Non-Borrowing Spouse Policy: A Wrench in the Gears?

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Does New Policy Spell Trouble for the Future?

Non-Borrowing Spouse Policy What may have gone unnoticed by some may in fact turn out to be one of the most momentous policy decisions in the history of the HECM program: the non-borrowing spouse provision. Recently columnist Jack Guttentag (AKA “The Mortgage Professor”) penned a column on HUD’s new non-borrowing spouse policy and the resulting wrench the NBS policy throws into the gears of the Home Equity Conversion Mortgage program. Guttentag writes in part “Effective August 4th, more than will be thrown in the HECM gears, thanks to a misguided lawsuit by AARP against the Department of Housing and Urban Development, and a misguided change in HECM rules by HUD in response to the suit.”

First some context. Prior to the policy HECM borrowers with a younger spouse often removed the younger spouse from title whether they were 62 or older or not. Some even removed a spouse over 62 in an ill-advised attempt to benefit from a larger benefit in proceeds based solely on the one borrower’s age. Guttentag states that there is little credibility that seniors who removed a younger spouse from title did so without…

Download the video transcript here.

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22 comments

Demas Lamas July 28, 2014 at 4:28 am

I’m miffed at “Why” a non-borrowing spouse has to come off title under the new HECM policies. The way I understand it: upon death of the borrowing spouse, the NBS has to “apply” within 90 days for a “waiver” that allows him/her to stay in the property without payments. Part of that “apply” means NBS has to get back on title. Can anybody offer any advice on how the NBS gets back on title AFTER their spouse dies?

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The_Cynic July 28, 2014 at 9:37 am

The general rules are simple; if you are a homeowner you must be a borrower. HUD is merely trying to comply with its view of 12 USC 1715z-20(j) in light of the case it lost.

So to protect a non-borrowing spouse (NBS) as a non-borrower, how can that person be on title at closing? If on title at closing, the NBS would suddenly be a borrower with all of the rights of a borrower which HUD correctly declines to give them.

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Tom Adams July 28, 2014 at 6:01 am

Allow non-borrowing spouse rights to assume the loan. If payments do not fully account for age of assuming borrower, adjust available proceeds accordingly.

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The_Cynic July 28, 2014 at 8:57 am

Tom,

And WHAT IF the HECM was fixed rate or all the proceeds have been drawn on an adjustable rate? How can you lower what is not there???

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Robin Faison July 28, 2014 at 7:17 am

Thank you again for your informative videos.
And many of us, I am sure, were aware of the “go around” of HUD’s tenure nonpayment declaration.
I am not as concerned about the younger spouse not being able to pay ongoing expenses so much as to the legal precedent that has been set with the ruling. I see a “can of worms”, so to speak, with the NBS’s that have gone before August 4th, 2014.
The precedent and battle ground has been set for further litigation for AARP and HUD.
This to me is the fly in the ointment for the program.
HUD continues to orchestrate without much thought to this program that should be the least of their worries in Washington and for the country. They can do nothing in Congress that needs to be done, but the HECM program continues to be “remantled”. So there it is.

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The_Cynic July 28, 2014 at 10:46 am

Robin,

As to case numbers assigned before August 4, 2014, you are right on point. While most commentators seem happy that the NBS issue looks to be taken of, they may quickly sour as the battle between AARP and HUD continues through the courts IF HUD appeals its loss as they have indicated they will. The ML does not impact this case since all of the plaintiffs were NBSs of borrowers with HECMs having case numbers assigned long before August 4, 2014.

No doubt many in the press who have reported so positively about the NBS changes will be confused by the ongoing litigation. That alone could throw sand into the HECM gears.

Also I am not so sure that we are done with the need for further changes to Mortgagee Letter 2014-07. What is left out of that ML are spouses who marry borrowers after the HECM was obtained. They are clearly covered under the law [12 USC 1715z-20(j)] even if HUD ignores them in the ML.

