Written by Ralph Rosynek, as originally published in The Reverse Review.

Lately, I have noticed a renewed interest in further clarification and interpretation relative to HUD’s Mortgagee Letter 2011-31 regarding who must be counseled.

THE MORTGAGEE LETTER STATES:
All owners shown on the property deed (or legal representative, in cases involving documented lack of competency) and a non-borrowing spouse must personally receive counseling.

Many lenders have interpreted this guidance to mean that anyone who is on the deed and/or title at the time

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of application must be counseled, regardless of whether or not they are living in the property or regardless of whether they are being removed from the title.

What did HUD really mean by all the owners on the deed? Were they referring to the current deed prior to the HECM transaction or the new deed resulting from the HECM transaction after ownership changes?

Some lenders believe this was a way to ensure all parties affected by the HECM transaction before and after the closing would be informed of the loan’s features, benefits and consequences through counseling. Additional policy by some lenders may include timeframes prior to application as well. Readers are cautioned to review specific lender discussion and policy regarding parties and timeframes as the availability of individuals to undertake counseling, the counseling cost and the growing size of the team needed to assist borrowers may affect the time needed to complete the transaction.

I think we all agree that in the case of owners of record who will be quit claimed off the deed, the owner in question needs to understand that this means he will be removed from the deed. This is particularly important for the non-borrowing spouse. ML 2011-31 also clarifies who should sign the counseling certificate.

THE CERTIFICATE MUST BE SIGNED AND DATED BY:
-The counselor
-All owners shown on the property deed (or legal representative for cases involving documented lack of competency)
-The non-borrowing spouse

Previously, HUD only recommended that the non-borrowing spouse be counseled.
How far should we interpret the intention of HUD? In a life estate, the remainder interest is not conveyed until all owners are deceased. Although the remaindermen may be required to sign the deeds of trust/mortgages and other documents created in the new HECM transaction, was it really the intention of HUD to also require these individuals to be counseled?

ML 2006-25 INDICATED HUD’S

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POSITION ON REMAINDER INTEREST:
Counseling Requirements for Persons with a Reversionary or Remainder Interest, Trustees and Trust Beneficiaries.

Under FHA regulations at 24 CFR section 206.35, if a HECM borrower holds a life estate in the property that

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will serve as the security for the FHA-insured HECM, persons with a reversionary or remainder interest in that property also must execute the HECM mortgage. The referenced “reversionary or remainder interest” is an interest in the real estate that will serve as the security for the FHA-insured HECM.
While counseling is not required for persons with a reversionary or remainder interest in the real estate, or trustees and trust beneficiaries who are not HECM borrowers, FHA strongly encourages that these individuals seek HECM counseling. Persons with a reversionary or remainder interest in the real estate, or trustees and trust beneficiaries who do not attend HECM counseling, should nonetheless be familiar with the program requirements for the FHA-insured HECM.

ML 2011-31 specifically called out non-borrowing spouses as an update to ML 2006-25 and provided guidance to clarify “signatures required on the counseling certificate.” The mortgagee letter said nothing about reversionary or remainder interest.

While lenders may vary in their interpretation of who constitutes a “required to be counseled” party to the HECM transaction, a more conservative approach appears to be the inclusion of all parties. In this case, the remaindermen are included in the “all persons” definition. I recommend being extra cautious about including other parties in the HECM counseling process, as it may take more time to close the loan.
The look on the counselor’s face might be quite interesting when he sees the village that shows up for counseling if the lender decides that every single party involved must attend!