Massachusetts High Court Reminds Reverse Mortgage Holders- Foreclosure IS possible; Rules that Lenders Don't Have to Spell Out Foreclosure Risk to Consumers

The Supreme Judicial Court of Massachusetts ruled in favor of a reverse mortgage lender in a foreclosure case earlier this month, finding that mortgagees don’t have to explicitly spell out their legal right to foreclose in their paperwork.

The case involved James B. Nutter Company and three reverse mortgage borrowers, all of whom secured Home Equity Conversion Mortgages in 2007 and 2008. Within the span of a few years, two had died and the third became too ill to remain in the home; J.B. Nutter then moved to foreclose by bringing actions against the borrowers or their executors in local land court.

But the case was delayed due to an objection over the company’s ability to foreclose on homes under state law. In Massachusetts, the Supreme Judicial Court (SJC) wrote in its opinion, foreclosures can proceed without a judge’s confirmation as long as the mortgage itself gives the lender “the power of sale” in such situations.

The problem stemmed from some imprecise language in J.B. Nutter’s standard reverse mortgage paperwork. The company informed borrowers that it “may invoke the power of sale and other remedies permitted by applicable law … At this sale, Lender or another person may acquire the Property. This is known as ‘foreclosure and sale.’ In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law.”

The disclosure, though left unresolved issues.  The form language  fails to directly refer to the “statutory power of sale,” which was insufficient to justify the lender’s power to foreclose after the death of a borrower or his departure from the property.

But despite the lack of legal specificity, the SJC found that “no reasonable borrower” could assume that a reverse mortgage lender did not have the power to sell his or her property in the event of a foreclosure.

“It matters that this is a contract for a reverse mortgage, rather than a traditional mortgage, where the borrower makes no monthly payments of principal or interest, where the lender cannot hold the borrower personally liable for the debt, and where the lender’s only recourse on default is to obtain repayment through a foreclosure sale,” the court wrote in its opinion.

“Without a power of sale, the only way that a lender can recover the principal of the loan, not to mention interest and fees, is through foreclosure by entry — a process that would take three years — or foreclosure by action, ‘a method rarely used’ in Massachusetts.”

The court also noted that J.B. Nutter would still have to abide by all other rules regarding foreclosures in the state.

Interestingly, the court had some words of praise for the reverse mortgage product in general — while also citing a controversial report from the Consumer Financial Protection Bureau that advised consumers against taking out the loans to delay Social Security payments.

“For many retirees, one of the most reliable potential sources of income in later life is the accrued equity in their homes,” the court wrote by means of introduction.

Like many financial products and strategies, a reverse mortgage has a specific purpose, and specific circumstances justify its use.  Unfortunately, like most financial products, consumers do not always understand fully these purposes or circumstances and find themselves suffering disadvantage or harm when they are misused. The consequences can be devastating. 

As discussed preciously on this blog, these financial devises can be particularly troubling for elderly couples that do not plan carefully.  See the articles posted here and here, for example. 

Groups Charge That New HUD Policy Gives Little Relief to Surviving Spouses of Reverse Mortgage Holders

Consumer advocacy groups are denouncing the U.S. Department of Housing and Urban Development’s (HUD) latest attempt to protect the spouses of reverse mortgage holders from being forced out of their homes when the mortgage holder dies. 

HUD’s plan, outlined in Mortgagee Letter 2015-03, “will not protect surviving spouses from displacement and will lead to more foreclosures,” the National Consumer Law Center charges in comments on the new policy filed on behalf of its low-income clients and five other advocacy groups.

As I previously reported, couples often fail to put both spouses on the reverse mortgage loan, either because one spouse is under age 62 or they are urged to do so by aggressive lenders in order to get a bigger loan. Few couples are aware of the potentially catastrophic implications.  In the past, 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.  

In 2013 a U.S. district court ruled that in not protecting spouses from foreclosure, HUD was violating the reverse mortgage statute, and the court ordered that the agency find a way to shield surviving spouses from foreclosure and eviction.  In response, HUD began by issuing a new rule in 2014 to help protect spouses left off loans written after August 4 of that year.  But the rule did nothing for non-borrowing spouses on loans that had been written before that date.

Mortgagee Letter 2015-03, issued in January 2015, was aimed at this group.  Under the new policy, when the borrowing spouse dies reverse mortgage lenders have the option of assigning the loan to HUD, a move that would allow an eligible surviving spouse to remain in the home.  However, the consumer groups charge that HUD’s guidance is so unclear that most lenders will choose the safer alternative of foreclosure, and that even if lenders do opt for the assignment route, few surviving spouses will qualify for it.  This is because the spouses will have to come up with a large sum of money to quickly pay down the loan in order to pass a HUD-prescribed loan limit test, a feat that will prove “impossible for many newly widowed non-borrowing spouses.”

The National Consumer Law Center and the other groups recommend alternative options that they say will provide true relief to non-borrowing spouses facing foreclosure while protecting the integrity of the insurance funds.

To read the Center's comments on the new HUD policy, click here. 

Feds Move to Protect Some Surviving Spouses of Reverse Mortgage Holders

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. 