I fully believe that the ML can stand as written since the HUD Secretary can override law through a ML where the MMI Fund could be fiscally harmed without the ML under The Reverse Mortgage Stabilization Act of 2013 [now codified as 12 USC 1715z-20(h)(3)]; however, the ML is now in conflict with 12 USC 1715z-20(j). So will the Supreme Court confirm the ML since it appears to be in conflict with long standing law? Will AARP decide to test the ML? Also, the HUD Secretary did NOT sign the ML; Ms. Galante did. HUD was not given this power just its secretary.

The result could be interesting in that the Supreme Court could rule that the definition of a qualifying NBS for deferral purposes is different before August 4th than after August 3rd or that the ML cannot overrule law since the HUD Secretary did not sign it. The question is WHY?

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The_Cynic July 28, 2014 at 12:03 pm

Robin,

I am confused by your fly in the ointment reference. You say: “as to the legal precedent that has been set with the ruling. I see a “can of worms”, so to speak, with the NBS’s that have gone before August 4th, 2014. The precedent and battle ground has been set for further litigation for AARP and HUD. This to me is the fly in the ointment for the program.”

Yet August 4th does not relate to the NBS but rather the date of case number assignment and how a NBS can qualify for deferral under ML 2014-07 on HECMs after 8/3/2014. If the law applies to all surviving spouses of a borrower and the HECM has a case number assigned on August 1, 2014, a HECM borrower may not be married to a NBS qualified under the anti-displacement and deferral period for decades to come.

So while I get the sense of your “fly,” we may not see final litigation on the NBS issue related to HECMs with case numbers assigned before 8/4/2014 for decades. More importantly, those with these rights under the law may not obtain such rights for decades into the future.

What remains unsettled is if the deferral period may not be transferrable to the subsequent surviving spouse of the surviving spouse of the borrowing spouse or even for an unbroken chain of subsequent surviving spouses far beyond that. HUD could have addressed this issue decades ago but chose to ignore it. A simple amendment in 1988 or shortly thereafter could have straightened this whole thing out before the first HECM was ever endorsed. HUD has known about this issue for decades.

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Mike Johnson July 28, 2014 at 8:01 am

WOW! So far, it’s been great. The new NBS tables are helping me go back to users who were to recieve insufficient funds for their plans, and now get so much more, they are changing their minds and going with the program, which otherwise had died in their minds. I had one today in his 80’s who is getting over $60,000 more. Between higher values, higher tables, NBS being permitted now, and a 5% rate cap max, I am pretty happy lately. Let’s hope the F.A.T. (Financial Assessment Toll) doesn’t spoli our recent happiness. Mike Johnson

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tobinsmith July 28, 2014 at 8:21 am

Do we know really know the numbers (as a percentage) of loans we’re talking about. Maybe its not as big a deal as we think it is, maybe a couple here or a couple there.

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Marshall Gallop July 28, 2014 at 8:31 am

H4P is my primary business. My folks are nicely able to use this. If FHA’s calculations are truly “actuarially sound”, then this provides excellent long term financial planning stability at a fair price/benefit ratio to all.

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CLIFF RIDDLE July 28, 2014 at 9:36 am

ONE OF THE BIGGEST WRENCHES IS TO TRY AND ADD THE WIFE ON WHEN THERE IS NOT ENOUGH CASH LEFT TO PAY THE SHORTAGE THAT EXISTS ,,,,NOT EVERY ONE CAN AFFORD THE SHORTAGE,,,

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The_Cynic July 28, 2014 at 9:47 am

Cliff,

Where in Mortgagee Letter 2014-07 or in any other HUD document do you find that the NBS must pay off some kind of “shortage” in order to qualify for the deferral? Please explain.

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tobinsmith July 29, 2014 at 5:08 am

You know what he meant.

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The_Cynic July 29, 2014 at 1:18 pm

Are you kidding? Then you explain what he meant in light of ML 2014-07.

