A court hearing this week could force housing officials to clarify a longstanding gray area in the reverse mortgage business: When the borrower dies, can the lender foreclose on a surviving spouse not named in the loan?
Four such spouses will ask a U.S. District Court to halt the foreclosures on their homes at the hearing in Washington on Thursday. Plaintiffs in a lawsuit against Housing and Urban Development Secretary Shaun Donovan say the department needs to clarify contradictory language about the rights of non-borrowing spouses in its rules for the Home Equity Conversion Mortgage program.
A court ruling last year found a conflict between HUD's rules and federal law and directed the agency to clear up the matter. HUD appealed the ruling, but has since withdrawn the appeal, according to Jean Constantine-Davis of AARP Foundation Litigation, one of the attorneys representing the plaintiffs. However, the ruling set no deadline for HUD to provide clarity.
Whether or not the four borrowers are allowed to remain in their homes, a resolution of the case resulting in clearer rules could be helpful in the long term for lenders that originate and service reverse mortgages. Clarification would settle the question on whether lenders are liable for past practices. The issue is particularly thorny given the twin pressures of containing losses for FHA and treating senior citizen borrowers properly.
"We need to solve this problem, and I think this is all about trying to push HUD to solve the problem," says Atare Agbamu, president and CEO of the advisory firm ThinkReverse LLC.
HUD is the de facto regulator for reverse mortgages. HECMs have long dominated this market, and account for roughly 99% of recent originations, says Michael McCully, a partner in the reverse mortgage capital markets consulting firm New View Advisors LLC.
The alleged rule conflict stems from the 1988 statute that established the HECM program and subsequent regulations, according to the plaintiffs, who are seeking class action status.
It cites in support of this a subsection of the statute under the title "Safeguard to Prevent Displacement of Homeowner." This "states that a HECM cannot be called due and payable until the death of the homeowner and specifies that, 'for purposes of the subsection, the term "homeowner" includes the spouse of the homeowner,'" according to the filing.
However, subsequent HUD regulations "substitute the term 'mortgagor' for 'homeowner' and 'spouse' and state that the duty to satisfy the mortgage occurs when the 'mortgagor dies and the property is not the principal residence of at least one surviving mortgagor,'" according to the filing. HUD also defines mortgagor as "each original borrower under a mortgage" and specifies that "the term does not include successors or assigns of a borrower."
Three of the four plaintiffs quitclaimed, or signed away their rights to, the properties, but allege in their court filing that they did so without realizing it, "or under the fraudulent promise" that they would be protected.
HUD spokesman Brian Sullivan did not respond to e-mail or calls about the case. He has said in the past HUD has a policy of refraining from comment on litigation.
The issue is additionally complicated by the fact that reverse mortgages have been a major source of red ink for the FHA. Losses from the HECM program played a disproportionately large part in the agency's post-downturn financial woes.
Government officials and the industry had been reluctant to collect on these loans and move the borrowers into foreclosure because they have tried to be sensitive to the rights of senior citizens. But the program's financial concerns have created pressure to contain losses. As a result, the FHA has been engaged in ongoing reform efforts to balance the two concerns in such a way that the program can continue to operate.
The National Reverse Mortgage Lenders Association has refrained from public comment on how to interpret non-borrowing spouse rules, citing involvement with the related litigation through a friend-of-the-court brief it filed last year in support of a need for HUD clarification. However, some of its representatives will meet privately with members at the trade group's conference in New York this week to share some information that may help them navigate the issue, according to a spokesman.
For all the complications and disagreements surrounding the product, there appears to be consensus among remaining stakeholders that it has value that needs to be preserved.
Senior borrowers who often were living on fixed incomes have liked the idea of having an additional source of income to tap via the withdrawal of equity from their homes, and lenders have liked this population of prospective customers with promising demographics. Investors have been attracted to securitizations of the product because among other reasons the prepayment risk is relatively low.
But making sure senior borrowers and their heirs understand the somewhat complicated product has proved tricky and time-intensive, involving the communication of sensitive requirements different parties have argued over the interpretation of, of which the non-borrowing spouse rule is just one example.
Agbamu, the consultant, has long pressed for reform of non-borrowing spouse rules and suggested some possible solutions. Among other things, he has suggested making quitclaimed loan applications ineligible for FHA insurance or subject to extra underwriting to ensure the non-borrowing spouse is protected from displacement.