Reverse Mortgages: Foreclosure Protections for Nonborrowing Spouses

In the past, if you weren't listed as a borrower on an FHA-insured Home Equity Conversion Mortgage (a reverse mortgage) and your spouse died, you could lose your home to foreclosure. However, a landmark ruling by the District of Columbia federal court recognized the need to protect surviving spouses in this situation.

These revised rules can protect you if your spouse passes away, but you aren't named as a co-borrower on a reverse mortgage.

Understanding Reverse Mortgages: What Nonborrowing Spouses Need to Know

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, such as 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 Some Borrowers Leave Their Spouses Off Reverse Mortgages

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 the past, brokers sometimes misled younger spouses by assuring them they could remain in the home after the borrowing spouse died. However, once the borrower died, the surviving spouse, who wasn't 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. That's because, 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 v. Donovan Case: A Landmark Ruling for Nonborrowing Spouses

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 historically called the loan due when the borrower named in the mortgage died, even if there was a surviving spouse.

Court Ruled That HUD's Actions Were Inconsistent With Federal Law

In the end, the court determined HUD's interpretation of federal law was inconsistent with the governing statute. (That is, they shouldn't call the loan due upon the borrower's death when their spouse was 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.

HUD's Updated Reverse Mortgage Rules: Protections for Nonborrowing Spouses

To remedy this issue, HUD amended its HECM program.

HECMs Issued On or After August 4, 2014: New Protections Explained

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.)
• 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 Issued Before August 4, 2014: What Nonborrowing Spouses Should Know

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 will then 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. (Keep in mind that there are other options for repaying a reverse mortgage, such as repaying the loan at 95% of the home's appraised value or the loan balance, whichever is less. Foreclosure isn't inevitable.)

Eligibility Checklist for Nonborrowing Spouses to Stay in Their Homes

For FHA-backed reverse mortgages issued on or after August 4, 2014, the loan becomes due and payable if any one of the following conditions isn't met.

For HECMs issued before August 4, 2014, eligibility criteria is similar but protections depend on whether the lender assigns the loan to HUD, which isn't guaranteed.

Foreclosure Protection for Nonborrowing Spouses When a Borrower Moves to Long-Term Care

Understanding the Risks Associated with a Reverse Mortgage

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

Reverse mortgage scams often target financially vulnerable seniors using high-pressure sales tactics, misleading claims about FHA insurance, deceptive advertising, and emotional appeals such as celebrity endorsements. Brokers sometimes falsely claim that reverse mortgages are risk-free or federally endorsed, omit important loan details, or push homeowners into using these loans to delay Social Security benefits despite evidence showing the financial downsides.

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.

Where to Get Help with Reverse Mortgage Issues and Foreclosure Concerns

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.