Non-Borrowing Spouse Scenario Sheds Light on Reverse Mortgage Misunderstandings

Multiple high-profile news articles that have appeared in different media outlets this year have highlighted the continued difficulties faced by the reverse mortgage industry in terms of protections in place for non-borrowing spouses (NBS), oftentimes including information that is either incomplete, out-of-date or both.

Two reverse mortgage industry experts offer their perspectives on this issue to RMD, while also addressing the ongoing reputational problems that matters related to NBS continue to have in the industry.

Two high-profile NBS stories

In an article appearing at Realtor.com titled “Reversal of Fortune: The Mortgage Mistake That Could Cost One Woman Her Longtime Home,” a 79-year old widow tells the story of how her husband entered into a Home Equity Conversion Mortgage (HECM) transaction in 2013 in an attempt to sustain the couples’ finances until their deaths. When the husband died, foreclosure actions were immediately taken and the widow – whose name was intentionally taken off the home’s title under the assumption it could be put back prior to the loan’s repayment – was in the process of losing her home as of late May.

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Another NBS instance was highlighted by the media last month in an investigative article published in national news outlet USA Today. Similarly to the Realtor.com article, this instance revolved around a NBS who was taken off of the liened property’s title in order to allow for the couple’s access to a higher level of proceeds in 2010. When the borrowing husband passed away in 2016, the lender instituted a foreclosure action that has resulted in the non-borrowing wife having to vacate the property.

Industry experts and personnel are all too familiar with the prevalence of stories like these appearing in the press, which often don’t include the details of the loan arrangement itself in telling the whole story.

Financial situation of the borrowers

No one enjoys reading about a situation in which a senior is displaced from his or her home for any reason, but one of the ways stories like these are shaped is by maintaining a sole focus on the failings of the reverse mortgage program and not on the specific financial situations of the borrowers themselves. This is not because it shifts any “blame” for a foreclosure, but because this is an important detail that media coverage often leaves out: the need for a reverse mortgage that the borrower(s) identified in the first place.

“When we see unfortunate cases where widows or widowers are displaced, it is often hard to see where the reverse mortgage was beneficial without reviewing the loan, as well as the financial history of the individual,” says Dan Hultquist, VP of Organizational Development at Finance of America Reverse. “For example, at the time [the Realtor.com] loan was originated [in 2013], the principal limits would’ve been enormously generous by today’s standards. So, if removing her from title was the only way they could qualify, then the couple’s outstanding debt obligations must’ve been extremely high.”

Because of that, concluding that a reverse mortgage leaves displaced NBS in “worse financial shape,” as contended by these articles, may not be accurate, Hultquist says.

“Remember, the couple’s debts that drove them to the HECM product were wiped out at closing,” he says of the Realtor.com story. “In addition, they haven’t made any monthly principal and interest payments on the reverse mortgage proceeds that were used for this purpose. In essence, the cash flow savings each year were likely very large.”

Taking the NBS off the title also represents a big misstep on the part of all involved parties when this scenario appears, according to John Lunde, president of Reverse Market Insight.

“Borrowers should never take an owner off title to do the loan if they intend for that person to stay in the home long term,” Lunde says. “That being said, the writer is not clarifying the relative age of the husband and how this could have benefited the couple in receiving more borrowing capacity on the reverse mortgage.”

Presenting the downside as a key part of a story without expressing the reason that a spouse’s name was taken off the title while implying that the lender was the sole beneficiary from such an action betrays a heavy bias, Lunde says.

Upfront costs

In the case of the Realtor.com article, reference is made to particularly exhorbitant upfront costs associated with establishing this reverse mortgage, but the cited numbers fail to stand up to the scrutiny of the industry experts RMD sought out.

“Reverse mortgages can also be pricey, with upfront costs that can run $15,000 to $20,000 on a $200,000 home. That’s important to consider, especially for those who don’t plan to stay in their homes long or want to borrow only a small amount,” the article reads.

