Reverse Mortgages: Foreclosure Protections for Nonborrowing Spouses

In the past, if you weren't listed as a borrower on a reverse mortgage and your spouse died, you could lose your home to foreclosure. But a District of Columbia federal court's landmark ruling recognized the need to protect surviving spouses in this situation.

As a result of this decision, reverse mortgage rules were revised. These rules might be able to protect you if your spouse passes away, but you aren't named as a co-borrower on the reverse mortgage.

How Do Reverse Mortgages Work?

The most common type of reverse mortgage is an FHA-insured Home Equity Conversion Mortgage (HECM). This type of mortgage is different from a traditional mortgage because, unlike regular mortgages, a borrower receives payments in the form of monthly payments, as a line of credit, in a lump sum, or a combination of monthly payments and a line of credit.

The loan must be paid off when a specific event—like if the borrower dies, moves into a nursing home for over 12 months, or transfers the property to a new owner—happens. A lender can also call the loan due if you breach the mortgage terms, like by failing to pay the property taxes.

If, after being called due, the borrower doesn't repay the loan, sell the property, or deed the property to the lender, a foreclosure will likely happen.

Why Would a Borrower Leave a Spouse Off the Reverse Mortgage?

The amount you can borrow with a HECM depends on several factors, including the age of the youngest borrower. So, if your spouse is considerably younger than you, you'll get less money with a reverse mortgage if you include your spouse as a borrower on the loan.

For this reason, mortgage brokers sometimes advise homeowners to quitclaim a property to the older spouse and leave the younger spouse off the mortgage to increase the loan amount. In many instances in the past, brokers misled younger spouses by assuring them they could remain in the home after the borrowing spouse died.

But once the borrower died, the surviving spouse—who was not named a borrower on the loan—was often shocked to learn that the loan had to be repaid immediately or the lender would foreclose on the property. (Under the terms of the mortgage, the lender could demand immediate payment on the loan if the "borrower dies and the property is not the principal residence of at least one surviving borrower.")

The Bennett Ruling

In the case of Bennett et al. v. Donovan, 2013 WL 5442154 (D.D.C. Sept. 30, 2013), the court ruled that the Housing and Urban Development (HUD) regulation allowing lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violated federal law.

Case Background

The plaintiffs, in this case, were the surviving spouses of reverse mortgage borrowers. Only their spouses—not the plaintiffs themselves—were listed as borrowers under the mortgage contracts.

The plaintiffs stated that their reverse mortgage brokers told them they would be protected from displacement from the home after their spouses died. But when their spouses passed away, the lenders demanded immediate repayment of the loans.

Rights of the Surviving Spouse After the Borrower Dies

The plaintiffs claimed the HUD regulation violated federal law because it didn't protect them as non-mortgagor spouses. In particular, the plaintiffs relied on a federal statute that says HUD may not insure a reverse mortgage unless the repayment obligation was deferred until the homeowner's death. The term "homeowner" was defined as including the spouse of a homeowner. Accordingly, the plaintiffs argued that they weren't required to repay the loan and were protected from foreclosure.

On the flip side, the regulations implementing the HECM statute stated that the loan becomes due and payable upon the death of all "mortgagors." A "mortgagor" is the borrower listed on the mortgage.

Furthermore, HUD's form documents for reverse mortgages allow lenders to call the mortgage due upon the mortgagor's death, even if a nonborrowing spouse was still living in the home. As a result, lenders have historically called the loan due when the borrower named in the mortgage died, even if there was a surviving spouse.

The Court Ruled That HUD Violated Federal Law

In the end, the court determined HUD had violated federal law by insuring reverse mortgages that permitted the loan obligations to come due upon the borrower's death when the plaintiffs' spouses were still alive.

The court also found, however, that it didn't have the authority to require HUD to take any particular action to remedy its error and sent the matter back to HUD to correct the problem.

So, HUD Updated Its Reverse Mortgage Rules

To remedy this issue, HUD amended its HECM program.

HECMs Taken Out On or After August 4, 2014

HUD policy now states that for FHA-backed reverse mortgages issued on or after August 4, 2014, the nonborrowing spouse may remain in the home after the HECM borrower dies (and the loan repayment will be deferred) so long as certain criteria are met. These requirements include, but aren't limited to, the following:

• The nonborrowing spouse must be named in the loan documents as a nonborrowing spouse.
• The HECM can't be in default for any reason other than the last borrower's death, such as a failure to pay property taxes or make hazard insurance payments.
• The borrower and spouse must have been legally married when the HECM closed and remained married until the HECM borrower's death. (Or they must have been engaged in a committed relationship akin to marriage but were legally prohibited from marrying before the closing of the HECM because of the gender of the borrower and nonborrowing spouse. Under this requirement, the spouses must have legally married before the borrower's death and remained married until the death of the borrowing spouse.)
• The nonborrowing spouse lived in the home at loan closing and continues to live in the property as a principal residence.
• The nonborrowing spouse has to stay current with the property tax and insurance payments.

The loan becomes due and payable if the nonborrowing spouse fails to meet the requirements.

HECMs Taken Out Before August 4, 2014

In 2015, HUD announced that a nonborrowing spouse could remain in the home if the HECM was taken out before August 4, 2014, and certain criteria were met—but only if the lender chose to assign the mortgage to HUD. HUD then will defer repayment of the HECM, as long as the nonborrowing spouse fulfills certain conditions similar to the ones above, such as:

• the HECM can't be due and payable for reasons other than the borrower's death at the time of assignment, and
• the nonborrowing spouse has to stay current with the property tax and insurance payments.

If a HECM is ineligible for assignment or a lender chooses not to assign the loan to HUD, then a foreclosure may happen.

Understanding the Risks Associated with a Reverse Mortgage

It is highly recommended that you proceed cautiously if considering taking out a reverse mortgage. Be sure that you know the risks and watch out for reverse mortgage scams.

Also, if you and your spouse are considering taking out a reverse mortgage, make sure both of you attend the required counseling session before signing HECM loan documents. Additionally, you should be familiar with the rules governing reverse mortgages that reduce the initial amount available to borrowers, rules about a financial assessment requirement, and tax and insurance payments.

Getting Additional Help

If you have further questions about how reverse mortgages work or how to preserve the right of a nonborrowing spouse to live in the property after the borrower's death, consider talking to a financial planner, an estate planning attorney, or an elder law attorney.

If you're concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.