Reverse mortgages and the non-borrowing spouse
The Federal Housing Authority's (FHA) Home Equity Conversion Mortgage (HECM) program, which provides reverse mortgages to those who are 62 years or older, allows elderly homeowners to obtain additional income by borrowing against the equity in their homes.
In a reverse mortgage, the loan obligation is deferred until the death of the homeowner, the sale of the home or the occurrence of other events. Issues may arise when a homeowner mortgagor obtains a reverse mortgage and the homeowner's spouse does not execute the note and is thus not a “borrower” on the loan. The mortgagor's spouse may not have signed the note for multiple reasons: 1) one spouse may have taken out the reverse mortgage before the marriage, 2) one spouse may be under 62 years old and thus ineligible for a HECM mortgage, or 3) the younger spouse may not be named in order to qualify for a larger loan amount.
A recent opinion by the United States District Court, District of Columbia, discussed whether these non-borrowing spouses are protected against foreclosure at the death of the borrowing spouse. In Bennett v. Donovan, — F.Supp.2d —, 2013 WL 5424708 (D.D.C.Sept. 30, 2013), widowed spouses of mortgagors with HECM 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. Section 1715z-20(j) of the National Housing Act (NHA) states that the Secretary of the Department of Housing and Urban Development (HUD) may not insure an HECM mortgage unless the mortgage provides that the homeowner's obligation is deferred until the homeowner's death, or the sale of the home, or the occurrence of other events specified in the regulations of the Secretary. 12 U.S.C. § 1715z-20(j). For purposes of that subsection, Congress specified that the term “homeowner” includes the spouse of the homeowner.
If the plain language of the statute is followed, Plaintiffs argued that the loan obligation of a reverse mortgage would not come due until after the death of both the borrowing spouse and the nonborrowing spouse. This statutory language contradicts the uniform HECM mortgage and regulations promulgated by HUD. An HECM mortgage provides that a 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.” Based on the language, the lenders in this case demanded payment and initiated foreclosure proceedings after the death of the borrowing spouses, despite the fact that the non-borrowing spouses still occupied the property.
In granting summary judgment for Plaintiffs, the 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. 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 mortgagor and has the discretion to determine how to accomplish that task.
Lenders and servicers face similar challenges when a titleholder who occupies the property executes the mortgage and not the note, yet is defined as a “borrower” under the terms of the mortgage. 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 but the property is still occupied by the non-obligated surviving spouse or the nonobligated party with a title interest in the property. Be sure to contact legal counsel if you have questions about reverse mortgages or how to ensure your business is anticipating all potential issues regarding reverse mortgages.