A federal judge gave the Department of Housing and Urban Development more time to come up with a fix to help widows and widowers facing foreclosure on federally-insured reverse mortgages.
At a hearing Thursday, Judge Ellen Huvelle said she wasn't ready to grant a preliminary injunction halting foreclosures on four surviving spouses who weren't listed as borrowers on the mortgages. But she stressed several times that she wants HUD to produce “something” so she can rule on the “merits” of the policy solution. The department's attorneys told her they may need several months to comply.
The fates of a lot of people are “up for grabs,” said Huvelle, who is with the U.S. District Court for the District of Columbia.
The issue crops up when an older spouse is the sole signer on Home Equity Conversion Mortgages, which are insured by the Federal Housing Administration and make up the vast majority of the reverse mortgage market.
The practice of having only the older spouse sign the title increases the proceeds available on a HECM, since a shorter life expectancy implies the loan will be repaid sooner. This was particularly attractive in the years following the housing crash (2007-2011) when many seniors needed more money to pay off their mortgages and save their homes.
But it has consequences. It leaves the younger spouse in the position of a squatter after the borrower dies and servicers can foreclose after providing 30 days' notice.
Lenders and servicers, on the other hand, are worried about the cost of dealing with non-signing spouses if they can’t be foreclosed on.
“You can't have a program where the loan amount is based upon the actuarial expectation for the older homeowner, yet the younger surviving member of the couple is permitted to live in the home indefinitely,” says Peter Bell, executive director of the National Reverse Mortgage Lenders Association.
“That would be a huge risk to the FHA fund. Surely Congress did not intend to create a program in which the underwriting would result in risk and losses,” Bell says.
There also is the issue of paying property taxes and hazard insurance.
Under a reverse mortgage, a borrower is in default if they don’t pay the taxes and insurance. If those payments are not made, the lender must advance those funds and collect repayment from the borrower.
But a non-borrowing spouse is under no contractual obligation to pay taxes and insurance. “It is unclear to me how this situation could be handled if a non-borrower is allowed to remain in occupancy,” Bell says.
In October, Judge Huvelle ruled that HUD is contradicting federal laws by not protecting certain surviving spouses from foreclosure. HUD initially appealed the ruling, which attempts to shield the spouses from foreclosure, but later withdrew that appeal.
At Thursday’s hearing, an attorney from the American Association of Retired Persons urged the judge to approve a preliminary injunction to stop the foreclosures.
The attorney, Craig Briskin, argued that HUD has been aware of lenders advising seniors to go with one signer as far back as 2006 and did nothing to stop it. AARP filed the original lawsuit on behalf of the four borrowers and Briskin warned that several spouses are facing imminent foreclosure. Briskin is an attorney with the law firm of Mehri & Skalet.
Instead of approving an injunction, Judge Huvelle urged HUD officials to use their discretion and temporarily delay foreclosures on the four borrowers. The judge also scheduled another hearing for April 17 to review the status of the foreclosures.
At the end of Thursday’s hearing, Huvelle said she has not received information on how many households may be affected by this HECM spouse issue or the economic implications.
But she said placing foreclosures on hold would cost a lot of money because FHA must continue paying interest to the lenders. “The lenders will be happy,” she said.