HUD Reverses Course on Nonborrowing Spouse Foreclosures

The Department of Housing and Urban Development has rescinded a policy designed to help certain widowed spouses of reverse mortgage borrowers avoid foreclosure.

The April 30 letter affects so-called nonborrowing spouses — individuals who were not named on their deceased husbands' or wives' reverse loan documents, and whose spouses had case numbers assigned before Aug. 4, 2014.

As a result of the rescission, mortgagees get an additional 60-day extension of the deadline when they must initiate foreclosure and "comply with reasonable diligence timeframes," according to information published on HUD's website. Mortgagees will not be penalized for not meeting standard foreclosure timelines during this period. However, mortgagees must submit a extension request to HUD for each case, as well as track and record the volume of requests they make.

The original letter, ML 2015-3, had drawn criticism because it required nonborrowing spouses to, among other things, pay to access foreclosure relief. It resulted from a long running legal battle over the rights of these consumers.

The mortgagee letter is related to pending litigation, said a HUD spokesperson, who declined to comment further.

"We are pleased that HUD has withdrawn its guidance, which our surviving spouse clients have challenged in recently filed complaints as illegal under federal law. We are hopeful that HUD will develop new rules that reflect its obligation to treat spouses of reverse mortgages as homeowners, who are entitled to protection from foreclosure and displacement," said Craig Briskin, an attorney at Washington law firm Mehri & Skalet PLLC, which is counseling plaintiffs.

The payment required as part of foreclosure relief was designed to make up the difference in the loan amount their spouse would have been allowed to receive if both names had been on the mortgage documents at the time.

Older consumers generally can obtain a larger loan through the Federal Housing Administration's Home Equity Conversion Mortgage program. During a period of exceptionally loose mortgage and home equity underwriting between 2005 and 2007, younger spouses would often not be named on loan documents to maximize the loan proceeds of a HECM transaction. While HECM borrowers named on a loan are protected from foreclosure after the first spouse dies, non-borrowing spouses do not enjoy those safeguards.

Lenders or originators were the ones who generally established the practice of removing or excluding a spouse's name from loan documents, but HUD at one point acknowledged the loophole without prohibiting it. Recent reform has made the practice more difficult to do without consumer acknowledgement of the risks.

"It's a positive development but we need to see additional measures that are compassionate," said Atare Agbamu, president and CEO of consultancy ThinkReverse, in reaction to HUD's decision to rescind the letter. These additional measures should address the concerns of both non-borrowing spouses and lender-servicers when it comes to these foreclosures, he said.