New Rules Make It More Difficult to Get a Reverse Mortgage

The federal government has tightened the rules regarding reverse mortgages, making it harder for some seniors to get these types of mortgages and reducing the amount of their home’s value that they can tap. The new rules are an effort to strengthen the federal Home Equity Conversion Mortgage (HECM) program, which insures almost all reverse mortgages and which has seen default rates rise.

For more information, click here to travel to my newsletter article!

Reverse Mortgages Are Causing Some Homeowners to Lose Their Homes

A reverse mortgage can be a great tool in the right circumstances, but if you aren't careful you could end up losing your home. A recent front-page article in the New York Times lays out some of the problems homeowners are encountering with these mortgages.

You must be 62 years or older to qualify for a reverse mortgage, which allows you to use the equity in your home to take out a loan. The loan does not have to be paid back until you sell the house or die, and the loan funds can be used for anything, including providing money for retirement or to paying for nursing home expenses.

It all sounds like a no-lose proposition, but there are downsides. For example, these loans carry large insurance and origination costs, they may affect eligibility for government benefits like Medicaid, and they are not ideal for parents whose major objective is to safeguard an inheritance for their children. There also have been complaints about aggressive marketing techniques.

In addition to these drawbacks, the Times points out two more important potential pitfalls:

• Pay attention to whose name is on the mortgage. When purchasing a reverse mortgage, be sure to put both spouses' names on the mortgage. If only one spouse's name is on the mortgage and that spouse dies, the surviving spouse will be required to either pay for the house outright or move out. This might happen if only one spouse is over 62 when the mortgage is signed. According to the Times, some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way.

• Watch out for a lump-sum loan. Usually reverse mortgages come in a line of credit with a variable interest rate. This allows homeowners to take money only when they need it. According to the Times,some brokers have been pushing lump-sum loans because the brokers earn higher fees. The problem is these loans have a fixed interest rate. The interest charges are added each month, so that over time the total amount owed can surpass the amount of the original loan.

The Consumer Financial Protection Bureau, which was created in the wake of the mortgage crisis in part to scrutinize consumer mortgages, is working on new rules to better regulate reverse mortgage lenders and provide disclosures to seniors.

To read the New York Times article about reverse mortgages, click here

Thirty Thousand Seniors To Get Default Notices from Reverse Mortgage Lenders

About 30,000 seniors will receive tough "dun" letters from their reverse mortgage lenders. This largest batch of mortgage delinquency notices in U.S. history will demand payments in 30 days and threaten foreclosures of the homes.

These 30,000 homeowners over age 62 are behind on property taxes or have not paid homeowners' insurance. Both overdue items violate terms of the reverse mortgages and trigger foreclosure.

Lenders are required to mail the letters to the seniors between now and April 29, 2011. The massive collection effort was ordered by the Federal Housing Administration (FHA) which insures most reverse mortgages under its "HECM" program - Home Equity Conversion Mortgage.

A Dramatic Loss of Wealth

Seniors Scramble for Solutions

A recent study suggests that current economic woes affecting the value of real estate will strip most people of wealth, with the hardest hit being those currently poised to retire.

The Center for Economic and Policy Research extrapolated from data from the 2004 Survey of Consumer Finance to project household wealth under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average.

The projections show that the vast majority of families between the ages 49-54 will have little or no wealth by 2009 in any of these scenarios and that those persons who just be approaching retirement will have very little to support them-selves in retire-ment other than their Social Security.

The projections also show that a large number of families will have little or no equity in their homes by the end of 2008. Finally, the projections show that the renters within the same wealth categories in 2004 will have more wealth in 2009 than homeowners in all three scenarios.

Seniors and their financial planners are scrambling to develop financial solutions and strategies. You should consider two obvious strategies. First, if you have debt on your home, you should eliminate it quickly. If you need a referral to an agent that will show you how you can within a few years eliminate your mortgage debt without bankruptcy, debt consolidation, or adversely affecting your credit rating, please call the office at 877-816-8670.

If your are likely to need a reverse mortgage in the future, you might consider obtaining a reverse mortgage line of credit now, before the value of your real property is further mpaired. A line of credit does not obligate that you access the funds, but the funds wll be available for the reminder of your life, if you later need them. Moreover, you ensure access to a greater amount, or at least some amount, whereas later, after the value of your home is further reduced by the market, you may not be eligible at all, or eligible for as much.

If you need a referral to a reputable reverse mortgage specialist or financial planner, please call the office at 877-816-8670.

A Dramatic Loss of Wealth: Seniors Scramble for Solutions

A recent study suggests that current economic woes affecting the value of real estate will strip most people of wealth, with the hardest hit being those currently poised to retire.

The Center for Economic and Policy Research extrapolated from data from the 2004 Survey of Consumer Finance to project household wealth under three alternative scenarios. The first scenario assumes that real house prices fall no further than their level as of March 2008. The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average. The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average.

The projections show that the vast majority of families between the ages 49-54 will have little or no wealth by 2009 in any of these scenarios and that those persons who just be approaching retirement will have very little to support them-selves in retire-ment other than their Social Security.

The projections also show that a large number of families will have little or no equity in their homes by the end of 2008. Finally, the projections show that the renters within the same wealth categories in 2004 will have more wealth in 2009 than homeowners in all three scenarios.