“I’ve never seen a HECM (for a $200,000 home) with fees of this magnitude,” Hultquist says. “The bulk of the upfront fees are 2 percent in insurance and at most 2 percent in origination fees for a total of $8,000 in this case. […] Nevertheless, these costs become a minor issue when future cash flow advantages of the reverse mortgage are clearly expressed.”

Beyond this, one signature reverse mortgage feature garners no mention in the article at all, adds Lunde, a trait shared with another USA Today article published in April of this year.

“[This coverage] also fails to note that HECMs are non-recourse loans, implying that borrowers or their heirs are responsible for the [loan] balance – or the lender can collect the property,” Lunde says. “Any mortgage would be required to be repaid by whoever the owner or legal heir to the property is, or the property can be foreclosed. That is not unique to reverse mortgages, it’s common to all mortgages.”

Added NBS protections

In 2014 and 2015, HUD addressed many of the common issues related to NBS that offers more thorough protections to ensure that scenarios like these are more limited in the future, Hultquist says.

“Since that time, couples have an added layer of protection and there is no longer a financial incentive to remove a younger spouse from title. In fact, eligible non-borrowing spouses have options for remaining in the home after the death of the last borrower,” Hultquist explains. “Clearly this loan was originated long before these reforms.”

One of these added protections for loans originated prior to August 4, 2014 is that HUD allows lenders to assign loans with surviving NBS to HUD for servicing under a Mortgagee Optional Election (MOE) Assignment.

“This option may defer the due and payable status of the loan,” Hultquist explains. “However, surviving spouses need to know that there are strict requirements and timelines to qualify for such a deferral.”

The value of trusted advisors

The final paragraph of the Realtor.com article quotes the affected spouse, Sharon Voss, and what she wants other reverse mortgage borrowers to know before getting involved in a transaction.

“Whatever you do, get an attorney to read over everything before you agree to the terms,” says Voss. “[A reverse mortgage] may sound like a good situation, but make sure your name is on the deed.”

While these new protections will help some NBS to remain on the property’s title, this emphasizes that one of the best ways a borrower can avoid situations like these is by having those they trust help them reviewing the documentation associated with a reverse mortgage, Lunde adds.

“I don’t disagree with [the Realtor.com article’s] closing paragraph at all,” he says. “Borrowers should have a trusted advisor review closing documents and loan terms before signing and anyone wanting to stay in the property long term should be on the home’s title and also the loan.”

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  • The RMD article states: “One of these added protections for loans originated prior to August 4, 2014 is that HUD allows lenders to assign loans with surviving NBS to HUD for servicing under a Mortgagee Optional Election (MOE) Assignment.” Like so many things, the quotation is inaccurate.

    HECM origination is the date that the HECM closes but that is not the date used in the three Mortgagees Letters on Non-Borrowing Spouses. For example, the Mortgagee Letter which applies in the two specific loan cases cited is Mortgagee Letter 2015-15 which states: “Mortgagee Optional Election Assignment for Home Equity Conversion Mortgages (HECMs) with an FHA Case Number assigned prior to August 4, 2014.” Thus it is the date of case number assignment that is used in each of the three Mortgagee Letters.

    As to Mortgagee Letter 2015-15 and ONLY Mortgagee Letter 2015-15, a non-borrowing spouse cannot qualify even if that spouse meets all requirements for deferral, unless in addition to meeting those qualifications the lender chooses to elect the assignment option. Thus if the lender wants to foreclose, there are no non-borrowing spouse protections.

    As to Mortgagee Letters 2014-07 and 2015-02, if the non-borrowing spouse qualifies for deferral status, then payment of the balance due is deferred until the time that an uncured default occurs.

    • Thank you for this clarification, John.

