 2015-02.

    On the other hand, if a HECM has a case number assigned before August 4, 2015, Mortgagee Letter 2015-15 controls and allows the lender to foreclose no matter if the eligible spouse meets all requirements to defer payment of the balance due or not. Otherwise, if the lender allows the eligible non-borrowing spouse to defer the balance due and that spouse meets almost exactly the same rules as found in Mortgagee Letter 2015-02, that spouse can defer such payment in the same way as found in Mortgagee Letter 2015-02.

    In his column of April 29, 2018 titled, “Florida Court Rules in Favor of Bank in Non-Borrowing Spouse Case,” Mr. Alex Spanko tells us:”The case involved Roberto and Luisa Palmero, a Florida couple that took out a reverse mortgage with Value Financial Mortgage Services in December 2006.” That means that the case number was assigned before 2014 and Mortgagee Letter 2015-15 controls. Again that Mortgagee Letter allows the lender to foreclose no matter if an eligible non-borrowing spouse meets all deferral requirements or not.

    Can you explain why you conclude that “a Florida court superseded federal law?” No one has found that Mortgagee Letter 2015-15 is wrong, not even the Federal Third District Court of Appeals. My personal position is that the state court ruled correctly because the plaintiffs did not argue the case properly. HOWEVER, if Mortgagee Letter 2015-15 is compliant with 12 USC 1715z-20(j), it seems the state court ruled property. Please explain why you conclude differently.

    • James,

      I feel like others I hear from. What is the rule?

      Ever since HUD walked away from the Court of Appeals in Bennett versus Donovan and made up these ridiculous rules, non-borrowing rules are more confusing, not less.

      Some of these survivng non-borrowing spouses in the assignment pool ought to get their deferral and then take HUD to court for not treating them in conformity to the law against spousal displacement. If it is done at the lender level, it is harder to get at HUD but in assignment, it should be far less so.

      Has Ms. Callahan gotten back to you?

      • reverse_mortgage_maven,

        I cannot find that Ms. Callahan has answered the question. Like most originators, she seems to believe that there is a valid rule and pretends that it is so. But none of us actually know what that rule is since we have yet to hear from the Supreme Court on the matter.

  • “they can remain in the home only if the borrowing spouse dies.”
    Thank you! When I saw the title of the article I was hoping this would be addressed. While DEATH is the most common maturity event in NBS cases, the couple must be prepared for “in-home” care to prevent a NON-OCCUPANCY event. Whether, or not, the NBS can stay will depend on the FHA case number date, the conveyance of title, the specific maturity event, etc.

    • Dan,

      Here is where the use of the term NBS (Non-Borrowing Spouses) falls apart. Under the Mortgagee Letters, a NBS who married the borrower after the HECM closes is ineligible for deferral by the very definition of eligible NBS. So there is no qualifying maturity event, proper conveyance of title, or meeting any other qualifying condition that will allow such NBSs defer paying the balance due.

      Also all NBSs have the right to remain in the home as long as legally permitted even if the HECM is in default awaiting foreclosure, unless the occupant surrenders occupancy before foreclosure. Of course if the NBS is ineligible to defer the payment of the balance due, such time should be used to prepare to move and then move out of the home. How long a NBS can remain in the home after a maturity event is a matter of state law, unless the maturity event is the death of the borrowing spouse and the NBS is eligible and executes all requirements to defer the payment of the balance due.

  • Very interesting discussion on everyone’s part. The article brings out common sense conclusions, we should all understand the ruling in detail as well as mortgagee letter 2015-15 that Jim refers to!

    Dan Hultquist brings up a very good point that was not mentioned in the article!

    Never the less, the confusion lies in the fact that many in our industry originating HECM’s do not fully understand the NBS ruling along with the changes made to it.

    Look real hard at Jim Veal’s comment, yes it is a long one but the comment addresses many great facts we can all learn from!

    John Smaldone
    http://www.hanover-financial.com

  • “The subject property is considered to be the principal residence of any borrower who is temporarily or permanently in a healthcare institution as long as the subject property is the principal residence of at least one (1) other borrower who is not in a healthcare institution.” — I, too, am glad this was discussed, as I had not read it to exclude NBS, but, of course, they are not “(1) other borrower”, are they…Does make one realize the importance of trying to get them onto the HECM once eligible. Thanks.

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