What rights spouses unnamed in reverse mortgages have remain unclear after a Department of Housing and Urban Development appeal of a court decision calling for it to provide direction on the issue.
“It’s too big an issue for lenders to want to deal with by themselves. What they can do in the meantime is to ensure that they lend prudently and they don’t make any decision that will impact a spouse, consciously or not,” says Atare Agbamu, president/CEO of consultancy ThinkReverse LLC.
One way to mitigate the risk is to refrain from allowing only one spouse to take out a reverse mortgage in exchange for the withdrawal of equity from the home, even though a single individual may get more attractive terms.
HUD’s policy when it comes to the rights of non-borrowing spouses after their partner dies and the loan becomes due has been unclear, a court decision last fall suggests. HUD refrains from comment on litigation, but its appeal late last year suggests it is continuing to contest this.
HUD may want to think twice before simply doing away with allowing non-borrowing spouses on the Federal Housing Administration’s Home Equity Conversion Mortgages, which almost entirely comprise the current reverse mortgage market.
“The non-borrowing spouse has been part of this industry since its inception,” notes Roger Beane, CEO of LRES, a national provider of property valuations that has been active in the HECM market.
Allowing the practice does intensify the risk that spouses unnamed in HECM documents could lose their homes when their partners die, though.
“Until that problem is resolved, that is not a good reputation for the product. HUD should solve that problem rather than litigating it. Otherwise that problem will linger and impact the business’ reputation,” says Agbamu, who has long pressed for a resolution to the non-borrowing spouse issue.
The HECM program has already been in the throes of a lot of change in the wake of disproportionately large losses from it during the downturn and overall strains on the FHA’s finances that have led to reform.
This larger context could play a role when it comes to the non-borrowing spouse question. Among other things it has led to a situation where underwriting standards for HECMs are growing much tighter. This will likely improve HECMs’ performance and reputation, but leaves the most financially needy seniors the government program exists to help with less access to this financial resource.
“Some might say, ‘Hey, maybe we should do away with public insurance, especially now that the product has become more of an upper-middle-class financial planning tool.’ Minds need to be put together. We need to figure out how to serve the neediest cases that originally motivated the legislation and the industry” without opening up the government and lenders up to unsupportable financial risk, Agbamu says.