Reverse Mortgages: Foreclosure Protections for Nonborrowing Spouses

Reverse mortgage rules might be able to protect you if your spouse passes away, but you aren't named as a co-borrower on the mortgage.

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

Read on to learn more about the groundbreaking ruling in Bennett et al. v. Donovan and how the outcome of this caseand revised reverse mortgage rulesmight be able to protect you if your spouse passes away, but you aren't named as a co-borrower on a reverse mortgage.

Reverse Mortgages: Overview

A reverse mortgage allows older homeowners to draw upon the equity in their home to provide a source of income. The most common type of reverse mortgage is a 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 (monthly payments, as a line of credit, in a lump sum, or a combination of monthly payments and a line of credit) and the loan must be paid off when a specific event—like if the borrower dies, moves out, or transfers the property to a new owner—happens. Though, a lender can also call the loan due if you breach the terms of the mortgage, like by failing to pay the property taxes. (To learn more about reverse mortgages, see What's a Reverse Mortgage?)

If, after being called due, the borrower doesn't repay the loan or deed the property to the lender, then a foreclosure will happen. (To learn more, see Foreclosure of Reverse Mortgages.)

Why Would a Borrower Leave His or Her Spouse Off the Reverse Mortgage?

The amount you can borrow with a HECM depends on a number of 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 him or her 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 amount of the loan. In many instances, brokers have misled younger spouses by assuring them that they would be able to remain in the home after the borrowing spouse died.

But once the borrower died, the surviving spouse—who was not named as a borrower on the loan—was often shocked to learn that the loan had to be repaid immediately or else 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 that allowed lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violates 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 that they would be protected from displacement from the home after their spouses died. However, 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 that the HUD regulation violated federal law because it did not protect them as non-mortgagor spouses. In particular, the plaintiffs relied on a federal statute that states 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 were not 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 death of the mortgagor, 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.

Court Rules 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 did not 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 Updates Loan Rules

To remedy this, HUD amended its HECM program.

HECMs taken out on or after August 4, 2014. HUD policy 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, including the following requirements, are met:

  • the nonborrowing spouse is married to the borrower at the time of the loan closing, and remains married to the borrower for the duration of the borrower's lifetime
  • their spousal status is disclosed at origination (and at closing)
  • the nonborrowing spouse is named in the loan documents
  • the nonborrowing spouse has occupied, and continues to occupy, the property securing the HECM as his or her principal residence
  • the nonborrowing spouse establishes legal ownership—or another ongoing legal right to remain in the home—within 90 days of the death of the last surviving borrower, and
  • the nonborrowing spouse meets and continues to meet all of the obligations described in the loan documents, and ensures that the HECM does not become due and payable.

If the nonborrowing spouse fails to meet any of the requirements, the loan becomes due and payable.

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 was 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, like:

  • being married at the time of the HECM extension and at the borrower's death, or being in a committed relationship but prohibited from marrying at the time the borrower entered into the HECM and later married
  • residing and continuing to reside in the property as a principal residence, and
  • obtaining marketable title within 90 days of the borrower’s death or the ability to remain in the property for life.

To qualify, 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 recommend that you proceed cautiously if you're thinking about 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 counseling session that is required before signing HECM loan documents. Additionally, you should be familiar with the rules governing reverse mortgages that went into effect September of 2013 that reduce the initial amount available to borrowers, as well as rules pertaining to a financial assessment requirement, and tax and insurance payments, which went into effect in 2015. (Learn more in Restrictions on Reverse Mortgages.)

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.

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