Q. I took out a HECM reverse mortgage loan a few years ago and was advised not to include my younger wife on the loan documents so that I could qualify for a bigger loan. When I die, will the bank be able to take over our home to pay the loan and evict my spouse if she survives?
A. Here’s the situation: the U.S. Department Of Housing And Urban Development (“HUD”), which ensures reverse mortgages placed by banks under the popular Home-Equity Conversion Program (“HECM”), currently has a regulation which requires reverse mortgage loans to be fully payable upon the death of the borrower, unless survived by a joint-borrower who is also on the loan. Where a husband and wife both sign the loan documents, they would be considered joint borrowers, the loan would only be due and payable upon the death of the survivor, and the concern that you raise would not arise.
However, sometimes couples are advised by lenders to take out a reverse mortgage only in the name of the older spouse, so as to qualify for a bigger loan. Remember, the size of the available loan is based, in part, upon the age of the borrower; the older the borrower, the more money he or she can access under a reverse mortgage. In those cases, the younger spouse would not be on the loan, and would therefore not qualify as a surviving joint-borrower. Upon the death of the older spouse, the lender would then demand full payment of the loan. If the survivor were unable to pay off the full loan balance, the lender could then begin the foreclosure process to force a sale of the home and evict the surviving spouse. This is the scenario that concerns you.
Many other couples around the nation have found themselves in this very situation and many have lost their homes to foreclosure upon the death of the borrowing spouse.
The good news is that, on September 30, 2013, a federal court in Washington DC issued a ruling finding that HUD’s regulation violates federal law, declaring that it was Congress’ intent to protect surviving spouses even if they were not on the loan. The court ordered HUD to fashion an appropriate remedy to protect surviving spouses in these situations. The case was initiated by AARP and entitled Robert Bennett, et. al v. Shaun Donovan.
Caution: It is not yet clear how HUD will correct the problem, and experts believe that the court ruling does not mean that couples can now safely take out a reverse mortgage and leave one spouse off the loan. Therefore, until HUD issues new regulations, it is still unwise for a spouse to be intentionally left off the loan documents. Likewise, in situations where an unmarried individual takes out a reverse mortgage loan and later remarries, he or she would be well advised to discuss with the lender the possibility of modifying the loan to add his or her new spouse as a joint borrower, so as to protect the surviving spouse from the risk of foreclosure.