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 of closing. However, because the previous due and payable clause was embedded in existing, legally binding contracts, the Mortgagee Letter’s new protections were expressly limited to HECMs originated on or after August 4, 2014. Accordingly, the HECM industry was still faced with the problem of determining how to proceed against Non-Borrowing Spouses on its entire existing portfolio.
On June 25, 2014, in the wake of the order in the Bennett case and a similar order in the separate case of Plunkett v. Donovan, HUD issued FHA INFO #14-34, which granted HECM mortgagees an indefinite extension of time in which to take first legal action to commence foreclosure and to comply with the reasonable diligence time frames set forth in 24 C.F.R. § 206.125. The indefinite extension was predicated on the satisfaction of several factors, the most notable of which is that the loan amount has to effectively be “rebalanced” to the Non-Borrowing Spouse’s Principal Limit Factor, the amount that would have been advanced had the surviving Non-Borrowing Spouse been an original borrower on the loan. In practice, this meant that if a surviving Non-Borrowing Spouse was younger than the original mortgagor, he or she would likely have to make a principal repayment on the loan—a payment that the surviving Non-Borrowing Spouse may not have the means to make. In addition, HUD’s guidance did not address how HECM mortgagees should calculate a Non-Borrowing Spouse’s Principal Limit Factor in order to qualify for an indefinite foreclosure extension, thereby creating the possibility that HUD could impose financial penalties on the mortgagees for the period of the indefinite foreclosure extension if HUD later determined that the mortgagees had improperly completed the “rebalancing” calculation.
At long last, on January 29, 2015, HUD published Mortgagee Letter 2015-03, which provides mortgagees a way to proceed after a borrower dies and is survived by a Non-Borrowing Spouse, and eliminates the indefinite foreclosure deferral period that HUD had set up in FHA INFO # 14-34. Under Mortgagee Letter 2015-03, mortgagees can assign to HUD those HECMs that are in default due to the death of a borrower, but with properties still occupied by Non-Borrowing Spouses, provided that certain conditions are met. If the mortgagee does not assign the HECM to HUD, it must proceed with foreclosure as required under 24 C.F.R. § 206.125. Although the following is not an exhaustive breakdown of each component of the new requirements, HECM mortgagees and servicers may want to take note of the following:
- Mortgagees have until April 29, 2015, to notify HUD of what they intend to do with the HECMs which have been subject to an indefinite foreclosure deferral. For HECMs which will be assigned to HUD, mortgagees will then have 30 days (from the date they notify HUD of their intentions) to assess whether each HECM meets all of the criteria for a valid assignment pursuant to the new requirements. The assignments must be initiated within 90 days of the election to assign the HECM to HUD.
- Mortgagee Letter 2015-03 expressly states that mortgagees are under no obligation to assign HECMs to HUD. Put differently, Non-Borrowing Spouses are not entitled to an assignment or foreclosure deferral.
- Mortgagee Letter 2015-03 does not address one of the industry’s biggest questions about FHA INFO # 14-34: how to perform the “rebalancing” calculation necessary to make a HECM eligible for assignment to HUD. The Mortgagee Letter simply states that “[a] payment may be made to reduce the unpaid principal balance in order to meet the requirements.” It does not specify how to calculate this payment or whether the appreciation of the underlying property would be applied to the Non-Borrowing Spouse’s Principal Limit Factor.
- If there is any default or other defect with an HECM (e.g., the property is no longer the Non-Borrowing Spouse’s principal residence, the mortgagee finds out during the assessment period that the couple had divorced, etc.) at any point before the mortgagee completes the assignment to HUD, the option to assign the HECM becomes unavailable and the mortgagee must proceed to foreclosure in accordance with 24 C.F.R. § 206.125. One caveat to this is if the HECM is called due and payable for a reason other than the death of a borrower (e.g., unpaid taxes), the Non-Borrowing Spouse has 30 days to cure the default.
- Mortgagee Letter 2015-03 does not only apply to spouses married to the borrower at the time of the loan, but also to couples who were in a committed relationship, but could not be married under state law at the time of the loan origination, and who were subsequently married.
- Mortgagee Letter 2015-03 provides stock language for certifications which the mortgagee and the Non-Borrowing Spouse must sign to effectuate a valid assignment, but does not provide a template for the newly required notice to the Non-Borrowing Spouse. Mortgagees will need to create this notice in order to comply with the new rules.