Reverse Mortgage Foreclosures Create Potential Wave of Homelessness for Widows
Elizabeth Shay, Esq., John Sharrar, and Wendy Bookler, Esq. on 5/20/2015
About The Author
Senior Law Center
An alarming number of seniors may soon be homeless due to a poorly understood provision in their mortgages. The increase in popularity of Home Equity Conversion Mortgages (HECMs), also known as "reverse mortgages" — a special type of home equity loan widely marketed on television and sold to homeowners aged 62 and older as the way they can stay in their homes despite their declining financial status-- has led to some serious legal questions about the right of widows and widowers to continue living in their home after the death of the borrower spouse.
The term "displaced spouse" refers to the surviving spouse of a reverse mortgage borrower who is not included as a borrower on the loan. These spouses are threatened with the loss of their homes following the death of the borrower due to a provision contained in most government guaranteed HECM contracts which accelerates repayment of the loan upon the death of the borrower if no other borrower is residing in the property. Despite the fact that this contract language has been held to be at odds with the federal statute creating the HECM program, the rights of displaced spouses to continue to reside in their homes has not been universally recognized by reverse mortgage lenders or HUD.
The rights of displaced spouses were first addressed by the United States District Court for the District of Columbia in Bennett v. Donovan, 4 F.Supp. 3d 5, 2013 U.S. Dist. LEXIS 140440 (Sept. 30, 2013). The Bennett Court found that the Fair Housing Administration (FHA) through the Office of Housing and Urban Development (HUD) violated the reverse mortgage statute (12 USC Sec. 1715z-20(j)) when it passed a regulation allowing HUD to insure mortgages that became due and payable in cases where the borrower died, leaving behind a non-borrower spouse who was residing in the home. (24 CFR 206.27). The court remanded the case to HUD to decide how best to provide the protection Congress intended for non-borrower spouses. Subsequently, HUD crafted a solution that reconciles the statute and the regulation and provides protection for non-borrower spouses for reverse mortgages issued after August 4, 2014. Under the new guidelines, for HECMs issued after August 4, 2014, the non-borrowing spouse may remain in their home after the borrowing spouse dies if: 1) they are married to the borrower at the time of the loan closing and remained married during the duration of the borrower’s lifetime; 2) the non-borrowing spouse is specifically named as a non-borrowing spouse in the loan documents; 3) the non-borrowing spouse has occupied, and continues to occupy, the property as their principal residence; 4) within 90 days of the death of the borrower, the non-borrowing spouse establishes legal ownership or a legal right to stay in the home; 5) the non-borrowing spouse meets all other obligations described in the loan documents; and 6) the non-borrowing spouse ensures that the reverse mortgage does not become due for any other reason. (HUD Mortgagee Letter 2014-07).
Unfortunately for both displaced spouses and mortgage lenders, the rules protecting widows and widowers under pre-August 4, 2014 HECM contracts are not so clear and are still being debated by HUD and the federal courts. As a result of ongoing litigation (Plunkett v. Castro, 2014 U.S. Dist. LEXIS 119805 (August 28, 2014)), HUD has suggested that mortgage companies with pre-August 2014 mortgages may consider non-borrower spouses faced with the loss of their home for a Mortgage Optional Election ("MOE"), which essentially grants the same protection given to spouses under post-August 2014 mortgages. This election permits the lender to request an indefinite extension of time to assign the mortgage to HUD, and thereby collect on the insurance guarantee, if five criteria are met: 1) the widow must have been married to the borrower at the time of the loan; 2) widow must have a legal right to remain in the property; 3) the loan cannot be in default for any reason other than the death of the borrower at the date of election; 4) no allegation exists that would invalidate the loan; and 5) a Principal Limit Factor must be calculated and satisfied by the non-borrower spouse which might require repayment of some amount of the loan.
In legal briefs submitted in the Plunkett litigation, HUD proposed a second voluntary remedy which reverse mortgage lenders could adopt to solve the "displaced spouses" problem, identified as the Trigger Inapplicability Decision ("TID"). Under TID, otherwise known as the Hold Election, the relationship between HUD and the mortgagee does not change as a result of the death of the borrowing spouse and the mortgagee can continue to hold on to the reverse mortgage without instituting foreclosure on the property at the time of the borrowing spouse’s death. Once the loan reaches 98% of the maximum loan amount the servicer may then assign the mortgage to HUD. By not foreclosing on the non-borrower spouse, "the mortgagee has the ability to continue earning interest on a loan that is fully insured by the federal government up to the maximum loan amount." Plunkett v. Castro, 2014 U.S. Dist. LEXIS 119805 (August 28, 2014).
However, changing course somewhat, on January 29, 2015, HUD released further guidance on foreclosure of reverse mortgages that predate August 4, 2014. HUD expressed its concern that the Hold Election "imposes a financial risk to the insurance fund that is simply too great." (HUD Mortgagee Letter 2015-13). HUD also stated that they cannot mandate that servicers of pre-August 4, 2014, loans provide the Mortgage Optional Election to every surviving spouse who meets the criteria because "FHA does not have the authority to alter existing, legally binding private contracts entered into between private parties." (HUD Mortgagee Letter 2015-03).
So where does this leave widowed spouses of pre-August 2014 reverse mortgage borrowers? For the very few who have the financial means to go to federal court and seek injunctive relief, they may be able to stop the mortgage foreclosure and the auctioning off of their home. But for most widows and widowers expensive litigation of this nature is not an option. Legal services attorneys such as SeniorLAW Center can only handle a few of these challenging cases. Most of these elderly victims will lose their homes, going first through foreclosure and then watching as their homes are auctioned at Sheriff’s Sale. This was the precise danger Congress intended to prevent with government-guaranteed reverse mortgages. The creation of the insurance program was meant to entice lenders to underwrite these loans in order to help meet the special needs of elderly homeowners who were suffering the effects of economic hardship caused by the increasing costs of meeting health, housing and subsistence needs at a time of reduced income. Congress recognized that the death of one spouse often results in a financial crisis for the survivor who is forced to live on less income than the couple had before the death. With most reverse mortgage contracts executed before August 2014 permitting an acceleration of the debt upon the death of the borrower spouse, widows are not being protected as Congress intended with the result that many may lose their homes to foreclosure.
We urge FHA to advocate for government funding on behalf of displaced spouses so that reverse mortgage lenders can be assured they will be financially protected if they elect to postpone acceleration of the mortgage upon the death of the borrower spouse.
Elizabeth Shay, Esq., is the Coordinator of SeniorLAW Center’s Homeowners Assistance Program. John Sharrar is a 2015 JD candidate at Temple University Beasley School of Law. Wendy Bookler, Esq. serves as SeniorLAW Center’s Legal Director.
SeniorLAW Center is a nonprofit organization which provides free legal representation, education and advocacy to older Pennsylvanians, fighting senior poverty, homelessness, abuse and injustice. The Homeowners Assistance Program provides elders with crucial community-based legal information and representation which enables them to remain independent in their homes and communities, helping to make their homes safe, healthy and dignified places to live.
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