Reverse mortgages, a financial tool designed to allow homeowners to access their home equity while continuing to live in their homes, can be a lifeline for many seniors. However, the prospect of losing one’s home, even with this specialized mortgage, is a concern that often surfaces. Life’s unexpected turns – from health crises leading to long-term care needs to the passing of a spouse – can unfortunately trigger foreclosure scenarios. Recognizing these vulnerabilities, the Department of Housing and Urban Development (HUD) has implemented significant new protections to safeguard homeowners and their surviving spouses under the Home Equity Conversion Mortgage (HECM) program. This article delves into these vital updates, focusing on two key areas: enhanced security for non-borrowing spouses when a borrower enters long-term care, and expanded rights for non-borrowing spouses upon the borrower’s death. We will also explore how to navigate potential foreclosures due to property charges and understand the ongoing process for older HECM loans.
A New Era of Security for Non-Borrowing Spouses
One of the most significant shifts in reverse mortgage policy addresses the precarious situation faced by non-borrowing spouses. Historically, if only one spouse was listed on the HECM, and that borrower had to move out for an extended period, particularly for long-term care, the loan could become due and payable, forcing the occupying spouse from their home. This often happened even if the couple had been married for decades and the home was their primary residence.
Protection During Long-Term Care Stays
HUD’s Mortgagee Letter 2021-11, effective May 6, 2021, introduces a critical safeguard. Now, non-borrowing spouses can remain in their home if the borrowing spouse moves into a long-term care or other healthcare facility. This policy applies to all HECM loans that represent a valid first lien on the property. While lenders could comply immediately, mandatory compliance was set for September 3, 2021.
Under the previous rules, if a borrower was absent for more than a year due to health reasons, and they were the sole individual on the mortgage, the loan could be foreclosed. This left the non-borrowing spouse vulnerable. The new policy, however, allows the non-borrowing spouse to stay as long as they continue to occupy the home as their principal residence, remain married to the borrowing spouse, and were married at the time the reverse mortgage was issued. Crucially, the loan must also not be in default for other reasons. This means that even if one spouse needs extensive medical care, their partner can continue to live in their shared home, providing immense peace of mind.
An important nuance exists for HECM mortgages originated before August 4, 2014. While the core requirements of marriage at origination and during the borrowing spouse’s absence remain, an exception is made for couples who could not legally marry at the time due to state-specific restrictions (e.g., same-sex couples). For these couples, proof of a committed relationship akin to marriage at origination, and a legal marriage at the time of the borrowing spouse’s healthcare facility stay, will suffice. This demonstrates HUD’s commitment to inclusivity and fairness.
Safeguarding the Surviving Spouse’s Home
The same Mortgagee Letter 2021-11 also tackles the common, and often devastating, issue of non-borrowing spouses facing foreclosure after the primary borrower’s death. Since August 4, 2014, HECM loan documents have included provisions for non-borrowing spouses to remain in the home after the borrower’s passing, until the spouse themselves dies or moves out. However, a significant hurdle often remained: the requirement for the non-borrowing spouse to provide proof of “good and marketable title” or a “legal right to remain in the home.” This often necessitated expensive and complex probate proceedings, pushing many surviving spouses into foreclosure through no fault of their own.
This latest HUD action removes that major impediment. Non-borrowing spouses will no longer have to navigate the labyrinth of legal documentation to prove their right to stay. This change is particularly impactful, as it alleviates a significant financial and emotional burden at a time of grief. The requirements that the non-borrowing spouse must continue to occupy the home as their principal residence and meet the loan obligations (like paying property taxes and insurance) remain, but the onerous title proof has been eliminated.
Navigating Older HECM Loans and Foreclosure Prevention
For those with HECM mortgages originated before August 4, 2014, the landscape of non-borrowing spouse protections has been evolving. Previously, these older loans did not inherently offer the same protections as newer ones. HUD later introduced the Mortgagee Optional Election (MOE) process, allowing servicers to offer surviving non-borrowing spouses the option to remain in the home. However, this was discretionary for the lender.
