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A New Type of Non-Borrowing Spouse


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A New Twist in the Non-Borrowing Spouse Policy

Ineligible Non-Borrowing SpouseWe had mentioned in an earlier episode that we expected to see HUD bring futher clarification to the new Non Borrowing Spouse policy. Last week however we have a new twist. The Ineligible Non-Borrowing Spouse. First let’s revisit what is a qualifying Non-Borrowing Spouse. A qualified NBS has been and remains the spouse of the HECM borrower at closing, has been properly disclosed in the loan documents and has occupied and currently occupies the property securing the loan.

Now let’s break down the latest mortgagee letter 2015-02 for more insight.

1- No opt out for eligible Non-Borrowing Spouses. That’s correct. To insure protection and avoid borrowers making the risky choice to maximize proceeds with only the oldest borrower considered HUD prohibits the exclusion of a qualifying Non-Borrowing Spouse from a HECM loan.

2- What if scenario required. If you have a borrower with an ineligible NBS the lender must disclose…

Download a transcript of this episode here.

Download Mortgagee Letter 2015-02 here.

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  1. Hi Shannon – Just to clarify my understanding regarding the Non-Qualified NBS. I have a situation where they live apart. Does this qualify for a Non-Qualified NBS ? If so, does the RM proceeds / benefit now based on the borrower only ? I know the NBS still has to participate in counseling, sign the NBS forms, and processing runs a credit report. Please advise on my 2 questions.
    Tom Pinocci

    • Tom,
      Unfortunately from what you described they would actually be an “ineligible Non-Borrowing Spouse” because they do not have the same primary residence as their spouse. No protections for a deferral period would be provided to them. The would still have to sign disclosures, participate in HECM counseling and the loan would be only based on the primary borrowers age.

  2. Shannon,

    In analyzing the Mortgagee Letter there does not appear to be any reason other than a spouse not occupying the home that will make a spouse an ineligible NBS at the time of closing. Is that correct?

    Yet, what if the borrowing spouse has a life tenancy with no rights for the non-borrowing spouse and the home is owned by the charitable trust of a prior spouse? The charitable trust specifically states that the charity cannot sell the home for a period of up to six months following the transfer of title and in no case can be sold to any future spouse of any life tenant. That would seem to make the NBS ineligible at closing but apparently it does not.

    What are your thoughts?

  3. Once HUD decided to stop following the law without demanding that Congress change the law, HUD started down a road that puts the reputation of the program at even more risk. This latest clarification is not only ridiculous but it is downright stupid.

    For example, you state: ” If the borrower moves out or divorces their spouse they must
    submit a signed certification (notice) within 60 days of such an event.”

    Yet it is not when the NBS no longer occupies the home that the sixty day notification period begins but rather when the home is no longer the Principal Residence of the NBS which is six months and one day AFTER they no longer occupy the home. (But then does the one year come into play for medical reasons?)

    Also there is no requirement that the NBS notify HUD, just the borrower. The pertinent area of Mortgagee Letter 2015-02 is quoted in the next paragraph.

    “If an Eligible Non-Borrowing Spouse, identified at closing, ceases to be married to his/her HECM borrower spouse for any reason other than death or fails to reside in the property as his/her Principal Residence, the Deferral Period that would prevent the displacement of such Non-Borrowing Spouse will no longer be in effect. The borrower must submit the following certification within 60 days of the date the Non-Borrowing Spouse becomes ineligible.”

    So now it is up to the borrower to determine exactly when the period of the home being the principal residence ends for the non-borrowing spouse. Yet what if in the middle of the six month period (a separation trial period of three months), the couple try to reconcile and live together for three months but then decide to separate again for a trial period of several months but after the second trial period ultimately stay together. You mean the borrower must track all of this and report if the technical six month and one day rule is violated?

    Now the borrower can blackmail an eligible NBS with making that spouse ineligible by simply reporting that the spouse is no longer eligible whether the NBS is or not. Once HUD is notified by the borrower there is no appeals system in place for either the NBS or the borrowing spouse if that spouse recants. What kind of folly is this?

    This Mortgagee Letter has more potential for problems than making things right. Why not leave it where it was? While the prior was bad, is this any better? Yes, some borrowing spouses with a NBS may get more money than under the prior Mortgagee Letter but now we have a whole new mess to deal with no system of appeals left just the initial goodwill of the borrower.

    The nonborrowing spouse mortgagee letters are a broken levee with holes sprouting up everywhere. It is about time that HUD deals with the law rather than continuing this nonsense about trying to fix its own nonborrowing spouse idea through continuous issuance of mortgagee letters. That is now shown to be a failure.

