Reverse

Spotlight: HUD Addresses Non-Borrowing Spouses

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

The non-borrowing spouses of HECM borrowers will soon receive recognition of their legal and relationship status, according to a mortgagee letter recently issued by HUD.

The mortgagee letter is the result of many months of pressure on HUD by consumer and industry groups to address what constitutes the fair treatment of non-borrowing spouses who occupy the residence of HECM borrowers upon their death.

Effective with new case file requests on August 4, 2014, the letter mandates that a non-borrowing spouse can remain in the residence providing they pass an annual certification showing their continued support of the representations and warrants made by their spouse at the loan’s closing.

Unfortunately, though, the mortgagee letter does little for the non-borrowing spouses of living borrowers in existing HECM transactions. HUD has determined that, as of April 16, 2014, the granting of requests for extensions from HECM mortgagees of up to 60 days to meet foreclosure timeframes for reverse mortgage loans was reasonable and the only relief currently available for these transactions.

The 60-day extension will be granted to mortgagees who request an extension on the initiation of foreclosure proceedings when all of the criteria listed below are met:

* The property is the primary residence of a surviving spouse who was married to the borrower at the time the mortgage was endorsed for insurance.

* The non-borrowing spouse was not listed as a borrower on the mortgage.

* The HECM has become due and payable solely because of the death of the HECM borrower.

* The property securing the HECM has not been sold to a third party.

So, is the non-borrowing spouse a homeowner or not? Interestingly, based on HUD’s acknowledgement that there are two interpretations of the HECM statute, this question remains unclear. One interpretation supports homeownership rights, while the other does not.

“FHA continues to believe that its original interpretation gives full force and effect to the intent of the statute. Nevertheless, recent events have advanced another possible interpretation of Subsection 255(j). This alternative interpretation would extend the mortgage insurance eligibility requirements concerning the safeguard to the mortgagor and any non-borrowing spouse of the mortgagor, at the time of origination.”

To provide for non-borrowing spouse recognition and rights, HUD requires that they be identified through data collection and listed as a party to the transaction at the time of application.

The calculation of proceeds available once the non-borrowing spouse is identified will be based upon a new principal limit factor to be published soon. According to the department, “Mortgagees will be required to use factor tables based on the age of the youngest mortgagor or non-borrowing spouse, if applicable. HUD is developing new factor tables and will release them through mortgagee letter prior to the effective date of this Mortgagee Letter.”

HUD has specified that a non-borrowing spouse can remain in the home if the following is completed:

* Additional documentation

* Guideline redefinition

* Loan document updates

* Continuing occupancy verification and documented compliance with occupancy requirements

* Adjustments in the proceeds calculation via revised PLF tables

Key to the continuing occupancy of the home after the death of the primary borrower is the definition of the deferral period, which guides the parties through the process. The deferral period is defined as “the period of time following the death of the last surviving mortgagor during which the due and payable status of a HECM is further deferred based on the continued satisfaction of the requirements for a non-borrowing spouse under this ML and all other FHA requirements.”

The definition continues, “Should a non-borrowing spouse fail to meet any of the qualifying attributes, or should any of the requirements for deferral cease to be met, the deferral period of the due and payable status shall cease and the HECM will become immediately due and payable as a result of the death of the last surviving mortgagor.”

In order for the deferral period to apply to a non-borrowing spouse, the non-borrowing spouse must:

* Have been the spouse of a HECM mortgagor at the time of loan closing and have remained the spouse of such HECM mortgagor for the duration of the HECM mortgagor’s lifetime

* Have been properly disclosed to the mortgagee at origination and specifically named as a non-borrowing spouse in the loan documents

* Have occupied and continue to occupy the property, securing the HECM as the principal residence of the non-borrowing spouse

In the event the last surviving mortgagor predeceases a non-borrowing spouse, the due and payable status will be deferred for as long as a non-borrowing spouse continues to meet all the qualifying attributes stated above. In addition, the non-borrowing spouse must satisfy and continue to satisfy the following:

* Establish legal ownership or other ongoing legal right (e.g., executed lease, court order, etc.) to remain in the property within 90 days of the death of the HECM mortgagor

* Ensure all other obligations of the HECM mortgagor contained in the loan documents continue to be satisfied after the death of the mortgagor

* Ensure that the HECM does not become eligible to be called due and payable for any other reason

It is important to note that the non-borrowing spouse, having satisfied the terms and conditions of the deferral period, is not entitled to any remaining proceeds that may have been unused at the time of the borrower’s death. Also, non-compliance with the terms of the deferral period would ultimately result in foreclosure and eviction.

This Mortgagee Letter impacts several different aspects of a HECM origination that involves a non-borrowing spouse. Pre-qualification activities and data/document collection will be enhanced. Processing and underwriting activities will require additional detail and verification. Loan documents will need to be altered to reflect the acknowledgement of representations and warrants required of the non-borrowing spouse. Counseling and technology platforms will need upgrading. And lastly, servicers will need to increase occupancy verification procedures and guidelines.

As the number of eligible borrowers continues to grow with the aging of the baby boomer generation, recognition of the non-borrowing spouse at the time of application becomes critical to preserving their ability to remain in the home. Additionally, non-borrowing spouses must recognize and acknowledge the process of securing their future in the home through attestation and verification requirements, as failure to fully comply and maintain eligibility could result in eviction.

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