Reverse mortgages have been heavily criticized as being a raw deal for consumers. One of the biggest complaints comes from the fact that many widows and widowers have lost their homes after their spouses passed away. Why has this happened, and could it happen to you?

Timing Is Key

How likely it is that your surviving spouse could lose the property after your death depends on when you took out the loan. Different rules apply to loans taken out before August 4, 2014, than to loans taken out on or after August 4, 2014. The latter marks the date the Department of Housing and Urban Development (HUD) changed its reverse mortgage policies.

This change came in response to a lawsuit brought against the department by a group of non-borrowing surviving spouses (that is, their names were not on the reverse mortgage contracts), who had been told by mortgage brokers that they would be able to keep living in their homes after their spouses (the official borrowers) died. Instead, the lenders were foreclosing since they wanted the mortgage loans to be repaid as soon as the borrower died. This situation is often called the "younger-spouse problem" because some spouses were not on the mortgage because they were too young to qualify for a reverse mortgage at the time the loan was taken out.

The lenders were, in fact, following HUD’s reverse mortgage regulations. However, in 2013, a federal court ruled in Bennett et al. v. Donovan that HUD’s regulations violated federal law, and a lender cannot require a surviving spouse who isn’t named on the reverse mortgage to make immediate repayment when their spouse, the sole reverse mortgage borrower, dies. We’ll go into more detail on the new rules in a moment.

First, let’s define what we mean by “taken out before August 4, 2014.” Is that the date when you applied for the mortgage? The date when you signed the paperwork? Technically, it’s neither, though it’s closer to the former than the latter. Any time you apply for a loan that’s insured by the Federal Housing Administration (FHA), whether it’s a regular, forward FHA mortgage or a reverse, home equity conversion mortgage (HECM) mortgage, your loan is assigned what’s called a case number. It’s the date when the case number is assigned that determines which rules apply to your mortgage. Your loan officer gets your case number, which is a unique 10-digit identifier assigned by the FHA, after the agency validates your property address and Social Security number. You can find this number at the top of page 1 of your HECM application. Then, to learn the date associated with your case number, you’ll need to contact your lender or HUD because this date is not provided on the mortgage application.

Before August 4, 2014: Harsher Rules

HUD lets the public know about changes in its regulations through documents called mortgagee letters. Mortgagee letter 2015-15, issued June 12, 2015, contains the rules about non-borrowing surviving spouses and HECMs taken out before August 4, 2014. This letter says reverse mortgage lenders can follow the terms of the original reverse mortgage contract when the borrowing spouse dies. That means a surviving, non-borrowing spouse whose house is covered by a reverse mortgage taken out before August 4, 2014, is still at risk of losing the home if his/her borrowing spouse passes away first.

However, the mortgagee letter also gives reverse mortgage lenders an alternative to calling the reverse mortgage due (in other words, demanding immediate repayment, at the risk of foreclosure in six months). Reverse mortgage lenders have an option called “mortgagee optional election (MOE) assignment” that lets them transfer ownership of the reverse mortgage to HUD. The lender will file a claim with HUD to recoup the sum it would have gotten by selling the house.

Transferring the mortgage creates what HUD calls a “deferral period” that allows an eligible, surviving spouse to remain in the home as long as he or she continues to meet the basic requirements of the reverse mortgage, such as keeping property taxes current, keeping up homeowners' insurance payments and maintaining the property in good repair. The spouse must be a legal owner of the home and continue to occupy it as his or her primary residence. He or she also must have been legally married to the borrowing spouse at the time the loan closed and have remained married until the borrowing spouse’s death. Committed same-sex couples who were not legally allowed to marry when the reverse mortgage was obtained – but who married before the borrower died – have the same rights.

The language makes clear that transferring ownership is an option, not a requirement, for the lender. In other words, this so-called “younger-spouse problem” still exists for homeowners who took out an HECM before August 4, 2014. Surviving spouses in this situation may want to consult a real estate attorney to explore options.

On or After August 4, 2014: More Safeguards for Spouses

Why did couples only put one spouse's name on the reverse mortgage in the first place? Often it was to increase the reverse mortgage proceeds, since the payment's size is tied to the borrower's age. Now, though, there's no longer any benefit to that strategy. Loan proceeds with today's mortgages have to be based on the younger spouse’s age, even if that spouse is younger than 62 and thus not old enough to be a co-borrower on the reverse mortgage. Under today’s rules, an eligible non-borrowing spouse who is younger than 62 will be protected as long as he or she meets the same deferral period requirements outlined above.

If you do take out a reverse mortgage while married to a younger, non-borrowing spouse, he or she will be formally documented at closing as either an eligible non-borrowing spouse or an ineligible non-borrowing spouse. An eligible non-borrowing spouse lives with the borrowing spouse in the primary residence; an ineligible non-borrowing spouse lives somewhere else as his/her primary residence. Deferral doesn't apply to the non-borrowing spouse if the couple divorces after taking out the HECM. It also doesn’t apply to a new spouse a reverse mortgage borrower marries after taking out the loan. The same regulations apply to committed same-sex couples who were not legally allowed to marry when the reverse mortgage was obtained but who married before the borrower died, because these partners fall under HUD’s definition of  “eligible surviving non-borrowing spouse.”

The Bottom Line

Despite recent reforms, there are still situations when a widow or widower could lose the home upon their spouse's death. If you or your spouse has already taken out a reverse mortgage, make sure you understand which set of rules applies to your situation. You may want to meet with a real estate attorney or financial planner to come up with a solution if you are at risk.

Whatever the date of your reverse mortgage, be aware that the surviving, non-borrowing spouse is not allowed to receive any more proceeds after the borrowing spouse dies. This won’t be a problem if the loan proceeds had been obtained as a lump sum, but it could be a problem if the reverse mortgage funds had been delivered as a stream of monthly payments or as a line of credit. If you’re taking out a reverse mortgage today, especially if only one spouse will be listed as the borrower, you should consider whether the lump-sum option might provide the most financial security.

(To learn more about reverse mortgages, read Picking the Right Reverse Mortgage Lender.)

Note: The rules described here only apply to home equity conversion mortgages (HECMs). These are the most common of the three types of reverse mortgages by far and the only ones insured by the FHA. If you’re one of about 5% of reverse mortgage borrowers who have a single-purpose reverse mortgage or a proprietary reverse mortgage, you’ll need to review your loan paperwork to see if the issues described in this article apply to your situation.

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