Q. I hear that there is a new reverse mortgage rule that protects younger surviving spouses from being forced out of their home when the older spouse dies. Do you know anything about this?
A. Yes, a new HUD reverse mortgage rule went into effect on August 04, 2014, and seeks to protect certain surviving spouses from being forced out of their homes upon the death of their spouse.
Some background is helpful: As you may know, a homeowner has to be age 62 or older in order to qualify for a reverse mortgage loan under the popular Home-Equity Conversion Program (HECM). In the past, when one spouse was over age 62 and the other was under age 62, the couple could not qualify for a reverse mortgage loan unless the younger spouse was left entirely off the loan. Many couples left younger spouses off the loan in order to qualify, or sometimes to secure a larger loan amount, often not realizing the future implications of this strategy.
Here is what then often happened: When the borrower spouse died, the reverse mortgage lender would require that the loan be repaid and, if the surviving spouse could not do so, would foreclose. This often resulted in a forced sale and the eviction of the younger surviving spouse.
To stop this practice, AARP brought a class-action lawsuit against HUD in a case called Bennett v. Donovan. Last year the court ruled that this practice violated federal law and directed HUD to modify its regulations to stop this practice. HUD did so, and the new rule is the result.
The new rule permits a couple, where one spouse is under age 62, to take a reverse mortgage and list the under-age spouse as a “Non-Borrowing Spouse” (NBS). When the older spouse dies, the surviving NBS then retains the legal right to remain in the home, providing that certain requirements are met. One of them is that the NBS must, within 90 days of the older borrower’s death, establish a legal right to remain in the home, such as by establishing legal ownership, an executed lease, court order, or other legal entitlement. Upon the younger NBS doing so, she retains the legal right to remain in the home, providing that other loan requirements continue to be met, such as the payment of insurance premiums and property taxes.
The new rule does have some “down-sides”: (1) the reverse mortgage loan amount will now be less, as it will be based upon the younger spouse’s age; (2) upon the death of the borrower spouse, the surviving NBS will not be able to make any further draws against the unused loan balance; and (3) the new rule protects only NBS’s who were married to the borrowing spouse at the time of loan origination; the new rule does not protect new spouses of a later marriage.
Further, the new HUD rule is not retroactive and does not protect NBS’s on existing reverse mortgage loans. However, surviving NBS’s on older loans might still attempt to seek protection under the umbrella of the court’s ruling in the Bennett v. Donovan case.
In view of the new rule, senior couples who had previously decided against a reverse mortgage because of the risk of foreclosure to the younger surviving spouse, might now wish to reconsider where such a loan otherwise makes sense for them.