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Non-Borrowing Spouse Pitfalls?


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Three potential issues with HUD’s new Non-Borrowing Spouse Policy

reverse mortgage newsNon-Borrowing Spouse Pitfalls. As with any new policy often more questions arise than answers. HUD’s recent Non-Borrowing Spouse policy is no exception to this rule. While benefiting younger spouses with the peace of mind of being able to remain in the home after the death of their spouse what pitfalls and problems can arise?

First is the question if a borrower can opt-out to include their younger non-borrowing spouse? If allowed it would benefit the borrower with increased proceeds in the short term while placing the younger spouse at risk of displacement in the future. Should the consumer have the choice to forgo declaring a non-borrowing spouse? Should HUD incur the risk of potential lawsuits even if the borrower willingly made such a choice? In the intrest of our industry’s reputation and consumer protection one would hope such a scenario is not possible.

Next is the surviving spouse’s future financial stability. The non-borrowing spouse has the right to remain in the home after the borrower’s death during a deferral period but does not have the right to any previous…

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  1. Why can we not keep the non-borrowing spouse’s name on the deed? Would that pose an additional risk to the program?

    • The HECM program is based on all property owners being HECM borrowers. Taking the Non-Borrowing Spouse off of title is in line with other program requirements. It also clarifies that a Non-Borrowing Spouse has absolutely no rights as a borrower or homeowner at the time the HECM closed. The only right that the Non-Borrowing Spouse has is a contingent right to defer the date when the HECM becomes due and payable due to the death of the borrowing spouse.

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

  2. What happens if the NBS is not the person that the property goes to in the will. (example: The property goes to the children of the borrower for a previous marriage.)

    • Skip,
      Good question. From what we understand as long as the NBS is specified in the loan documents and the NBS establishes legal ownership (title) or a legal right (trust, will, etc.) to remain in the home they should be eligible for the deferral period to remain in the home. In your example the NBS would want to coordinate with their spouse and legal counsel to insure their NBS rights remain intact.

    • Mr. Koehler,

      If it is the goal of the title owner to see the property go to a non-spouse immediately following death, HECM rules do not interfere with that transfer. The only thing that the HECM rules do is defer the required payoff of the HECM for a Non-Borrowing Spouse.

      Non-Borrowing Spouses do not have the right to defer. They have a contingent right of deferral if they can meet all the HECM requirements found in Mortgagee Letter (“ML”) 2014-07 at the time the HECM becomes due and payable.

      Some are reading the ML as if it has magical powers to override state property right laws at death. That interpretation is utter nonsense. The Non-Borrowing Spouse must provide proof of holding a qualifying ownership interest in the collateral at the time of deferral application in order to qualify for the deferral and that cannot be obtained through the ML.

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

  3. I completely agree with your point about the tenured payments and LOC. Just as the PLF is determined by the younger spouse, so should the rest.

    • Mr. Messeloff,

      Your point gets to the crux of what makes the NBS issue so difficult. If HUD was to do as you suggest, then isn’t the NBS essentially a borrower who has no property interests in the collateral of a non-recourse debt? What an odd tale to spin.

      Quite frankly, the prior position of HUD makes more logical sense than ML 2014-07; however, the law since inception is not reflected in either HUD policy positions. While opposed to the position taken in the law, we are a nation ruled by law not bureaucratic determinations which ignore legal requirements so why is HUD circumventing the law?

  4. I currently am working with a potential borrower (age 68) whose wife (age 65) was diagnosed with MS 15 years ago. She was placed in a nursing home 7 years ago and taken off of the deed 5 years. Since she doesn’t live in the home and will never live in the home she does not qualify for the non-borrowing spouse status. However, since the borrower is married, for principal limit calculation, we must use her age under the so-called “estranged non-borrowing spouse guideline”. THIS IS REALLY UNFAIR.

    • Mr. Gottfried,

      While you present a sympathetic case, it is also entirely off point. The right of deferral is contingent for all Non-Borrowing Spouses. Some Non-Borrowing Spouses may be estranged at the time of closing but reunite with the spouses soon after. Why not allow these spouses to defer?
      (The opinions expressed in this comment are not necessarily those of RMS or its affiliates.)

