An Open Letter to FHA's Carol Galante

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It is now common knowledge that you are leaving your HUD/FHA position for a professorship at University of California, Berkeley by the year's end, and I want to thank you for your service and for your many accomplishments as federal housing chief since 2012 and in your previous roles at HUD since 2009. 

With oversight responsibility for FHA's trillion-dollar insurance portfolio among other weighty duties at HUD, I am particularly grateful for the reforms you have made in the comparatively small HECM reverse mortgage program. You recognized the value of the HECM program and fought for keeping it when others wanted it shut down; you pushed to get the Reverse Mortgage Stabilization Act enacted, and you introduced strong product-level changes that has put the HECM program on its soundest footing in years.

In addition to these many laudable HECM segment accomplishments, you have made great strides in addressing a critical legacy problem that your predecessors either failed to recognize or chose to ignore: the displacement of non-borrowing spouses in HECM transactions since the program's inception more than 25 years ago.

With Mortgagee Letter 2014-07, you solved the problem for prospective borrowers. For a problem that has dogged the program for more than 25 years, affecting potentially millions of spouses of HECM borrowers and possibly billions (even trillions) of dollars in transactions, this is no small achievement.

However, as you well know, there is some unfinished business in this area: the plight of existing non-borrowing spouses who are facing foreclosure and displacement and those who are expecting that fate when their spouses die.

Even in this area, we have seen progress. Most recently, an Aug. 4 memorandum before the U.S. District Court for the District of Colombia), reaffirmed some encouraging assertions and assurances in court papers filed on July 21. These suggest that non-borrowing spouses' mortgagees"may elect to hold its mortgage…without losing any part of its mortgage insurance benefits by reason of a delay in foreclosure following the death of the sole mortgagor."

On foreclosures, HUD states in court papers,"The mortgagees in plaintiffs' cases are not required by HUD to pursue foreclosure to continue to get the benefits of their insurance contracts with HUD (as long as any eventual insurance claim, minus the proceeds received through the eventual sale of the mortgaged property, does not exceed the maximum claim amount)."

As significant as the above HUD policy conclusions are, and more than a month after they were filed with the court, it is unclear that they have gotten through to all mortgagees (and their attorneys) and to non-borrowing spouses. As a result there is palpable confusion about HUD's present policy positions on existing non-borrowing spouses' foreclosures and displacement problem.

Existing non-borrowing spouses and their spouses' mortgagees should be glad to know that death of their borrowing spouses no longer "triggers" default as this statement in the July 21st court filing declared:

"HUD ordinarily accepts mortgage assignment only if the loan is not in default and the loan balance has reached 98% of the maximum claim amount…as once the loan balance exceeds the maximum claim amount, the mortgagee risks not being able to obtain the funds to which it is entitled. On the assumption that this Court takes the same action in Plunkett that it has taken in Bennett, none of these loans would be default under the regulations because of the death of the sole mortgagor."

It is evident we are getting close to a resolution of the existing non-borrowing spouses' issue. But, let's face it, there is mistrust because it is unclear to mortgagees and to plaintiffs whether statements in HUD's recent court filings are policy statements that plaintiffs and mortgagees can rely upon.

To remove the mistrust and to state HUD's policy on existing non-borrowing spouses clearly and authoritatively, HUD should consider codifying the trigger-inapplicability-decision policy statements through a mortgagee letter. Mortgagees, non-borrowing spouses, industry, and the public need such unequivocal regulatory reassurance. The uncertainty created by the lingering existing non-borrowing spouses' situation is unhealthy for non-borrowing spouses, lenders, and for the HECM program, and you know that.

And there is another vital consideration that should inform your decision-making as you craft the TID Determination on Remand required by the court in its August 28 decision on the Plunkett case: beyond the learned and elegant legal arguments on both sides of the non-borrowing spouses' litigation, a simple fact exists: neither the existing non-borrowing spouses nor their dead spouses' lenders had anything to do with the flawed regulations and policy missteps that brought about  the real human injuries that must now be redressed for justice's sake and for the sake of the HECM program's reputation.

No elder existing non-borrowing spouse should have to deal with the twin heartaches of losing a spouse and being kicked out of a marital home within 30 to 60 days of a funeral. It is repugnant to our sense of justice, no matter the strength of learned arguments about "administrative prerogatives" and "agency discretion."

The existing non-borrowing spouses' issue should not be a contest of legal wits between HUD and justice department lawyers on one side and AARP Foundation Litigation and Mehri & Skalet lawyers on the other. At this stage in the three-year-plus litigation, it should be about doing what is right and proper to right a wrong that a federal court has identified and HUD itself has acknowledged.

As federal housing regulator, HUD routinely holds lenders, servicers, builders, and others accountable for infractions against its regulations protecting consumers. Shouldn't HUD, as a major federal government agency, live by the same high standards of consumer care it expects of the private-sector housing industry participants it oversees? As FHA commissioner, you have shown tremendous courage in solving difficult problems at a very difficult time in housing history and have demonstrated that you are up to the task of solving this problem once and for all.

So Commissioner Galante, for the sake of existing HECM non-borrowing spouses across the country waiting to hear from you, I paraphrase Frost: you have some promises to keep, you also have some miles to go on HECM road before you return home, to California and to academic life at U.C. Berkeley.

Once again, thank you very much for your distinguished service to our country at HUD. May God bless you, and keep you.

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