The government has added further protections to reverse mortgage borrowers' spouses who are not named in the loan agreement, but placed conditions under which they are ineligible for older protections.
The rules for federally insured reverse mortgages, known as Home Equity Conversion Mortgages, used to require a surviving spouse who did not cosign the loan to repay it when the borrower died. To maximize loan proceeds, which are determined by estimating how long the last surviving borrower will live, originators would often leave the younger spouse off the loan. Last year, following litigation contesting foreclosures on surviving spouses, the Department of Housing and Urban Development changed its policy for new loans, allowing the unnamed widow or widower to defer repayment provided certain conditions were met.
And in a letter to lenders this month HUD said they must also give the survivor 30 days to cure any default that occurs during the deferral period (unless the spouse no longer lives in the home). However, the letter also requires lenders to determine at the time the loan is originated if a non-borrowing spouse could be eligible for a deferral and allow for the existence of an "ineligible" spouse. And this doesn't sit well with consumer advocates.
"I think this could start a new round of gamesmanship by bad actors who will as they did for many years talk the younger spouse into saying she or he doesn't live in the property so that they can get a higher loan amount," said Jean Constantine-Davis, an attorney at AARP Foundation in Washington who has represented survivors in litigation against HUD. "And then she or he will be out in the cold if the borrower dies first."
If spouses fail to meet eligibility requirements listed in the new mortgagee letter, they and their partners must sign documents indicating that they realize they won't be eligible for non-borrowing spouse protections. If the spouse is younger, part of the documentation the couple must sign also specifies how much the non-borrowing spouse's ineligibility increases the borrower's principal limits for the equity withdrawal.
There also are ongoing certifications related to eligibility status. Eligible spouses' status could change if they fail to meet the requirements in the future, but the status of ineligible spouses continues throughout the life of the loan.
In addition to permanently sharing the same principal residence, eligible spouses must be and remain married to the borrower for life, be able to establish legal ownership of the property after the borrower's death and continue to satisfy other obligations such as payment of property taxes and insurance.
Litigation has largely prompted the reform to spousal rights. At the same time the HECM program has been undergoing other changes more directly linked to performance woes the product suffered in the past. These performance problems took a significant toll on the finances of HUD's Federal Housing Administration arm at one point. The FHA insures HECMs.
While HUD has instituted new protections for non-borrowing HECM spouses prospectively, it has not addressed their retroactive rights. Some spouses of existing borrowers continue to face pressure to sell their properties to satisfy loan obligations when their partners have died. HUD has shown willingness to consider certain legal arguments suggesting protections should be extended to individuals who are existing non-borrowing spouses.
The new mortgagee letter pertaining to non-borrowing spouses' rights takes effect with loans originated in March, around the time that a new financial assessment rule that is considered one of the last major post-crisis changes for HECMs goes into effect. The industry has been hoping these final touches will help the reverse mortgage market inch closer to the end of what has been a long period of regulatory upheaval.
"These final rules will enable the mandated changes to bring the industry closer to a point where it can complete reform and move forward with an improved HECM product," said Jeffrey Taylor, a consultant who previously ran Wells Fargo's reverse mortgage unit. Taylor sits on the board of industry vendor ReverseVision.