  5. Another situation that comes into play with a NBS is that by taking their name off the deed, should the borrower die could cause the NBS to possibly have to file thru the probate court to secure title to the property. With both names on the deed or the property in a trust would avoid probate. If the target of any estate planning is to avoid probate, this could be counter to that direction or at least add a complication.

    • Mr. Theiss,

      There is another way to avoid probate which still leaves some power of title in the hands of a Non-Borrowing Spouse throughout the life of a HECM and that is to be a remainder man in a life tenancy.

      • James
        Thanks for your point. Obviously HUD does not address any of this and many individuals would not think this thru. Hopefully the MLO would have a interest in making sure the borrowers are aware of the implications or have the client seek counsel.

      • Mr. Veale,
        What are your thoughts on using a “Beneficiary deed”.

        • Mr. Binkey,

          This is a state law matter. As a non-attorney in all states, I strongly suggest that you contact legal counsel qualified and practicing law in the state where the property is located.

  6. I feel that the option for opting out should be available. In a lot of cases, the surviving spouse WOULD NOT want to stay in the home after the other spouse passes on.
    I also agree that the non borrowing spouse should remain on the title to the property. I don’t feel HUD or anyone else has the right to make it mandatory to have them relinquish ownership
    I eonder ewhere HUD’s legal counsel was when these rulings where put in place? There are many legal issues here.

    • Joyce,

      Deferral is an option which can be elected by a qualifying Non-Borrowing Spouse; it is not a requirement of ML 2014-07.

      Many wonder what the HUD legal department was thinking when they chose a policy which intentionally ignored the spousal anti-displacement issue to begin with.

  7. How about a borrower who wants his NBS to have the right live in the house as long as she wants, but ultimately wants the house to go to his kids from a 1st marriage. Is she sufficiently vested in title after the borrower’s death to be afforded deferral from the ‘due and payable’ clause as recipient of a life estate created by the borrower’s will with his children as remaindermen?

    • Mr. Warns,

      Why not? The situation you describe is known in law as a life tenancy which can be established for the Non-Borrowing Spouse through a will. HUD looks at such situations as sufficient interests in property to qualify for a HECM but HUD does need to clarify.

      As you imply, HUD should provide examples of what it means to meet the ownership requirement for a Non-Borrowing Spouse to qualify for deferral of the due and payable clause on a HECM.

  8. All of the opinions expressed in this thread of comments and replies which I have written are not necessarily those of RMS or its affiliates.

  9. Wish there were a way to “FIX” what we had with a simple siugnature from the NBS and keep the old program alive. Simply allow the NBS to elect to sign away all their rights to stay in the home after the demise of the borrowing spouse. Permit the HECM Borrowing Spouse to get more money using their age alone, BUT, the tradeoff being their spouse cannot stay in the home utilizing the deferral program. They must either refi, buy or sell the home upon the Borrowers demise. I have one that cannot qulaify now using the NBS age, and can using their own age. They feel, and stated so, that he, the borroiwng spouse who is 76 is being unfairly treated, even discriminated against, because he has a spouse and his friend of the same age, does not. He could divorce her and get a REVERSE, leaving her the home in his will. SHe would not be a NBS but she could sell after his death and get 100% of the equity. How funny is that. Let’s hope divorce rates among the elderly don’t skyrocket.

    • Mike,

      There is an underlying current in many of the comments above including your own which ASSUMES that the surviving NBS has control over the ownership in the collateral following the death of the borrowing spouse. Yet the NBS may not ever accede to ownership in the property and thus never qualify for deferral as to enforcement of the due and payable clause.

      With less than 55,000 HECM originations annually and of those less than 40% involving married couples (with only a small percentage of those involved in the NBS issues), the divorce rate for those 62 and over should be relatively unaffected by the “evil” effects of ML 2014-07.

  10. Even before the first HECM was offered, the law of the land on displacement of a spouse where any spouse survives a HECM borrower is found at 12 USC 1715z-20(j). So the issue is not ML 2014-07 but rather WHY did it take HUD over 25 years to even address this issue?

    Some say that hubris at HUD legal is beyond the level of reasonable or rational. These claim that the position in this long fight has been more about how powerful the HUD legal department is in the fight than what Congress intended or what is in the best interests of seniors.

    Thank goodness for the courts and their ability to weigh in on this issue.

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