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The Non-Borrowing Spouse Surprise?

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Little Known Facts That Apply to Non-Borrowing Spouses

Non-Borrowing Spouses
The truth about the rights and responsibilities of non-borrowing spouses. HUD recently released new Principal Limit Factor or PLF tables which now account for younger non-borrowing spouses under the age of 62. The Home Equity Conversion Mortgage or HECM program still only allows borrowers 62 or older but now adjusts proceeds based on the age of the younger non-borrowing spouse. In essence it gives the non-borrowing spouse the right to remain in the home indefinitely during a ‘deferral period’ provided requirements are met. That said there are a few key points we must now to fully comprehend the benefit and risks of this policy change.

First- non-borrowing spouses are on a very short leash. Within 90 days of the borrower passing the surving spouse must transfer the property into their name establishing legal ownership. If this deadline is not met the loan will be called due and payable.

Second- The non-borrowing spouse must meet the…

HUD’s Mortgagee Letter on Non-Borrowing Spouses.

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Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
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26 Comments

  1. Faulty reasoning, flawed logic, decisions made in a vacuum. Where’s Congressional oversight when we need it? If a loan officer or a lender advises a prospective borrower on any of these related matters they will be practicing law without a license.
    HUD has until August 4th to redesign this recipe for disaster. Either leave the spouse on title with all the rights of the primary borrower or forget about it.

    • Jim,

      I’m unclear where one would be practicing law by merely informing them of their options to secure any remaining line of credit or Principal Limit prior to the borrower’s passing. In my humble opinion I believe it would be our fiduciary responsibility to inform them of this to prevent a loss of future borrowing power.

      • Shannon,

        Here we substantially disagree even though we agree as to the action which originators should take. I believe the information should not only be directed to the borrower but also to the financial advisor of the borrower. I do not believe we should communicate any of this information to the non borrowing spouse or any of the person’s advisors without the written but legally competent consent of the borrowing spouse.

        How can an event (the pending demise of the borrower) which we may or may not know about trigger a fiduciary responsibility? Since servicers (even those of our own current company) cannot notify us as to things that they know of and also are uncertain if we know about them, how in the world can we have any responsibility about such things? Perhaps more importantly borrowers have no responsibility to report such events to originators whether we are in regular communication with them or not.

        Then comes the issue of reasonable notification. Notifying a borrower within 15 minutes of death about a potential strategy that could benefit the borrower’s estate is hardly a notification with a reasonable basis to believe it can be effectively adopted. What if we do not know it but the borrower has been declared by a court to be incompetent and we notify the borrower rather than the person having oversight for the financial matters of the borrower? How in the world in this last case be found to have effectively fulfilled our fiduciary responsibility in this regard?

        One can reasonably argue moral responsibility and even good business practice but not ethical responsibility and most certainly not legal fiduciary responsibility.

        Our fiduciary responsibilities like those in the insurance industry should be primarily focused on the point of sale (in our case, origination). While there should be some way to report events subsequent to the effective servicer (primary but in many cases, the subservicer), no such system exists and in practice several effective servicers discourage such reporting.

        To make any fiduciary responsibilities following origination applicable to originators, systems for obtaining information and correctly disseminating that information to the correct parties must also be in place. We are a very immature industry and it shows.

        Seniors choose their own advisors whether they be in the area of law, finance, insurance, real estate, tax, bookkeeping, medicine, etc. A true professional practices within their own domain not that of others. Where it is common to find people practicing beyond their own competency is in sales and related disciplines.

        Despite our occasional disagreement, there is no question that you are and remain the best industry reporter this industry has ever seen. Your service to the industry remains unparalleled. I am glad you feel confident to express your opinions unless wisdom dictates otherwise.

        (The opinions expressed are not necessarily those of RMS or its affiliates.)

  2. Unless the surviving NBS (non-borrowing spouse) has a legal claim to the home following the death of the borrowing spouse, the surviving NBS has no right to transfer title to themselves. This point is critical since at least one originator has published an industry article claiming that inheritance laws are impacted by Mortgagee Letter 2014-7 which is absolutely wrong, other than the size of the mortgage will be increased during any deferral period thus impacting the future equity of the home.

    Also note that even if the NBS has no potential property rights in the collateral due to inheritance, the principal limit will still be reduced due to the existence of a NBS.

