THE FOLLOWING LEGAL STUDY ARTICLE POSTING IS INTENDED TO SUPPORT AWARENESS AND UNDERSTANDING. IT IS ONLY A PRELIMINARY LEVEL LEGAL STUDY ARTICLE AND IT IS NOT LEGAL ADVICE. IF THE READER SEEKS LEGAL ADVICE CONCERNING HIS OR HER PARTICULAR SITUATION, HE OR SHE SHOULD SEEK OUT AN ATTORNEY IN A LAWYER CLIENT RELATIONSHIP.
For HECM Reverse Mortgage Loans Originated Before August 4, 2014, A Non-Borrowing Spouse Is Not Safeguarded By Any Loan Obligation Deferral Regulations Designed To Prevent Spousal Displacement From The Home Upon The Death Of The Homeowner.
The most widely available reverse mortgage product is the Home Equity Conversion Mortgage (HECM) authorized under Section 255 of the National Housing Act, the only reverse mortgage program insured through the Department of Housing and Urban Development ( HUD) and administrated by the Federal Housing Administration (FHA).
The plain statutory language of Subsection 255(j) indicates that the homeowner’s obligation to satisfy the HECM loan obligation is deferred until the non-borrowing spouse of the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary of Housing and Urban Development ( HUD) . See 12 U.S. Code § 1715z–20(j) . The statutory language reads, in pertinent part, as follows:
“ 12 U.S. Code § 1715z–20 – Insurance of home equity conversion mortgages for elderly homeowners
(j) Safeguard to prevent displacement of homeowner
The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner … “
However, since the inception of the HECM program until August 4, 2014, HUD’s restrictive regulatory interpretation of Subsection 255(j) required HECMs to be due and payable upon the death of the last surviving mortgagor (i.e. not upon the death of the surviving non-borrowing spouse), the sale of the home, and other conditions, including the failure to reside in the property and the failure to pay required taxes and insurance. See HUD Mortgagee Letter 2014-07. Thus, for HECM loans originated from the inception of the HECM program until August 4, 2014, HUD’s restrictive regulatory interpretation of Section 255(j) did not safeguard the non-borrowing spouse of a homeowner through any HECM loan obligation deferral regulations designed to prevent spousal displacement from the home upon the death of the homeowner.
On August 4, 2014 , recognizing that some non-borrowing spouses were not able to refinance HECMs upon the death of their mortgagor spouses in order to remain in the home they had previously shared with that spouse, HUD used the used the authority granted to it in the Reverse Mortgage Stabilization Act of 2013 to amend the FHA’s HECM program regulations and requirements concerning due and payable status where there is a non-borrowing spouse at the time of HECM loan closing. See HUD Mortgagee Letter 2014-07. Therefore, for HECM loans originated after August 4, 2014, such a nonborrowing spouse of a homeowner is safeguarded, by an HECM loan obligation deferral, from being unable to keep the homeowner’s property if that homeowner ceases to live in that property because of the homeowner’s death. See HUD Mortgagee Letter 2014-07.
However, because HUD’s restrictive interpretation of Subsection 255(j) is embedded in legally binding HECM contracts originated prior to August 4, 2014, HUD had no authority to alter that interpretation with respect to those loans originated prior to August 4, 2014. See HUD Mortgagee Letter 2014-07. Thus, in order to ensure the viability of the HECM program and the Mutual Mortgage Insurance Fund, HUD’ s August 4, 2014 amendment to its interpretation of Subsection 255(j) is only prospective to HECM loans that were originated after August 4, 2014. See HUD Mortgagee Letter 2014-07 .
According to the HUD’s current regulatory interpretation of Subsection 255(j), an HECM loan must now include a provision deferring the due and payable status that occurs because of the death of the last surviving borrower for an eligible non-borrowing spouse. See 24 CFR § 206.27(b). The HECM documents shall now contain a provision deferring the due and payable status, called the Deferral Period, for an eligible non-borrowing spouse until the death of the last eligible non-borrowing spouse or the requirements of the Deferral Period cease to be met and have not been cured. See 24 CFR § 206.27 (c)(3).
In order to qualify as an eligible non-borrowing spouse , the non-borrowing spouse must: (i) have been the spouse of a HECM borrower at the time of loan closing and remained the spouse of such borrower for the duration of such borrower’s lifetime; (ii) have been properly disclosed to the mortgagee at origination and specifically named as an eligible non-borrowing spouse in the HECM mortgage and loan documents; (iii) have occupied, and continue to occupy, the property securing the HECM as his or her principal residence; and (iv) meet any other requirements as the Commissioner may prescribe by Federal Register notice for comment. See 24 CFR § 206.55 (c)(1)(i)(ii)(iii)(iv) .
Additionally, an eligible non-borrowing spouse must satisfy and continue to satisfy the following requirements: (1) within 90 days from the death of the last surviving HECM borrower, establish legal ownership or other ongoing legal right to remain for life in the property securing the HECM; (2) after the death of the last surviving borrower, ensure all other obligations of the HECM borrower(s) contained in the loan documents continue to be satisfied; and (3) after the death of the last surviving borrower, ensure that the HECM does not become eligible to be called due and payable for any other reason. See 24 CFR § 206.55 (d)(1),(2),(3).
Lastly, all applicable terms and conditions of the mortgage and loan documents, and all FHA requirements are unaffected, continue to apply and must be satisfied. See 24 CFR § 206.55 (e)
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