This fiscal year has brought significant changes for reverse-mortgage borrowers and lenders. New restrictions under the Reverse Mortgage Stabilization Act of 2013 seek to make these loans less risky and less prone to default.
Home equity conversion mortgages, or HECMs, are for homeowners who are at least 62. They allow the homeowners to draw on their home equity without repaying it as long as they stay in the house. They get the money upfront, and interest is deferred until the borrower dies or moves to a nursing home.
But questions—and litigation—continue over the status of non-borrowing spouses and whether they can remain in their homes when their husbands or wives die. The Federal Housing Administration (FHA) recently issued a new advisory concerning that—more on that below.
But first, here’s a recap of HECM rules that took effect in September and January.
- Financial assessments and set-asides: Lenders now analyze borrowers’ credit history, cash flow, and residual income. Income, credit, assets, and property charges (taxes, insurance, association fees, ground rents, and assessments) are verified. Borrowers must set aside a portion of loan proceeds or withhold a portion of monthly loan payments to cover taxes and insurance, based on the financial assessment.
- Principal limit: 60 percent, based on the claim amount and the youngest borrower’s age and the interest rate.
- Type of disbursement: A new lump sum disbursement is available at closing only.
- First-year disbursement limit: The greater of 60 percent of the principal limit or mandatory obligations plus 10 percent of the principal limit. (Mandatory obligations include origination and closing fees, warranties and inspections, federal tax debt, mortgage insurance, removal of liens, and repairs.)
- Mortgage insurance premiums: The existing annual 1.25 percent continues. For disbursements of 60 percent or less of the principal limit, an additional one-time premium of 0.50 percent is charged; an additional one-time premium of 2.50 percent is charged for more than 60 percent.
But the new rules don’t address the nagging issue of non-borrowing spouses, who have sued the US Department of Housing and Urban Development (HUD).
The cases turn on surviving spouses who were the younger of the two in their marriages. They contend that HECM originators told them to quit-claim their interest in their homes so that their older spouses could get larger loan payments. They also contend that they were told they wouldn’t lose their homes if their spouses died.
But after their spouses died, the plaintiffs were notified that the reverse mortgages were due. That’s because the mortgages state that the loans become payable when a borrower dies and the home is not the principal residence of at least one surviving borrower.
HUD foreclosed on the homes when the surviving spouses couldn’t repay the loans.
The plaintiffs contend that HUD violated federal law, which defines “homeowner” as including surviving spouses. HUD’s required HECM mortgage contract contradicts the law because it states that the mortgage ends when the borrower dies regardless of whether a non-borrowing spouse survives, the plaintiffs contend.
In late April, the foreclosures in the cases had been transferred to inactive status and HUD was considering its options. At the same time, the FHA, which insures HECMs, issued an advisory to lenders.
While FHA maintains that the earlier “due and payable” interpretation was accurate, the agency notes that “recent events have advanced another possible interpretation” of the law: That FHA insurance can be issued on HECMs that include the non-borrowing spouse at the time of the mortgage’s origination. However, the HECM cannot be assumed by the surviving spouse and the deceased spouse’s heirs have the right to dispose of the property. The proposed changes would apply to case numbers issued on or after August 4.
In May, the FHA will post the proposed rule in the Federal Register for notice and comment.
Finally, according to the New York Times, there’s trouble brewing in another way: Heirs of deceased borrowers are supposed to be offered a chance to settle the HECM for a percentage of the full amount. Instead, lenders are threatening to foreclose unless heirs pay the mortgages in full, according to the article.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.