    Often overlooked is a clear definition of what a principal residence means and supersedes all prior definitions. ML 2014-7 states: “Principal Residence” is defined as the dwelling where the mortgagor and, if applicable, Non-Borrowing Spouse maintains his or her permanent place of
    abode, and typically spends the majority of the calendar year. A person may have only one Principal Residence at any one time. The Property shall be considered to be the Principal Residence of any mortgagor who is temporarily in a health care institution provided the mortgagor’s residency in a health care institution does not exceed twelve consecutive months.”

    Several years ago, there was an article about a couple who had acquired timeshares and also had a home. The couple used their timeshares for about 30 weeks out of the year and were traveling or living in the only home they owned the remainder of the year. They got a HECM to pay off their timeshare mortgages, have some additional cash flow each month, and have a line of credit available for emergency expenses beyond what their cash reserves could provide. This example was pointed out as a valid use of HECM proceeds but the issue was and of course would be today whether or not the home they owned qualified as a principal residence for HECM purposes.

    (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  3. What is not addressed here is what about the repayment of the mortgage? You state that there is a 90 day deferral period and the certification period within 30 days. I understand the reduced benefit via the smaller plf, but my question is does all this in any way change the situation for the survivor as it pertains to full refinance of the outstanding balance due? It seems like HUD has just placated the public. Does the surviving spouse still have to repay the loan in order to stay in the house?

    • Bill,

      The mortgagee letter (see link in post) requires that the surviving spouse transfer the property into their name establishing legal ownership. There is no requirement to refinance the property as long as the NBS meets the obligations of the HECM and completes annual certifications. What isn’t clear from the ML is if the NBS can be on title as the time the loan is closed.

  4. I agree with Jim Spicka. When one considers that transferring ownership into the name of the NBS is tantamount to a sale of the property, the due-on-sale provision of the mortgage can be invoked by the lender. Congressional oversight would not accomplish much, if anything. What is needed is input and collaborative efforts from the mortgage industry experts. Recipe for disaster, indeed. I do not want the liability of promoting this to a prospective borrower and NBS.

    • Bruce,

      Good points. It remains unclear from HUD’s ML if the NBS can remain on title during the closing of the HECM loan. Typically a transfer would trigger the due a payable clause. Also HUD’s certification as shown in the ML makes no mention or require acknowledgment that all payments (tenure) or line of credit are frozen once the primary borrower passes. Hopefully this will be corrected soon as it invites unwelcome litigation by NBS and their children.

      • The problem with this thread of is that it ignores the legal meaning of the Reverse Mortgage Stabilization Act of 2013 (P.L. 113-29) which adds paragraph (3) to 12 USC 1715z-20(h). The new law states that the Secretary may “establish, by notice or mortgagee letter, any additional or alternative requirements that the Secretary, in the Secretary’s discretion, determines are necessary to improve the fiscal safety and soundness of the program authorized by this section, which requirements shall take effect upon issuance.”

        Since Mortgagee Letter 2014-07 was posted after the effective date of the RM Stabilization Act of 2013, its provision meets the standards of that law. Thus if current policy leads to a different conclusion, the new PL overrules current policy, period.

        Of course my opinion is just that and not a legal opinion of legal counsel. To be current, contact the counsel for your firm after obtaining proper approval from your management.

        (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

  5. I agree with Jim Spicka. When one considers that transferring ownership into the name of the NBS is tantamount to a sale of the property, the due-on-sale provision of the mortgage can be invoked by the lender. Congressional oversight would not accomplish much, if anything. What is needed is input and collaborative efforts from the mortgage industry experts. Recipe for disaster, indeed. I do not want the liability of promoting this to a prospective borrower and NBS.

    • Mr. Coffman,

      If servicers ignore Mortgagee Letter 2014-07 they do so to their own peril and are subject to possible fines and penalties. If lenders interfere to stop compliance with this Mortgagee Letter they are also subject to possible fines and penalties including loss of any reimbursement for loss on that HECM.

      There is a general lack of appreciation for the power of the HUD Secretary under the Reverse Mortgage Stabilization Act of 2013 as explained in the reply to the reply of Mr. Shannon Hicks to Mr. Bruce Coffman.

  6. James,

    Majority = >26 weeks

    The couple in your article was not occupying the primary residence for a sufficient time each year to meet the “majority” definition then.

    Seems pretty clear to me,,,now.

