HUD Addresses Risks in Reverse Mortgages

Our recent articles have addressed issues of “due diligence” when buying and selling real property, each intended to encourage the use of trained professionals. Our last article focused on borrowing to finance the purchase. This article specifically focuses on the most current development with respect to reverse mortgages.

The U.S. Department of Housing & Urban Development, (HUD), is the federal agency that has jurisdiction over the Reverse Mortgage Program. (Home Equity Conversion Mortgage, HECM), which allows homeowners age 62 0r older, to tap into the equity on a primary residence. Under a Reverse Mortgage, the borrower, (mortgagor), receives funds but makes no monthly payments. The lender, (mortgagee), is not repaid until the borrower dies or sells the home or moves out of the home. The loan is non-recourse, meaning the lender can only look to the equity remaining in the home at that time. Should the equity be insufficient to fully compensate the lender, HUD insurance makes up the difference. Which brings us to the point of this article: The loan is based, not only on the equity in the home, but also the age of the youngest borrower. The older you are, the more you can get. If a couple takes out a Reverse Mortgage, the amount of the loan will be based on the younger borrower’s age.

Some couples, in recognition of this provision, took the younger owner off the deed in order to qualify for a larger loan. Unfortunately, when the person named on the deed died, the survivor had to either pay the loan balance or face foreclosure, a not uncommon occurrence.

A lawsuit brought by Robert Bennett against HUD Secretary Shaun Donovan, brought the matter to a head. Robert Bennett was ten years younger than his wife. When they took out a Reverse Mortgage, Robert removed his name from the deed and his wife became the sole owner. Shortly thereafter, she died. The lender informed Robert that since he was not a borrower, the loan was due and payable. Robert alleged that the Housing and Community Development Act of 1987, which authorized HUD to administer the program including circumstances in which Robert found himself, protected him from responsibility for paying the loan or face foreclosure. The District of Columbia District Court ruled that Robert Bennett lacked standing and dismissed his complaint. On January 4, 2013, the U.S. Court of Appeals for the District of Columbia took a different view. It stated: “The issue on appeal is limited to appellant’s (Bennett) standing. But we admit to being a little puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.” The court found in favor of Bennett. It suggested to HUD that it formulate an appropriate relief.

In a New York Law Journal Article written by Daniel J. Fish published on May 16, 2014, the author points out. “As a result of the decision on remand HUD issued ‘Mortgage Letter 2014-07’ implementing the decision.” He further states the following conditions:

The change of policy will only be effective for reverse mortgages on or after August 4, 2014.

The new rule will require that the non-borrowing spouse have been married to the mortgagor at the time of closing on the reverse mortgage. There will be no protection for a non-borrower who marries the mortgagor after the closing.

The surviving non-borrower spouse will not be permitted to assume the loan and will not be able to receive the loan proceeds.

Lenders will be required to calculate the amount of the loan by taking into account the age of the non-borrower spouse.

HUD does concede that future non-borrowing spouses will not need to pay off or refinance the reverse mortgage upon the death of the mortgagor spouse.

The U.S. Court of Appeals ruling states the following: “Robert Bennett and Leila Joseph are the surviving spouses of reverse mortgage borrowers whose mortgage contracts were executed pursuant to HUD’s insurance program. Only their spouses, not the appellants themselves were legal borrowers under the mortgage contract. Appellants allege that they were assured by their brokers that they would be protected from displacement after their spouses died, and that in reliance on this protection, they quit claimed interest in the homes they had owned jointly with their spouses when their mortgages were originated.”

This should serve as a cautionary note to the consumer.