Left In The Cold? Rights Of Lenders, Heirs & Surviving Spouses Upon The Death Of The Reverse Mortgage Borrower
Overview of Reverse Mortgages
A reverse mortgage can provide a source of income for elderly individuals while allowing them to stay in their home. Many elderly individuals have much of their wealth tied up in the equity of their home — a non-liquid asset. A reverse mortgage allows elderly individuals to access that equity without selling their home. The borrower receives the loan proceeds as a lump sum, periodic payments, a line of credit, or some combination of these options. The loan does not need to be paid off until a triggering event occurs such as the borrower’s death, the conveyance of the property, the home ceasing to be occupied as a primary residence (with certain exceptions), and/or the failure to satisfy one or more conditions of the loan. Thus, a reverse mortgage is different than a traditional home equity loan in that repayment is deferred, so the borrower does not make monthly payments to the lender. As a result, the loan balance increases and the equity decreases over time as the borrower receives payment from the lender.
The most common type of reverse mortgage today is the FHA Home Equity Conversion Mortgage (“HECM”). The HECM was first established as a pilot program in 1988 under President Reagan, with the enactment of the Housing and Community Development Act of 1987. The program became permanent in 1998. While there are a handful of proprietary (non-government insured) reverse mortgage offerings out there, by far the vast majority of reverse mortgages today are insured by the FHA under the HECM program.
Reverse mortgages are non-recourse loans. This means that if the loan is not paid when due and the sale of the home is insufficient to cover the balance, the lender has no recourse against the borrower’s other assets. The lender also has no recourse against the borrower’s heirs for any deficiency. Recognizing the risk of non-payment to lenders in this framework, Congress authorized the U.S. Department of Housing and Urban Development (“HUD”) to implement a mortgage insurance program to minimize the risk and encourage lenders to offer reverse mortgages. Thus, among other costs and fees, reverse mortgage borrowers are required to pay an upfront mortgage insurance premium (“MIP”) at closing, which is a percentage of the loan amount. In addition, monthly MIP accrues daily and is added to the loan balance.
While reverse mortgages can provide a source of much needed income for the elderly, they of course come with some potential downsides. One potential downside is that it may not be possible for the borrower’s heirs to inherit the property. The rights of both heirs and surviving spouses have been the source of a great deal of confusion and the subject of several recent lawsuits. These issues are discussed in greater detail below.
Is the Lender Required to Allow the Heir(s) to Purchase the Property at 95% of its Appraised Value?
In many cases, the lender forecloses on the home upon the death of the reverse mortgage borrower as that is its only recourse. In fact, HUD generally requires that lenders commence foreclosure proceedings within six months of providing notice that the loan is due and payable. Thus, heirs who may otherwise have been entitled to the property by will or operation of law may not be so entitled when there is a reverse mortgage in place.
What ability, if any, do heirs have to avoid foreclosure? In many instances heirs have been informed that they must pay the full balance of the loan in order to keep the property. However, a question that has been the source of recent conflict and debate is whether heirs may take advantage of the so-called “95% rule” that permits a borrower to sell the property for at least 95% of the appraised value.
HUD regulation 24 CFR § 206.125(c) permits a borrower to sell the property at any time and pay off the loan balance whether or not the loan is due and payable. It also states, in part, that “[i]f the mortgage is due and payable at the time the contract for sale is executed, the borrower may sell the property for at least the lesser of the mortgage balance or five percent under the appraised value.”” Whether heirs may keep the property by paying 95% of its appraised value has been a burning question. On June 12, 2013, HUD issued the following guidance intended to provide clarity on this issue:
The current language in Handbook 7610.1 REV5, page 105 “Non-Recourse Feature” incorrectly states that “if the heirs or the estate wish to keep the property, they are personally liable for the full balance of the loan.” However, when a HECM loan becomes due and payable as a result of the mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs . . .that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.”
However, recent case law suggests that unless the HECM Deed of Trust specifically provides for the right of the heirs to purchase the property for 95% of its appraised value or incorporates the HUD regulations, the lender may not be compelled to permit heirs this option. See, Chandler v. Wells Fargo Bank, N.A. 2014 WL 31315 (N.D. Cal. 2014). In Chandler, an HECM borrower’s son claimed that he was entitled to notice and an opportunity to purchase his mother’s property after she passed away for 95% of its appraised value. Id. The court disagreed. The court based its decision on the fact that the Deed of Trust did not require the lender to provide the borrower’s son with an opportunity to purchase at 95% of the appraised value. Id. Furthermore, the court pointed out that the Deed of Trust did not expressly incorporate the HUD regulations and, even if it had, the HUD regulations are “far from clear” on whether a borrower’s estate may purchase the property for 95% of its appraised value. Id. Notably, the HUD’s position in effect at the time of the Deed of Trust in Chandler was to require the borrower or estate to pay the mortgage debt in full if they wished to retain the property once the mortgage was due and payable. As stated above, HUD has since reversed this position.
Is the Surviving Spouse of an HECM borrower permitted to remain in the property without paying off the HECM loan?
Until recently, a borrower’s surviving spouse who was not on the loan would likely have been forced to leave the home as a result of the lender’s foreclosure. You may ask why only one spouse would ever be the only borrower on a reverse mortgage loan. There are a number of reasons why some couples choose to have only one spouse on the loan. For instance, to qualify for a reverse mortgage, the borrower must be at least 62 years old. Also, the amount that may be borrowed depends in part on the age of the borrower. Thus, some couples elect to have one spouse on the loan in order to be able to borrow and/or to obtain more favorable loan terms.
Recent case law may prevent the non-mortgagor spouse from being displaced from the home upon the death of the mortgagor spouse (or other triggering event). The law is not yet settled on this issue, however.
The decision in Bennett v. Donovan, 703 F.3d 582 (D.C. Cir. 2013) turned on the definition of “homeowner.” Two surviving spouses of deceased HECM borrowers initiated the case against the Secretary of HUD alleging that the regulations implementing the HECM program were unlawful and contrary to the HECM statute. Specifically, 12 U.S.C. § 1715z-20(j) provides, in part, as follows:
[t]he Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in the regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of the homeowner. (emphasis added)
The court in Donovan found that under this section, the loan obligation is deferred until death of the homeowner, including the spouse of the homeowner. It found that HUD violated this statute when it implemented regulations that permit the HECM loan to become due and payable upon the death of the borrower/homeowner, even if the surviving spouse who was not on the loan is still alive.
The issue is not settled yet, however, as the Secretary of HUD filed a notice of appeal to the D.C. Circuit on November 26, 2013.
This article is intended to provide general information and, therefore, should not be treated as legal advice. If you have questions about a specific legal issue, nothing will substitute for the advice of a qualified attorney.
For questions, please contact Jon Goodman.