    _____________________________________

    All

    I really do not like the idea of removing the NBS from title for any length of time. All kinds of evils can come into play.

    I do not understand the need to remove the NBS from title. Just have them sign off on the “Dowry” docs, Mortgage, etc. and make the loan.

    Jerry

    • Mr. Hanley,

      You are right they would not qualify after August 4, 2014 when Mortgagee Letter 2014-07 goes into effect. However, I do not believe they are qualified borrowers at any time if they lived out their intention.

      WARNING:

      Mortgagee Letter 2014-07 states: “Principal Residence” is defined as the dwelling where the mortgagor and, if applicable, Non-Borrowing Spouse maintains his or her permanent place of
      abode, and typically spends the majority of the calendar year.”

      The majority of a leap year is 184 days and in a normal year 183 days. By my count that is 26 weeks and 2 days and 26 weeks and 1 day respectively. I hope that helps.

      (The opinions expressed are not necessarily those of RMS or its affiliates.)

  7. during Point 1. Shannon you express that the NBS has 90 days to transfer title after the passing of the spouse, but the slide over your right shoulder says 30 days, to be clear, which is it?

    • Erik,

      It should read 90 days. The narration is correct, the graphic is incorrect. For more details see the link to the mortgagee letter in this post. Thank you for pointing this out.

  8. This is a point that I personally hope they get cleared up soon. I have a borrower who wants to use the HECM for Purchase (she is 64) her husband is 58. They want to retire and move here for retirement in our beautiful area (The Villages, FL) Perfect fit for this loan, right?
    Well, she is going on title by herself. This is in the state of Florida, where the spouse keeps the possession of the property if they are living in the house. The death cert gives the spouse a right to the house, right? I agree placing the spouse on title at the time of purchase and base it on the younger aged spouse. The rules for the reverse can stay the same, but who doesn’t want to be on title if their spouse is on it? Doesn’t seem right not to have the NBS on title somehow. If you want to go a step further, imagine and justify 4 sisters (siblings) all wanting to live in a home, but 3 are 10-15 years younger than the borrowing sister. Or, if there was an adult child living there, because of health (mental or physical) issues. Dad dies, then mom (NBS) dies then the child has a right to the home or gets kicked out. Where does it stop? Just thinking. Your thoughts ?

  9. I cannot understand why HUD made this so complex. They are reducing the principal limit to comply with the youngest borrower.anyway so Why don’t they just leave the spouse on title and put them both on the loan as borrower and co-borrower instead of requiring them to be a non-borrowing spouse?
    The attorney’s for HUD need to read the entire Deed of Trust, the due on sale clause could definitly come in to play
    By deeding the spouse off the title, opens up a lot of legal issues upon the death of the older spouse and the younger spouse NOT on title at the time of the death of the property owner and I feel HUD and the Lender holding the loan could be sued and held liable for insisting this be a condition of the loan. Ownership of a property and mortgage terms are two separate issues
    Has HUD got the opinion of AARP on this?? I feel that would be a place to start inasmuch as AARP is the one who instigated the law suits pertaining to the original terms of the non-borrowing spouse.

    • Ms. Hanson,

      If they left the non-borrowing spouse on title then issues about continued availability to the line of credit and term and tenure payments during a deferral period would arise. HUD must do it this way.

      What part of the due on sale clause in the trust deed are you referring to?

      Could you please expand your second to the last paragraph? Remember the non-borrowing spouse can be either the younger or older spouse.

      I really have a hard time seeing why Mortgagee Letter 2014-07 creates any greater possibility for a lawsuit than before it. Please elaborate especially in light of PL 113-29, the Reverse Mortgage Stabilization Act of 2013.

      Thank you.

      (The opinions expressed in this reply are not necessarily those of RMS or its affiliates.)

  10. Great stuff guys, thanks for the video and the opinions, this has prompted me to ask my rep for some guidance here. I don’t want anyone getting hurt on my watch.

  11. Can any of you “legal eagles” answer me this simple question….I originated a reverse mortgage in 2007. My wife was too young to be on title, so I was required to “quit-claim” her off the title.
    Question: If I die does she have to refinance the house (which would be equal to “losing” her primary residence) or can she stay in it indefinitely?
    I would appreciate a simple answer to my e-mail address (Wolfgang54@att.net.) Thank you in advance for your efforts !