      I have been contacted by two NBS on loans (not mine) for which FHA case #’s were assigned prior to Aug 4, 2014 where the borrowing spouse has died. In both cases I advised them of ML 2015-15 and suggested they contact the servicer for consideration under those provisions. The NBS appeared to qualify, but In BOTH cases the servicers chose NOT to elect the assignment option.

      Do you have any thoughts on why a servicer would NOT want to elect the assignment option?

    • While “origination” and “case number assignment” are often used interchangeably, Mr. Veale is correct that MOE Assignments are restricted to loans with case numbers assigned prior to that 8/4/14. And while HUD does allow lenders to assign loans with surviving NBS to HUD, some spouses don’t qualify for a MOE because either the timelines were not met or the loan does not meet the requirements. But the sad reality is that this is also an “optional” election for the mortgagee, not an obligation. HUD is in no position to change legally-binding loan terms. I wish there were easy solutions to difficult problems, but the best we can do for now is to educate NBS (and the media) about the relevant guidelines and consumer protections.

      • Dan –
        Does not ML 2015-15 apply to those loans for which case #’s were assigned PRIOR to 8/4/14, as per James Veale’s post:
        “Mortgagee Letter 2015-15 which states: “Mortgagee Optional Election Assignment for Home Equity Conversion Mortgages (HECMs) with an FHA Case Number assigned prior to August 4, 2014.”

      • Yes. That is correct, Jim. If you are referencing a loan with an FHA Case # assigned prior to August 4, 2014, then ML15-15 is your best guidance. If you are referencing a loan with an FHA Case # assigned on, or after, August 4, 2014, then you would look at both ML14-07 and MLML15-02 for guidance.

  • The article was a good one, but can cause many questions. Questions like the ones Jim Veal refers to in Mortgagee Letter 2015-15. Reading what Jim has quoted about what could happen to a NBS because of Mortgagee Letter 2015-15 raises a lot of concerns for the NBS them self’s?

    In fact, we all need to be concerned with what Jim stated in his next to last paragraph, which was:
    “As to Mortgagee Letter 2015-15 and ONLY Mortgagee Letter 2015-15, a non-borrowing spouse cannot qualify even if that spouse meets all requirements for deferral, unless in addition to meeting those qualifications the lender chooses to elect the assignment option. Thus if the lender wants to foreclose, there are no non-borrowing spouse protections”.

    The major concern I have and everyone should have is the last sentience to Jim’s statement, “Thus if the lender wants to foreclose, there are no non-borrowing spouse protections”.

    Wow, how many of us are really aware of this, if in fact this is the case! I consider this a very critical issue that needs to be investigated seriously!

    I read Mortgagee Letter 2015-15 and there are areas of the mortgagee letter that does state what Jim has quoted. However, I found it to be very ambiguous, to say the least. In fact, I found the Mortgagee letter to have many areas that were ambiguous.

    As originators are are talking to their borrowers along with the borrowers non-borrowing spouses they feel the NBS is qualified?

    The subject of, “By the way, if the lender wants to foreclose if you the borrower passes away, your no non-borrowing spouse may still be able to be foreclosed upon! Meaning Mr. Borrower, your NBS may still have no protections”? WOW!!!!!!

    The point I am getting at is that no originator would ever think or even know to bring something like this up. When the originator is in front of their senior borrowers and one spouse qualifies as a NBS, the originators go over or should go over all the details that go into being able to qualify to be a NBS. This would never enter into the conversation!

    What do we do about this as an industry, we must know the facts when presenting the NBS so called benefits and protections. What we need is NRMLA or some legal entity to the facts straight and in Lehman terms that originators can understand so they can properly protect and explain to our seniors the entire picture on the NBS provision!

    This is my opinion only at this time, but it alarmed me enough to wright this opinion.

    Thank you,

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

    • John, it is my understanding that the ‘lender option’ applies ONLY to those loans for which FHA case #’s were assigned prior to Aug 4, 2014. NBS protection for loans after that date is per qualifications outlined, and if such qualifications are met the lender does NOT have the “option” to foreclose.

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