HUD/FHA’s Home Equity Conversion Mortgage (HECM) or Reverse Mortgage program has an overwhelming market share of the Reverse Mortgage market. So, any policy changes HUD implements impacts large numbers of senior homeowners.
One particular problem that HUD/FHA has been experiencing with this program involves situations in which a HECM borrower dies and his/her surviving spouse was not on the mortgage. Since HECM pay-outs and/or monthly payments are based on a formula utilizing the age of the youngest borrower as one of the key criteria (the older the borrower, the higher the amount they are entitled.)
Some HECM cases involve just one spouse (the oldest person) and the younger spouse is not part of the loan transaction. As a result, when the older spouse dies and the lien is due & payable, the surviving spouse is faced with the difficult decision of either paying off the lien or selling the property to satisfy the lien.
In some real-life cases, the surviving spouse did not wish to sell the property and could not afford to pay off the lien and became subject to a foreclosure action. This is a very difficult situation for HECM lenders to deal with and the focus of lawsuits filed by several of these non-borrowing spouses.
To address these concerns, HUD/FHA issued two Mortgagee Letters in January 2015 (Mortgagee Letters 2015-02 and 2015-03) that effectively make foreclosure protections available to a larger number of surviving spouses on HECM cases. There are certain criteria that have to be met, however, for servicing lenders to exercise this new option.
Under the Mortgagee Optional Election Assignment, HECM lenders can provide a non-borrowing spouse with a deferment and the loan’s mortgage insurance contract is modified to permit assignment of the HECM to HUD. As a result, these eligible surviving spouses can remain in the property and the foreclosure action is postponed.
HUD has provided new Model legal documents and certifications that lenders must utilize in connection with this new option. This topic will continue to be debated for months to come since the practice of only utilizing the older homeowner as the sole HECM borrower will continue and not all non-borrowing spouses will be deemed eligible for the new foreclosure relief option.
Stay tuned for more discussion of this and other HECM-related topics!