    • Wolfgang,

      I am no legal eagle MEANING I am NOT an attorney but I can tell you that she must meet minimum qualifications as found in Mortgagee Letter (ML) 2015-15. The ML is written to lenders and allows THEM the option to offer deferral to your surviving spouse. So you need to check with your lender to gain some kind of guarantee (preferably in writing) providing your spouse with that right if she meets the general requirements under Mortgagee Letter 2015-15.

  12. Thank you J.E.V. for your answer…I did not even expect one, so it took me several months to read it.
    My problem is that my lender now says he is no longer concerned with anything but “servicing” my loan. I further fail to find any motivation for my lender to grant me that “spousal guarantee” that would enable my wife to keep residing in my home without refinancing this loan. Why would they do that? What financial incentive would they have?
    It seems that an ironclad guarantee is not on the horizon and the politics of HUD is just to create the “illusion” of protection for the NBS.
    Is there a web address where I can obtain a simplified version of this provision from a representative of HUD? Even the “free legal opinion websites” simply reply with a reference to the 2015 Mortgage Letter…which doesn’t really help me.
    Strange how such a vast bureaucracy can be established without providing the resources for a practical answer to a simple question….

    • Mr. Koster,

      Even though NRMLA is a great organization and is a good source in expressing current HUD and most of its members’ thinking, the only source of information upon which you can fully rely into the indefinite future is Mortgagee Letter 2015-15.

      This Mortgagee (meaning HUD approved lender) Letter is not written to either the borrower or the non-borrowing spouse; it is written to the lender offering two ways that the loan can be paid back to the lender. Lenders are under NO obligation to offer the non-borrowing spouse the deferral under this Mortgagee Letter. That Mortgagee Letter states:

      “Where a deceased borrower is survived by a Non-Borrowing Spouse, a mortgagee may elect to either:

      1. Foreclose in accordance with the contract as endorsed; or

      2. Utilize the MOE Assignment.

      Where a mortgagee elects to consider utilizing the MOE Assignment, the terms and conditions set forth below shall apply.

      Where a mortgagee does not elect to utilize the MOE Assignment upon the death of the last surviving borrower or determines that a HECM is ineligible for the MOE Assignment, the mortgagee shall notify the Secretary that the loan has become due and payable and shall commence foreclosure within six months from the date of the last surviving borrower’s death or within six months from the publication date of this Mortgagee Letter, whichever is later.”

      If you refinance now, you will find the guarantee that a lender will make to you in the mortgage documents. The requirements for lenders on all HECMs with case numbers assigned after 8/3/2014 can be found in Mortgagee 2015-2 which is located at:

      https://www.hud.gov/sites/documents/15-02ML.PDF

  13. Hello Mr. Koster,

    I had a non client of mine call me a few months ago with a situation similar to yours. I sent him a pamphlet written by NRMLA that addresses this issue. Please go to their website, http://www.reversemortgage.org and in the “Search” box enter, “What do I do when my loan is due?”. Page 4 outlines what is required of the Non Borrowing Spouse. Also, I called his servicer and, although it was verbal, he confirmed that as long as those guidelines were met, his NBS would be fine if he was to pass away first. I hope this helps. Have a good day!

    • Mr. Peerless,

      I find the reference in the pamphlet inaccurate as to Mortgagee Letter 2015-15. It specifically overlooks the election decision of the Mortgagee. Under that election, the Mortgagee is free to foreclose EVEN IF the non-borrowing spouse is qualified to defer. That is true for all HECMs with case numbers assigned before 8/4/2014 and is a sound reason to try to meet the refi rules and refi the HECM after 8/3/2014.

      Mortgagee Letter 2015-02 establishes an insurance requirement that the lender incorporate the qualified non-borrowing spouse rules into loan documents. Mortgagee Letter 2015-02 requires that if the non-borrowing spouse qualifies and elects to defer, the lender MUST grant the deferral requested. The framework of Mortgagee Letter 2015-02 and Mortgagee Letter 2015-15 are very different.

      • Mr. Peerless,

        I forgot to note that I believe the pamphlet was never intended to be used for any purpose other than to help in the decision making process for new borrowers. It was never intended to explain rules that apply to HECMs originated before the release date of the pamphlet.

        As to the accuracy of that last paragraph, you will need to check with that section’s writer at NRMLA.


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