The Department of Housing and Urban Development (HUD) continues to grapple with how mortgagees and servicers of Home Equity Conversion Mortgages (HECMs), commonly known as reverse mortgages, should proceed where a spouse that is not a party to the loan agreement or mortgage (a “Non-Borrowing Spouse”) survives a recently deceased borrower. In an August 24, 2015, letter to the National Reverse Mortgage Lenders Association, HUD rejected industry requests to more precisely define a Non-Borrowing Spouse’s “legal right” to remain in the mortgaged property following the borrower’s death or to grant Non-Borrowing Spouses a deadline extension allowing them to stay in the home where, for example, the borrower’s probate proceedings are contested or otherwise delayed.
Since the inception of the HECM program, HUD had interpreted its regulations to require HECMs to be called due and payable and foreclosure to be initiated upon the death of the last surviving borrower, regardless of whether that borrower was survived by a Non-Borrowing Spouse. In 2013 and 2014, the U.S. District Court for the District of Columbia determined that this interpretation was inconsistent with the statute authorizing the HECM program and ordered HUD to develop a plan to allow Non-Borrowing Spouses to remain in the mortgaged property following the borrower’s death.
On January 29, 2015, HUD published Mortgagee Letter 2015-03, which provided HECM mortgagees and servicers an alternative to foreclosing on Non-Borrowing Spouses following the death of the borrower. ML 2015-03 established the Mortgagee Optional Election Assignment (MOE Assignment), under which HECM mortgagees and servicers could assign the loan to HUD provided the Non-Borrowing Spouse met certain conditions, including continued occupancy of the mortgaged property, lack of any other default under the HECM documents, and the ability to obtain “good, marketable title to the property or a legal right (e.g., executed lease or court order ) to remain in the property for life” within 90 days after the borrower’s death. Additionally, ML 2015-03 required Non-Borrowing Spouses to make a one-time “Principal Limit” payment that was to be calculated in part on the difference in age between the Non-Borrowing Spouse and the borrower. The required Principal Limit payment could potentially be in the tens of thousands of dollars, effectively barring a Non-Borrowing Spouse from taking advantage of the MOE Assignment and remaining in the mortgaged property. Unexpectedly, and one day after posting final comments to ML 2015-03 in the Federal Register, HUD rescinded the MOE Assignment option in its entirety on April 30, 2015.
HUD revised and reinstated the MOE Assignment by publishing ML 2015-15 on June 12, 2015. The redesigned program no longer requires a Non-Borrowing Spouse to make the Principal Limit payment in order to be eligible to remain in the mortgaged property. However, HUD continues to require Non-Borrowing Spouses to show the ability to obtain “good, marketable title to the property or a legal right (e.g., executed lease or court order) to remain in the property for life” within 90 days after the borrower’s death. In an August 24, 2015, letter to the National Reverse Mortgage Lenders Association, HUD rejected the industry association’s request to more precisely define a Non-Borrowing Spouse’s “legal right” to remain in the mortgaged property or to grant Non-Borrowing Spouses an extension to this deadline where, for example, the borrower’s probate proceedings are contested or otherwise take longer than 90 days.
By taking this approach, HUD is requiring HECM mortgagees and servicers to make judgment calls about whether a Non-Borrowing Spouse can remain in the mortgaged property based on the nuances of each state’s real property law, potentially leading to inconsistent outcomes based on who services the loan and where the property is located. Further, HUD’s approach will prevent a Non-Borrowing Spouse from remaining in the mortgaged property following the death of his or her spouse for reasons as seemingly mundane as court delays, potentially resulting in a harsh outcome for the recent widow or widower. Even as HUD attempts to make it easier for Non-Borrowing Spouses to remain in the mortgaged property by abandoning the Principal Limit payment requirement, it solidifies other barriers to the MOE Assignment program with potential ramifications that are currently unknown and that may prevent Non-Borrowing Spouses from remaining in their homes.