  4. I think it’s outstanding I believe they finally got it right

    • Billy,

      And what about a borrower who is living outside of the home for a few years due to medical reasons, should the mortgage go into the due and payable status when there is an eligible NBS living in the home? Right now that is the result. Only death will allow an eligible NBS to defer repayment.

      So as one of many, I find your conclusion wrong; HUD has NOT got it right.

      Why didn’t and why won’t HUD follow the law and let Congress make needed corrections? Like many others who find a problem in the cost of the legislated spousal displacement protection in 12 USC 1715z-20(j), the provision should be changed by Congress or Congress should appropriate the funds needed to pay for it.

      However, HUD has got it wrong and its correction makes it worse except for those few who can get more proceeds because their NBS does not live in the home as their principal residence at the time of closing.

      So if an older spouse with an eligible NBS wants more proceeds why not make sure that the NBS is out of the house for at least six months of the last 12 months before closing and then close the HECM and then have the spouse return to the home as the principal residence.

      That six months could consist of one day short of them traveling together. Then have the NBS visit relatives for one day of the NBS and boom the rule is met and the older spouse can get the higher proceeds.

      Under the Mortgagee Letter 2014-07 alone, there would be no reason for that occurring but now it is a way to make an otherwise eligible NBS, ineligible. No rule is perfect and Mortgagee Letter 2015-02 does not even come close.

  5. Shannon,

    OK, I give up. What is the penalty for not reporting the event that makes the eligible NBS, an ineligible NBS? What is the penalty if the borrower reports an eligible spouse as ineligible out of spite?

    If the lender or HUD finds out that an event which made an eligible NBS ineligible was not reported within the required 60 day period, will the HECM immediately go into the due and payable status? It would seem if there is no way to cure the ineligibility triggering event, is there a way to cure a failure to report event within the required sixty day period?

    What if the NBS refuses to jointly report the triggering event, if a joint report is actually required (which I do not believe it is)? Can the NBS now threaten the borrower with losing the loan?

    Is all of this worth giving a few borrowing spouses additional proceeds?

    • Critic,

      No penalties were specified in the Mortgagee Letters so I don’t know. As far as events disqualifying an eligible borrower HUD does make provisions to cure…outside 60 days may void that opportunity.

  6. When our government is paying out untold millions of dollars in fraudlent medicare and social security claims and hundreds of other wasteful entities throughout DC, why have they targeted one
    program that has actually made an impact for the senior community.
    My personal belief is it has been more political than profitbility of the MMI fund.

    • Bill,

      You are right that financial assessment has very little to do with the future profitability of the MMI Fund. The reason is that FHA insures the note and the growth in the note, not the payment of property charges. So all property charge defaults are the primary responsibility of lenders/servicers/note owners (and only after a note is assigned to HUD, FHA but only for defaults that occur in assignment not before it. In the past less than 4% of all HECMs have been assigned to HUD).

      You might think that the reason why lenders/servicers/note owners have pursued as hard as they have for financial assessment is because of the financial cost of property charge defaults and related foreclosures to them. While that is a factor, it is the damage to their reputations when a home is foreclosed on which is said to be the most significant reason.

      The public explanation Wells Fargo gave for leaving our industry was reputation risk on the rest of their businesses if they became known for throwing grandmas and granddads out of their homes for not meeting their property tax and insurance payment requirements. Although Wells could have created their own financial assessment underwriting standards, they apparently felt that would be self defeating if the rest of the industry did not have similar policies.

      The outcry for financial assessment really did not amount to much until after GNMA issuance really went into full gear in 2009. Before that, FNMA generally purchased all closed HECMs and took over this risk for lenders. Then as the industry turned to GNMA issuance to sell closed HECMs into the secondary market, suddenly lenders found themselves ultimately responsible for property charge payments if defaulted. It was at that point that the largest lenders began pressing HUD for some type of financial assessment.

      No doubt the slowness with which HUD responded not only became the most significant reason for Wells leaving but it was a significant reason for MetLife leaving and Bank of America abandoning its almost one-quarter of a billion dollar investment in Seattle Reverse.

      FHA was disappointed with the loss of the previously mentioned Big Three but based on fairness to the lenders in our industry it realized it must create financial assessment. The only question now is what percentage we will see business decline as a result, is that percentage too high or too low, and finally, does financial assessment reject or discourage the right prospects from getting a HECM?

      The answers to the last three questions are some time off in the future. For now, we must deal with the hand HUD has dealt us or at some time in the future move on.

  7. I have a situation where husband has significant tax lien
    He has never been on the deed or title or note. Wife is 72 he is 65. Could she get a reverse and not include him as the tax lien might make him ineligible

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