Guidelines for new Home Equity Conversion Mortgages ensure non-borrowing spouses have the opportunity stay in their homes after a borrowing spouse dies. But the rights for existing spouses remain unclear and subject to change until HUD and litigants agree on a final policy in line with court directives.
In the meantime, servicers are finding HUD is neither encouraging nor discouraging foreclosures on non-borrowing spouses, and seems to be considering loans on an individual basis, said Jeffrey Taylor, a consultant who previously ran Wells Fargo's reverse mortgage unit.
"The servicers continually work with HUD for guidance on loans closed prior to the mortgagee letter issued in April and every case is different," Taylor said. But he deferred to servicers who work directly with the loans for more specific comments about practices.
Nationstar, which has ceased originating reverse mortgages but still services them, is named in documents related to what appears to be one example of an existing non-borrowing spouse foreclosure.
The loan taken out by the late husband of a Virginia widow appears to be the first targeted by a foreclosure action since an August rule change protecting spouses in similar situations when it comes to new originations, but not existing ones.
Nationstar has a policy of not commenting on individual loans but said it generally works to avoid foreclosure.
"We explore all options available and work with our borrowers, investors and HUD to avoid foreclosure whenever possible — being careful to follow and comply with whatever rules and guidelines are in place," the company said in an e-mail provided by Nationstar spokesman John Hoffman.
One servicing executive said he wants to avoid foreclosing on non-borrowing spouse loans, particularly since HUD's policies could change. The executive asked not to be identified because of HUD's sensitivity to still-pending litigation.
Foreclosure can be delayed, but it is difficult to prevent entirely because unless the spouse meets narrow interim criteria HUD set in a bulletin issued in June, HUD directs them to. HUD can curtail the payments it makes to lenders if they don't follow such policies, and those losses can really add up, according to the executive. And if a mortgage company waits too long to foreclose, some states' statutes of limitations could run out before a non-borrowing spouse dies or leaves the home, the executive added.
In its interim guidance, HUD established criteria for when servicers can delay foreclosing on a non-borrowing spouse, but places the onus on servicers to use their discretion in determining which cases qualify. And while HUD even leaves the door open for servicers to delay foreclosure in cases where the criteria "reasonably can be met," the bulletin doesn't specify what actions a servicer can or can't take to help a non-borrowing spouse meet the guidelines.
"FHA will not deny any request for an extension that is based on the Mortgagee’s reasonable belief that the criteria are true, regardless of whether FHA’s future policy decisions would provide an alternative to foreclosure for any specific Non-Borrowing Spouse," the bulletin reads.
But servicers may see this leeway as HUD giving them just enough rope to hang themselves, and are uncomfortable interpreting the open-ended guidelines out of fear that if they don't meet HUD's expectations, they'll could end up with financial penalties for not initiating foreclosures on time.
HUD declined to comment, citing pending litigation.
For example, the HUD criteria to stay in the home indefinitely require a non-borrowing spouse "to have a principal limit factor greater or to the PLF of the HECM borrower spouse." This generally rules out younger spouses, which is to say, most non-borrowing spouses.
Some mortgage companies have wondered if the mention of principal limits means that there is a way for non-borrowing spouses to bring money to the table that would effectively allow them to meet the PLF requirements needed to stay in the home indefinitely. But so far, HUD has been unwilling to clarify this in writing, the servicing executive said.
HUD may be resistant to efforts to allow non-borrowing spouses to stay in their homes because it took considerable losses on the HECM product at one point that jeopardized the FHA's finances and doesn't want to take any more financial hits, particularly not as it wraps up its fiscal year.
However, the financial hits from HECMs that the FHA has taken to date appear to be largely as a result of tax and insurance defaults, not the non-borrowing spouse issue.
Under the rules for new HECM loans, when a borrower dies, a non-borrowing spouse can remain in the home so long as taxes and insurance continue to be paid, but the spouse cannot access any remaining proceeds or equity related to the loan unless the property is sold.
The Virginia spouse facing foreclosure can pay taxes and insurance, according to Carlos Cato, a Community Reinvestment Act liaison officer at the nonprofit neighborhood group Revitalizing American Properties, Inc., which has been working with the widow.
Even though heirs are given the opportunity to buy a HECM borrower's property for 95% of its current appraised value, in this case, the spouse cannot afford the forward mortgage necessary to complete the transaction.
Reforms, including a just-released mortgagee letter on financial assessment guidance, has targeted the T&I concern. But it is unclear how much progress has been made to that end. As of 2012, when HUD released statistics on T&I defaults at a National Association of Reverse Mortgage Lenders Association conference, there were about 57,000 delinquent T&I accounts, representing less than 10% of active loans. This was up from roughly 46,000 foreclosures almost a year early.
At that time, HUD found cure rates by servicer ranged from 1% to 18%. The extent of HECM foreclosures can't be divined from prepayments, the key performance measure investors in bonds backed by the loans look at. These have been rising, but the increase has been priced into the market, and the increase mostly reflects a more active housing market, said Mike McCully, a partner at capital markets firm New View Advisors.