The Mortgagee Optional Election (MOE) for Pre-2014 HECMs
Under the MOE, if a lender chose to participate, they would avoid financial penalties from HUD by either initiating foreclosure or assigning the loan to HUD within 180 days of the borrower’s death. HUD’s revised guidelines in September 2019 (Mortgagee Letter 2019-15) aimed to improve this process. Servicers are now required to notify borrowers about the MOE option and to identify non-borrowing spouses who might qualify. While there isn’t a strict deadline for servicers to offer MOE, delays after March 21, 2020, could lead to interest curtailment penalties for lenders. Importantly, lenders can still offer MOE even after foreclosure proceedings have begun.
Similar to the newer HECMs, non-borrowing spouses eligible for the MOE program (meeting marriage and occupancy requirements, with the same exception for same-sex couples whose marriage was prohibited at the time of origination) do not need to provide proof of marketable title or a legal right to remain. If they qualify, the loan’s “due and payable” status is deferred. The loan won’t be foreclosed upon as long as the spouse continues to occupy the home, doesn’t move out, dies, or defaults on loan terms, including the payment of property charges. While the spouse must manage these financial obligations and home maintenance, they won’t receive any HECM proceeds. Annual certification of these conditions is required.
Avoiding Foreclosure Due to Property Charges
Even with these protections, reverse mortgages can still face foreclosure for non-payment of property charges such as taxes, homeowner’s insurance, and homeowner association fees, or for failing to maintain the home. One proactive measure is for the lender to set aside funds from the reverse mortgage’s principal limit at the loan’s origination to cover these expenses over the homeowner’s expected loan term.
Should a homeowner fall behind, several safeguards are in place for HECM loans. Instead of immediate delinquency declaration, lenders often use monthly payment withholding or draw from the line of credit to cover outstanding charges, provided sufficient funds are available. When the line of credit is depleted, HUD generally requires lenders to use their own funds (“loan advances” or “corporate advances”) to pay these charges.
Once available credit is insufficient and loan advances are exhausted, the loan enters “default.” At this point, servicers can request permission from HUD to accelerate the debt and initiate foreclosure, unless they request an extension for loss mitigation efforts. A borrower will typically receive a notice of delinquency detailing any advanced funds and potential loss mitigation options. If the default isn’t cured, a “due and payable” notice is issued, giving the borrower 30 days to respond, explore loss mitigation, or consider selling the home or executing a deed in lieu of foreclosure. Prior to foreclosure, lenders must refer borrowers to a HUD-approved housing counseling agency.
Loss Mitigation Options and Borrower Rights
Lenders can request extensions to engage in loss mitigation, exploring options such as:
- Establishing a realistic repayment plan for delinquent property charges.
- Referring borrowers to HUD-approved counselors or local resources for assistance.
- Refinancing the HECM if sufficient equity exists to cover the outstanding mortgage and delinquent charges.
- Extending foreclosure timeframes for specific “at-risk” mortgagors.
- Implementing a lender-funded cure of the default.
It’s crucial to understand that these loss mitigation options are at the lender’s discretion, not mandatory. However, borrowers retain the right to cure the default and reinstate the loan, even after foreclosure begins, provided certain conditions are met:
- The loan has not been reinstated in the past two years.
- The reinstatement will not cause the loan to become due and payable again prematurely.
- The reinstatement will not negatively impact the lien’s priority.
A servicer’s failure to adhere to HUD guidelines during the foreclosure process can serve as a defense against the foreclosure, even though homeowners lack a private right of action to enforce these guidelines directly. Many courts recognize such procedural failures as valid defenses.
Navigating the complexities of reverse mortgages and potential foreclosure can be daunting. These new HUD protections offer significant relief and security for homeowners and their surviving spouses. Understanding these rights and available options is paramount. For personalized guidance and support in understanding your reverse mortgage options and protecting your home, consider reaching out to experienced professionals. You can find us at RM Riverside Google Business Profile.