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Decision requires changes to reverse mortgage rule

By Ginny Cochran Rutledge • Wednesday, October 16, 2013

A recent opinion by the United States District Court, District of Columbia, ruled that regulations promulgated by the Secretary of the Department of Housing and Urban Development (“HUD”) conflict with federal law. This holding may lead to more protections against foreclosure for surviving spouses of mortgagors who took out reverse mortgages under HUD's Home Equity Conversion Mortgage (“HECM”) program.  In Bennett v. Donovan, — F.Supp.2d —, 2013 WL 5424708 (D.D.C. Sept. 30, 2013), widowed spouses of mortgagors with HECM reverse mortgages (“Plaintiffs”) filed suit and claimed protection from foreclosure, even though they themselves were not obligors of the notes secured by the mortgages and were not listed on the deeds of their homes. Based on the language of the uniform HECM reverse mortgages and 24 C.F.R. § 206.27, the lender can demand full payment of the loan if the mortgagor “dies and the property is not the principal residence of at least one surviving [mortgagor.]”

Since the surviving spouses were not mortgagors or borrowers who executed the notes, the lenders initiated foreclosure.  The surviving spouses filed suit and claimed that § 206.27 violated 12 U.S.C. § 1715z-20(j), a HECM provision which prohibits HUD from insuring a HECM reverse mortgage unless the mortgage provides that the homeowner's obligation is deferred until, among other events, the homeowner's death. Subsection (j) also state that “homeowner” includes the spouse of the homeowner.  Accordingly, Plaintiffs argued that §206.27 violated the statute and the lender should not be able to foreclose if the deceased mortgagor is survived by a spouse.  The district court first dismissed the case due to lack of standing, but the Court of Appeals reversed and remanded it back to the district court. Bennett v. Donovan, 797 F.Supp.2d 69 (D.D.C.2011) reversed in Bennett v. Donovan, 703 F.3d 582 (D.C.Cir.2013). In its 2013 opinion, the district court held that HUD violated § 1715z-20(j) when it insured the reverse mortgages of Plaintiffs' spouses pursuant to agency regulation, which permitted their loan obligations to come due upon their death regardless of whether their spouses (Plaintiffs) were still alive.  The court performed a Chevron analysis and ruled that the statute was clear on its face and Congress likely intended to include the death of the homeowner's “spouse” as a condition- precedent of the deferral of the loan obligation, regardless of whether the spouse was a mortgagor or borrower.

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984) (outlining a two-step process courts must follow in determining whether to defer to an agency's interpretation of a statute).  Interpreting the statute otherwise would render the definition of a “homeowner” in subsection (j) meaningless. The court also noted that Congress' use of the word “spouse” was specific to that subsection, confirming that “Congress drafted the statute with an understanding that spouses could be distinct from homeowners, and that scenarios might arise where reverse mortgages would be entered into by only one of two spouses but still affect the non- mortgagor spouse.”

Although the court was unable to require HUD to follow a precise set of steps to remedy the legal error, it did remand the case to HUD for further proceedings consistent with its opinion. HUD has been given the direction to protect the surviving spouse of a reverse mortgage borrower and has the discretion to determine how to accomplish that task. The Federal Housing Authority's (“FHA”) HECM program provides reverse mortgages to those who are 62 years or older and allows elderly homeowners to obtain additional income by borrowing against the equity in their homes.

At loan origination, the mortgagor's spouse may not sign the note for multiple reasons: one spouse may have taken out the reverse mortgage before the marriage, one spouse may be under the age of 62 and thus ineligible for a HECM mortgage, or the younger spouse may not be named in order to qualify for a larger loan amount.  In order to prevent the foreclosure challenges involved with reverse mortgages, a lender should identify all parties with an interest in the property at loan origination, including not only the spouse but also parties who have a title interest in the property. The lender should also consider requiring all parties with such an interest to execute the note. Otherwise, lenders will continue to face challenges when foreclosing reverse mortgages when the reason for default is due to the death of the borrower who signed the note and the property is still occupied by the non-obligated surviving spouse or the non-obligated party with a title interest in the property.

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