HUD policy aims to correct mistaken interpretation of statute causing senior citizens to lose their homes.
A new policy may help surviving spouses of federally-backed reverse mortgage borrowers keep their homes. The U.S. Department of Housing and Urban Development (HUD) issued the policy in January to give lenders the option of assigning certain financially risky reverse mortgages to HUD, instead of foreclosing on the homes. The policy is intended to remedy situations where the agency erroneously insured loans in violation of federal law. On February 6, HUD issued a notice in the Federal Register, seeking public comments on its new approach.
Reverse mortgages allow senior homeowners who have paid off the mortgage on their home to withdraw their equity in the form of a loan. The loan must be repaid if the borrower dies, sells the home, or moves to a different primary residence. Failure to repay the loan in any of these circumstances can lead to foreclosure.
Reverse mortgages have recently become a prominent issue facing HUD, after a federal court found that the Federal Housing Administration (FHA) – the HUD agency that provides insurance on loans made by government-approved lenders – insured certain reverse mortgages in violation of a federal statute.
While reverse mortgages have become an important source of supplemental income for many senior citizens, they carry significant risk to lenders. The home’s value upon sale or the death of the borrower may not be enough to cover the entirety of the loan, and the borrower’s assets outside of the home are off-limits to lenders seeking repayment.
Recognizing the benefits of reverse mortgages to senior homeowners, Congress passed the Housing and Community Development Act of 1987 to encourage lenders to offer reverse mortgages, despite the risks. The Act authorized a mortgage-insurance program under which HUD can agree to cover the outstanding balance on a reverse mortgage, provided certain conditions are met. These FHA-backed reverse mortgages allow, but do not require, lenders to assign the reverse mortgage to HUD once it reaches 98% of the maximum loan amount. If a lender assigns a loan to HUD under the program, HUD “takes on full responsibility for servicing the loan.”
Loans are eligible for FHA insurance if they contain certain safeguards to defer repayment until after “the homeowner’s death, the sale of the home, or the occurrence of other events specified in the regulations.” The Act’s definition of “homeowner” includes the surviving spouse of a homeowner, regardless of whether the surviving spouse was also a borrower on the reverse mortgage. This arrangement protects lenders from the risks associated with reverse mortgages, while guaranteeing that surviving spouses will not be displaced from their homes after the borrowing spouse dies.
Nevertheless, HUD issued regulations under the Act stating that the balance on an insured reverse mortgage would be due upon the death of the last surviving borrower. This means that the home can be foreclosed upon once the borrowing spouse dies, regardless of whether the surviving spouse still lives there. Despite the statutory language, some non-borrowing spouses found themselves facing foreclosure when their spouses died.
In 2011, two plaintiffs whose deceased spouses had taken out FHA-backed reverse mortgages sued HUD in federal court. The plaintiffs claimed that the agency’s regulations were unlawfully inconsistent with the statute, pointing to the discrepancy in the definition of “homeowner” between the regulations and the Act. The court concluded that HUD’s regulations violated the Act, and remanded to the agency to determine how it would correct the problem. Soon after, the court sent a similar case back to the agency for review as well. HUD determined that it was not required to grant relief to non-borrowing spouses from previously executed contracts, and denied relief to the plaintiffs in both cases.
However, in April 2014, HUD also issued a letter prospectively implementing an “alternative interpretation” of the statute consistent with the court’s decision. Although HUD could not retroactively modify existing loans, it required all FHA-insured reverse mortgages initiated after August 4, 2014, to include a provision deferring repayment until the death of the non-borrowing spouse.
For existing loans initiated before August 4, 2014, HUD introduced an alternative remedy called a “Mortgagee Optional Election Assignment” – or MOE. An MOE gives lenders the option to assign to HUD reverse mortgages meeting certain conditions, but which lack the “safeguard” language normally required for assignment under the statute. This remedy was originally available only to the plaintiffs in the two court cases, but HUD announced in a January policy letter that it intends to adopt this policy for all FHA-backed reverse mortgages taken out prior to August 4, 2014.
The January letter and the notice issued February 6, provide that, when the borrower dies and there is a surviving non-borrowing spouse, the lender may choose one of only two options: foreclose upon the home in accordance with the original contract (unless the heirs sell the property and pay off the mortgage), or assign the reverse mortgage to HUD – an MOE assignment.
The FHA claims that, by allowing non-borrowing surviving spouses to stay in their homes, the MOE assignment offers pre-August 4, 2014 mortgages “similar treatment” to that afforded to post-August 4, 2014 mortgages. However, lenders are not obligated to exercise the MOE assignment option, and they can only do so if certain eligibility requirements are met. If the loan is ineligible, the lender must proceed with the foreclosure.
HUD is seeking public comments on its adoption of the MOE assignment option for FHA-backed reverse mortgages issued prior to August 4, 2014. The 30-day comment period ends on March 9, 2015.