A new federal rule has taken effect aimed at protecting certain spouses of reverse mortgage holders from being forced out of their homes when the mortgage holder dies.
Borrowers must be 62 years or older to qualify for a reverse mortgage. Until now, if one spouse was under age 62, the younger spouse had to be left off the loan in order for the couple to qualify. Some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way.
But couples often did this without realizing the potentially catastrophic implications. If only one spouse's name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction. Although this prospect is, perhaps, explained by the disclosures made in specific instances, the truth is that most seniors are unaware, informed generally by advertisements touting the benefits of reverse mortgages, which assure seniors that they can remain in their homes.
In 2012, AARP sued the Department of Housing and Urban Development (HUD) on behalf of the surviving spouses of individuals who took out Home Equity Conversion Mortgage (HECM), the most widely available reverse mortgage and are administered by HUD. The spouses in the suit could not sell and repay their loans because, due to the housing downturn, the homes were worth less than the balance due on the reverse mortgage.
In a decision issued September 30, 2013, the U.S. District Court for the District of Columbia agreed with AARP and told HUD to find a way to shield surviving spouses from foreclosure and eviction.
HUD developed a new rule that took effect August 4, 2014, and that better protects at least some surviving spouses. Under the rule, if a couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.” If the older spouse dies, the non-borrowing spouse may remain in the home, provided that the surviving spouse establishes within 90 days that she has a legal right to stay in the home (this could, for example, be an ownership document, a lease, or a court order). The surviving spouse also must continue to meet the other requirements of a reverse mortgage holder, such as paying property taxes and insurance premiums.
However, the non-borrowing surviving spouse cannot access the remaining loan balance, and the new rule protects only spouses who were married to the borrowing spouse at the time the loan was taken out. Spouses who married the borrowing spouse after the mortgage was taken out are not protected.
One major downside is that under the new rule, spouses will no longer be able to leave a younger spouse off the mortgage in order to get a larger loan amount. This means that loan amounts will be less for such couples because loans are based on the younger spouse’s age. This is a particularly unfortunate event where the younger spouse is unable to support the couple, and is not the heir of the home at any rate, such as where there is a prenuptial agreement.
Finally, the new HUD rule affects only loans written after August 4, so it does not protect non-borrowing spouses on existing reverse mortgage loans, as Hayward, California, elder law attorney Gene Osofsky points out in his excellent blog post on the new rule. However, Osofsky notes that surviving non-borrowing spouses on older loans might still attempt to seek protection under the umbrella of the court’s ruling in the AARP case.
Prof. Jack M. Guttentag, the self-styled “Mortgage Professor,” has been critical of the change and sees one particularly ominous consequence. Writing in a July 19 article, he said that in anticipation of death a borrower could draw the full amount of any unused credit on the loan, making it accessible to the non-borrowing spouse. “This is a horror show waiting to happen that will seriously endanger the integrity of the program,” Guttentag warns. He does not elaborate on what the horror show could be, but presumably it involves more foreclosures.
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