HUD clarifies rule on reverse mortgages

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The Department of Housing and Urban Development’s recently issued a Mortgagee Letter covering non-borrowing spouses on home equity conversion mortgages (HECM’s) with case numbers issued prior to Aug. 4, 2014, and it’s good news for one non-borrowing spouse who had contacted Bankrate last year.

When the woman and her husband originally got a reverse mortgage, she wasn’t 62, so she couldn’t be named on the deed or the note if her husband was going to be able to get a reverse mortgage. She wrote me concerned about whether the couple would have to refinance to provide a way to keep her home should her husband die before her or need to move out of the home for health reasons.

Foreclosures shouldn’t have happened

What she was worried about was the non-borrower spouse faced a financial crisis when the borrowing spouse died or hadn’t lived in the home for at least 12 months. If the spouse didn’t have the ability to pay off the mortgage at the lower of 95% of the appraised value of the house or the mortgage balance, they faced foreclosure.

In 2011, the courts established that HUD had violated the law by triggering payment of the loan while the non-borrowing spouse was still in the house. The case, championed by the AARP Foundation, applied to two specific cases, but HUD was instructed to provide clarification and guidance for all non-borrowing spouses.

New rules for old loans

After a couple of missteps and four years of waiting, Mortgagee Letter 2015-15, titled, Mortgagee Optional Election Assignment for Home Equity Conversion Mortgages(HECMs) with an Federal Housing Administration case number assigned prior to Aug. 4, 2014. To oversimplify, it allows the lender to pursue a Mortgagee Optional Election (MOE) Assignment, which assigns the loan to HUD on the death of the borrower versus the lender pursuing a foreclosure.

Obviously, an 18-page letter can’t be distilled into a sentence, and non-borrowing spouses need to know what’s required to stay in the home. Meeting with a real estate attorney to discuss the requirements can provide a level of comfort to the non-borrowing spouse that he or she won’t be forced out of the home.

New reverse mortgages, with case numbers issued after Aug. 4, 2014, consider the age of the non-borrowing spouse when sizing up and qualifying for a reverse mortgage.

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