One stop-gap is that the issue comes up in required counseling. Image: Fotolia.
One stop-gap is that the issue comes up in required counseling. Image: Fotolia.

HUD Leaves Non-Borrowing Spouses Waiting Over HECMs

JAN 14, 2014 5:14pm ET
Comments (4)

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.

Comments (4)
Have had two younger widows that I know have horrific problems with reverse mortgages because they were too young to be on the mortgages. They found that they would lose their homes because reverse mortgages take such a big bite out of equity every month and the mortgage needs to be paid off within a year of the borrowers death, they both tried to save them with a regular mortgage. That of course did not work. One went to foreclosure and the younger spouse died depressed. The other is trying to get hers sold. By the way, neither spouse was put back on title after the reverse mortgage was made so they did not even have a legal interest in the property! Had another where adult children attempted to get Dad's property sold because they didn't want Dad's memory sullied by a foreclosure. That didn't work either. Would not wish a reverse mortgage on anyone.
Posted by Donna D | Wednesday, January 15 2014 at 9:29AM ET
Reverse Mortgages (HECMs) can be an excellent tool when they truly make sense for the homeowner. But, like any financial product, it has to make sense for their situation, needs, goals.

It's essential for the mortgage professionals to ensure that the borrowers are fully aware of the potential risks as well as the benefits before they sign on the line. (Third party counseling is required for the homeowner and this is a crucial part of the program.) It's also one of the reasons why we value reverse mortgage education so much.

Whether or not having clear, unwavering policy from HUD on this issue will be a plus or a minus, I'm not sure. For now, it seems that homeowners should plan for the worst-case scenario to play it safe.

Best bet: work with someone you know and trust or seek a referral from a trusted advisor. Ask lots of questions. Get answers that you understand. If not, ask the questions until you do. And don't choose your mortgage professional from an ad you see on late night television. You want someone who will take a good look at what you need and advise you accordingly. Just because the numbers say you can doesn't mean that you should.
Posted by | Wednesday, January 15 2014 at 11:55AM ET
The Reverse Mortgage when used properly is a very good tool. Both spouses need to be over 62 years old. If one is under that age there will always be a problem. Maybe an insurance policy as part of the package would work. If one dies the policy could pay the Home Off. Nothing is simple unless it is planned out. The Reverse is just one tool.
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