HUD Should Protect Nonborrowing Spouses
The doors to the first chamber of justice in the federal court system have been shut in the faces of nonborrowing spouses in HECM transactions for the second and last time. Yet, their plight, foreclosures and evictions when their spouses die, remains. HUD and the reverse mortgage industry should look for ways to protect them, consistent with the intent of Congress when it created the program more than 22 years ago. It is good business.
In July the Federal District Court for the District of Columbia dismissed Bennett et al v. Donovan for “lack of standing.” Plaintiffs filed a motion for reconsideration, which was denied in September for the same reason. The court agrees that the plaintiffs have been hurt, but that their injury came from contracts signed by their dead spouses with private reverse mortgage lenders. So, even if the court should decide in the plaintiffs' favor, its decision will not stop the foreclosures and evictions. It would only mean that HUD shouldn't have insured the reverse mortgages.
Unless they appeal, their path to justice looks uncertain. The foreclosures and evictions, suspended during the court process, could resume. Thanks to the lawsuit, which forced HUD to rescind the infamous Mortgagee Letter 2008-38, some spouses could use the 95% option (the rules allow spouses or heirs to buy property back for 95% of appraised value) to keep their homes. Others would not be so lucky. They could end up on the streets, at a time of life when they are most vulnerable. Some would say, “Tough luck. It is business. A contract is a contract. They knew what they were getting into.”
But how would evictions of spouses from their marital homes affect the reputation of the business? Not too long ago, when you mention reverse mortgages to prospects and nonprospects, the first reaction often goes like this: “Is it the scam where the bank gives you some money and takes your house?” It was one of many myths about reverse mortgages. Over the years, NRMLA and industry educational activities have buried some of these myths, or have they?
With the plight of nonborrowing spouses, lawsuits and publicity, a more damaging perception is taking hold in the minds of prospects and consumers: “Take a reverse mortgage and your spouse could end up on the streets when you die.” Is that the perception of the business industry wants in a culture increasingly swayed by consumers in the second half of their lives? That is the war; HUD and the industry must not lose it.
That is why addressing the plight of nonborrowing spouses is good business. There is another reason. Spouses are core centers of influence in reverse mortgage borrowing decisions. In baby-boomer land, with many second, third, fourth, or even fifth marriages to possibly younger spouses, there are thousands if not millions of nonborrowing spouses in the market. A product perceived as structurally hostile to nonborrowing spouses is unlikely to enjoy their support. That could dampen industry growth as well as limit the product's potential to help our nation manage its fiscal problems in an age of austerity.
The plight of nonborrowing spouses is also a gender issue. Although there are some men, they are mostly women; and they are going to be primarily women. Life expectancy and history suggest women own the market. In any market, in any country, and in any civilization, you want the women on your side. It is common sense; it is good business. Consumers could care less about fancy actuarial-balance argument. What they now “know” is that reverse mortgages are bad for nonborrowing spouses. That “knowledge” must be reversed for the industry and our country's long-term good.
So while HUD may have won a battle in getting Bennett et al v. Donovan thrown out on technicalities, the industry and HUD could lose the war if the opportunity to address the plight of nonborrowing spouses is squandered. Since the problem is structural and has persisted for 22 years, what can HUD and the industry do? Admit that there is a problem, and that it is bad for the reverse mortgage business in America. Convene a group of stakeholders, including consumer advocates, lenders, counselors, regulators from CFPB, lawmakers, HUD, NRMLA and AARP. And ask the group to come up with options for action that strike a balance between protection for nonborrowing spouses and the program's actuarial health. It can be done. Twenty-two years of inaction is enough.