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Litigation Prompts Revamp of FHA Reverse Mortgage Policy

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May 15th 2015
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The Federal Housing Administration (FHA) will no longer allow lenders to delay demanding payoffs of a certain group of reverse mortgages by the surviving spouses of the deceased borrowers.

In a recently issued letter to lenders, the FHA announced it was rescinding a January letter that put in place a policy known as Mortgagee Optional Election Assignment (MOE). It applied to reverse mortgages with FHA case numbers assigned before Aug. 4, 2014.

MOE allowed lenders to modify their FHA mortgage insurance contracts to allow a reverse mortgage to be assigned to the US Department of Housing and Urban Development (HUD) – even if the reverse mortgage qualified as “due and payable” because the last surviving borrower had died.

Reverse mortgages, incidentally, are technically known as home equity conversion mortgages (HECMs).

Why did the FHA develop that policy to begin with? It’s got to do with whether the “due and payable” pertains to the death of the borrowing spouse or that spouse’s eligible surviving spouse, who is not a borrower. And, yes, litigation is involved.

Here’s the backstory.

A section of the National Housing Act provides that unless an HECM includes a “safeguard to prevent displacement of homeowner,” the loan doesn’t qualify for FHA insurance. That safeguard means the loan doesn’t have to be repaid until the homeowner dies, the home is sold, or other events occur.

So the FHA figured that meant HECMs can be considered “due and payable” when the last surviving borrower dies, the home sells, or no one lives in the home or pays property taxes and insurance, according to the January letter.

Not so, said a US District Court ruling in two cases challenging that interpretation: Bennett v. Donovan and Plunkett v. Castro. In remanding the cases to the FHA, the court said that the FHA wrongly insured two reverse mortgages because they didn’t include language that delayed the “due and payable” proviso until the death of the deceased borrower’s spouse.

So, because HUD couldn’t reverse FHA insurance, MOE evolved as an alternative for those cases assigned before Aug. 4, 2014.

But the January letter and MOE spurred more litigation.

According to an article in Mortgage Servicing News by Atare Agbamu, president and CEO of ThinkReverse, three homeowners sued HUD in April because they face foreclosure allegedly for failure to meet MOE requirements.

The homeowners’ attorney, Craig Briskin in Washington, DC, did not return two phone calls from AccountingWEB seeking comment.

The latest FHA policy letter allows reverse-mortgage lenders a 60-day extension beyond the foreclosure-filing deadline.

But more’s to come, apparently. A posting on the National Reverse Mortgage Lenders Association website indicates that additional guidance is expected soon.

Related article:

New Rules—and Lawsuits—for Reverse Mortgages

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