HUD Issues New Rules About Surviving Spouses Following Death Of Reverse Mortgage Borrower

For the past year and a half, mortgagees of FHA-insured Home Equity Conversion Mortgages ("HECMs"), commonly referred to as reverse mortgages, have had to grapple with issues related to the foreclosure of homes occupied by non-mortgagors who survive their mortgagor spouses (a "Non-Borrowing Spouse"). Historically, some couples applying for reverse mortgages went to great pains to not include the younger spouse on the loan in order to increase the initial disbursement amount and related line of credit available under the loan. Under the terms of an HECM and HUD's regulations, the lifetime deferral of loan repayment obligations only applies to the borrower of the HECM and is not extended to any other persons, including a Non-Borrowing Spouse. Upon the death or move-out of the borrower, the loan becomes due and payable, meaning that a Non-Borrowing Spouse has to either pay the loan in full (or 95% of appraisal value if the loan amount is greater than the value of the home) or face foreclosure. This has long been a HUD requirement and is extensively addressed in the HUD-mandated pre-origination counseling performed by a neutral third party, independent of the HECM originator.

On September 30, 2013, the United States District Court for the District of Columbia entered an order in a case filed against HUD, Bennett v. Donovan, 4 F. Supp. 3d 5 (D.D.C. 2013). The decision upended the way HUD has long-required HECM mortgagees and servicers to proceed after the death of a mortgagor who is survived by a Non-Borrowing Spouse. The court held that a provision of the HECM statute, 12 U.S.C. § 1715z-20(j), allowed HUD to insure only HECMs that came due after the death of both the homeowner-mortgagor and the spouse of that homeowner, regardless of whether that spouse is a Non-Borrowing Spouse or a co-mortgagor. The court invalidated 24 C.F.R. § 206.27, the federal regulation that required HUD to insure only HECMs stating that the loan's balance would be due and payable in full if the mortgagor died and the property was not the principal residence of at least one surviving mortgagor. The Bennett court ordered HUD to issue new criteria consistent with the court's ruling.

On April 25, 2014, HUD published Mortgagee Letter 2014-07, which set up a new system to protect Non-Borrowing Spouses by requiring HECM documents to contain a provision deferring the loan's due and payable status until the death of the last surviving Non-Borrowing Spouse identified at the time...