FHA Announces New Protections for Reverse Mortgage Non-Borrowing Spouses

The Federal Housing Administration (FHA) on Thursday announced new amendments to non-borrowing spouse (NBS) provisions for the Home Equity Conversion Mortgage (HECM) program, implementing additional protections for such spouses involved in a government-sponsored reverse mortgage. This is according to the publication of Mortgagee Letter (ML) 2021-11.

The agency details that while HECM mortgagees can begin using the new procedures immediately for all new HECMs, those electing not to do so will have to have the new procedures implemented by September 3, 2021, or 120 days after the publication of the new ML.

New expanded criteria for qualifying NBS

The new ML features four primary new protections for eligible NBS in a reverse mortgage transaction, including the expansion of criteria that begins a deferral period for HECM loans with case numbers assigned on or after August 4, 2014, including for a scenario in which the primary borrower resides in a healthcare facility for more than 12 consecutive months but the NBS has remained in the home.

“[As long as all] qualifying attributes are met, the due and payable status may be deferred as long as the Eligible Non-Borrowing Spouse continues to meet the Qualifying Attributes and the requirements,” the ML reads in part.

The ML also expands assignment criteria for Mortgagee Optional Election (MOE) Assignments for HECMs with case numbers assigned before August 4, 2014. The new criteria will “include HECMs eligible to be called due and payable under the terms of the original mortgage due to the property no longer being considered the Principal Residence of a borrower due to the borrower’s residence in a health care institution for more than 12 consecutive months,” according to the ML.

Additionally, the definition of someone who can be called an “eligible non-borrowing spouse” has been expanded to include “the spouse of a HECM borrower where the HECM loan was assigned an FHA case number prior to August 4, 2014,” as well as several additional new criteria. Such newly-eligible NBS can be spouses who were legally married to the borrower either through the borrower’s death or during the borrower’s relocation into a healthcare facility.

That definition also includes an allowance for a spouse who was in a “committed relationship” with the borrower but who may not have been legally allowed to marry at the time the HECM was closed, but who was married sometime prior to the borrower’s death or remains married after the borrower’s relocation to a healthcare facility.

Additionally, an eligible NBS can now be someone who “has occupied, and continues to occupy, the property securing the HECM as his or her Principal Residence,” according to the ML.

Marketable title, residence in a healthcare facility

A prior requirement which said that an eligible NBS must establish marketable title or other legal rights to remain in the property following the death of the primary HECM borrower has been eliminated, according to the publication of the new ML.

“FHA no longer requires, as a condition of a Deferral Period for Eligible Non-Borrowing Spouses, that the [NBS] possess or demonstrate the ability to obtain good and marketable title to the property or a legal right to remain in the property for life,” the ML provision reads. “The Deferral Period [a]ffects only the HECM’s due and payable status and does not confer or interfere with any other real property interests. FHA had previously eliminated this requirement for HECMs with FHA case numbers assigned before August 4, 2014 and hereby expands this provision to all HECMs.”

Now, the deferral period “shall cease immediately” once the NBS stops occupying the secured property as his or her primary residence, or fails to meet the amended eligibility requirements as outlined in the new ML.

“The HECM security interest is not adversely impacted by the removal of this requirement,” the ML reads. “The institution of a Deferral Period is not a determination by FHA of the property rights of the [NBS] or any other party who might claim an interest in the property.”

FHA response, justification: HECM stability

In its informational notice announcing the publication of the new ML, FHA explains that these additional protections are being instituted to help secure the long-term viability and stability of the HECM program.

“These program changes should improve the efficiency and long-term viability of the program by aligning all HECMs — regardless of case number assignment date — under the same HECM MOE Assignment policies as previous[ly] announced in ML 2019-15,” FHA said. “These changes also streamline processes and reduce administrative costs for both mortgagees and HUD by eliminating a disparity in servicing policies based, in part, on FHA case number assignment dates.”

Additionally, these new changes should have a material impact on a segment of HECM borrowers, according to FHA.

“The program changes also have a positive impact on HECM borrowers since now all HECM NBS can take advantage of the expanded deferral period and MOE Assignment, which provides non-borrowing spouses with increased options to remain in their homes without having to repay the HECM loan or face foreclosure,” FHA said in its informational notice.

The ML also specifies that “all updates will be incorporated into a forthcoming update of the HUD Single Family Housing Policy Handbook 4000.1,” an update previously alluded to by Principal Deputy Assistant Secretary (PDAS) for the Office of Housing and the FHA Lopa P. Kolluri who signed this new ML.

ML 2019-15 updated the MOE Assignment for HECMs with case numbers assigned prior to August 4, 2014, offering a slew of changes that were welcomed by the reverse mortgage industry at the time.

Read ML 2021-11 at the U.S. Department of Housing and Urban Development (HUD).

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