The Department of Housing and Urban Development has eased the terms of reverse mortgages for borrowers' surviving spouses who are not named in the loan documents—but only for new loans.
Beginning with loans originated on Aug. 4, a non-borrowing spouse will no longer automatically be required to pay back a government-insured reverse mortgage when the person listed on the loan dies or leaves the property.
The new policy, disclosed in an April 25 Federal Housing Administration letter to lenders, will not help non-borrowing spouses who are already facing foreclosure and have been fighting HUD in court to keep their homes.
At a court hearing two weeks ago in Washington, HUD agreed to suspend foreclosures for 60 days while it developed this policy letter. But at the same hearing, the agency seemed unable to address the issue of non-borrowing spouses currently in this situation.
The policy letter says the agency's hands are tied.
"Because FHA's traditional interpretation is embedded in existing, legally binding contracts, FHA has no authority to alter it with respect to existing loans," the mortgagee letter states.
Under current rules, a Home Equity Conversion Mortgage becomes due when the borrowing spouse dies or otherwise has to permanently vacate the home or if tax and insurance payments are not made.
After the policy change, a non-borrowing spouse, specifically named in the HECM documents and continuing to occupy the home as the principal residence, will not be required to repay the loan right away as long as he or she continues to meet certain criteria. These include maintaining the property as the primary residence and paying taxes and insurance on the property.
If the non-borrowing spouse fails to meet the criteria, the loan becomes due. The servicer is not required to notify HUD that it now must be paid off.
The letter also makes it clear that the non-borrowing spouse is not entitled to receive any further reverse mortgage payments, unless some funds were set aside specifically for property repairs. Interest will continue to accrue on the money already paid to the borrower.
If the borrower marries after the loan closes or divorces his or her spouse after the loan closes, the non-borrowing spouse is not entitled to the deferment established by the policy.
FHA is using its authority under the Reverse Mortgage Stabilization Act of 2013 to make this change. However, it still plans to go through the normal rulemaking process and it will seek comments on this mortgagee letter.