There is hope for justice and resolution in the long-standing HECM non-borrowing-spouse problem facing HUD and the reverse-mortgage industry.
A recent DC Circuit Court decision granting “standing” to surviving non-borrowing-spouses who sued HUD is an opportunity for HUD to solve this festering legacy legal, financial, and reputational problem. And there are at least four options for resolution if HUD decides, though not without potentially large financial costs to the embattled Mutual Mortgage Insurance (MMI) Fund.
In March 2011, with the help of AARP Foundation Litigation, Robert Bennett of Maryland, Leila Joseph of New York, and Delores Moore of Indiana, surviving non-borrowing spouses of HECM reverse-mortgage borrowers, sued HUD in D.C.’s Federal District Court.
They claimed that they faced foreclosure and displacement after the death of their borrowing spouses because HUD’s HECM regulation took away their protection under HECM law.
In July 2011, the court dismissed their case for “lack of standing.” The court agreed that they were hurt, but it said their injury came from the terms of contracts their dead spouses signed with private reverse-mortgage lenders. Their motion for reconsideration was again denied in September 2011. So they took their case up the federal judicial food chain, again with AARP’s help, but this time without Delores Moore.
On Friday January 4th, the DC Circuit Court granted them standing in a unanimous decision which offers some suggestions for resolution.
The lower federal court must now hear the original case on its “merits.” That is, it must determine whether HUD’s HECM regulation limiting protection from displacement to HECM “mortgagors” violated the protection from displacement in Subjection j of the HECM law and caused the non-borrowing spouses’ foreclosure and displacement problems. The outcome of the merits-hearing is unknown at this writing.
For its part, HUD defends the legality of the disputed HECM regulation, arguing that it makes the HECM program “actuarially sound” as decreed by Congress. And it says the appellants’ idea of a ‘HECM homeowner’ could wreck the “actuarial balance” of the program and expose it to financial losses.
The appeals court thinks otherwise. It says HUD has power under HECM law to solve the non-borrowing spouses’ and the reverse-mortgage lenders’ problems in this case. This statutory ability to solve the problems, the court rules, is what gives the appellants standing to bring their case against HUD.
No matter the outcome of the impending ‘merits’ hearing, HUD should take steps to resolve the problem and remove the uncertainty it creates for prospective HECM borrowers and the reverse-mortgage industry. There are at least four options for resolution, as follows:
Option One: Assignment.
HECM lenders holding Subsection j HECM loans that are due and payable by their terms but that violate Subsection j could assign those loans to HUD and let HUD decide whether or not to foreclose. This option, which relies on HUD’s assignment powers under Subsection i of the HECM law, comes from the court’s decision, drawing heavily on argument made in AARP’s brief for appellants.
Of the four options here, option one is the only one that addresses existing HECM loans; the others speak to prospective loans.
Option Two: Regulation limiting who is a non-borrowing spouse for Subsection j protection.
Again, the appeals court offers this idea to allay HUD’s biggest fear about a Hugh-Hefner scenario: for example, a 75-year-old marrying a 25-year-old spouse and taking out a reverse mortgage.
Option Three: Regulation making quitclaimed loan applications either ineligible for FHA HECM insurance or subject to extra underwriting to ensure non-borrowing spouse is protected from displacement, consistent with Subsection j of the HECM law.
This option could curtail fraudulent quitclaim deeds designed to get higher loan limits at the expense of protection from displacement for non-borrowing spouses.
Option Four: Reworking HECM actuarial assumptions to account for risk of eligible non-borrowing spouse.
By regulation or amendment to HECM law, HUD could propose a rule to set the age of an eligible non-borrowing spouse at, say 59. It could then use this age (59) or any other age it deems actuarially sound as a variable in its actuarial formula for calculating loan limits for the borrowing spouse.
Of course, there are costs and benefits to these options, but they are outside the scope of this article. Also, there are options that may be more robust than the ones outlined here. Let’s put all of them on the table and solve this problem now.