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Charles Guinn July 28, 2014 at 10:19 am

The good thing about not having the NBS ON title is that the Basis Value is steped up the current market so the NBS will have less Capital against Tax when they sell if they choose to. Of course that was alys the case. but now they have the choice to stay in the home if they want. By the way, in cases where it is financially possible, the couple should considering paying into the RM an amount equal to the interest each month to keep the loan principal down to prevent compounding.

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Scott Larson July 28, 2014 at 10:40 am

We as an industry need to stop being the nannies for the senior world we serve. Treat them right? Of course. Be responsible? Absolutely. But we cannot, and should not, make the program so “safe” that it serves no one.

I had to learn early in my reverse mortgage career that I cannot fix the problems stemming from a lifetime of bad financial management. The same happens here. if a surviving spouse cannot afford the home, they NEED TO SELL. It is not, and should not be, the responsibility of HUD, or any other agency, to assume additional obligations to keep the spouse… especially a non borrowing spouse… in the home for a lifetime at no cost to them.

There are “rules to the game” here, and if the spouse is borrowing, then they get all the benefits that accrue as a part of that transaction. IF THEY ARE NOT BORROWING, then they don’t get all the benefits! If they want the benefits, then play by the rules and get them, by being on the loan.

Yes, there will be some people that are hurt. However we can’t structure the program so there will never be anyone who has a problem… at least if we want the program to be financially viable.

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The_Cynic July 28, 2014 at 12:38 pm

Scott,

There are rules to the game but apparently you are not familiar with them. So here is a subsection of the original law which has not changed to this very day: “The 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 regulations of the Secretary. For purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.” This subsection is found at 12 USC 1715z-20(j) and can be found at the NRMLA website or at the Government Printing Office website at:

http://www.gpo.gov/fdsys/pkg/USCODE-2011-title12/html/USCODE-2011-title12-chap13-subchapII-sec1715z-20.htm

It is HUD which knowingly made up some rules related to NBSs which is not in the rule book. They measured the legal risk and thought that because of the low dollar reward few would sue and even if they did, the courts would find for HUD. HUD could have had an amendment introduced into Congress to revise the quoted subsection but they did not.

If HUD’s old position was right, why did the subsection define a homeowner as a spouse? HUD has said that spouse here means a borrowing spouse. That argument makes no sense because if both spouses are borrowers there would be no need to define a homeowner as a spouse.

Even HUD is acknowledging their prior position was wrong by issuing ML 2014-07. The courts found HUD’s old position wrong. The foundation of the HECM “game” as you call it, is the law not some rules you or I may choose to follow.

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James E. Veale, CPA, MBT July 28, 2014 at 11:31 am

The video summarizes the view of Dr. Guttentag on Mortgagee Letter (ML) 2014-07 as it pertains to the NBS issue and also covers some minor points related to the NBS issue.

Dr. Guttentag somehow takes the position that AARP should not have instituted the lawsuit; yet the law at 12 USC 1715z-20(j) does not distinguish between categories of spouses. The law simply requires that HUD cannot insure any mortgage as a HECM “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 regulations of the Secretary. For purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.”

If only borrowers (and borrowing spouses) are protected from displacement subsection (j) as HUD has claimed for the last 25 years, then why have the last sentence quoted above which states for the purpose of subsection (j), “…’homeowner’ includes the spouse of a homeowner.” Now HUD is agreeing with the law in ML 2014-07 to a small extent but excludes any spouse who is not a borrower and has not been continuously been married to the borrower since the date the HECM closed. It also excludes otherwise qualifying non-borrowing spouses who do not meet other qualifications including being declared as a non-borrowing spouses at closing. Yet the law makes no such distinctions.

Since after 25 years, HUD is just now agreeing with a portion of existing law and a federal appeals court has agreed with AARP, how can Dr. Guttentag call AARP “misguided” as to the lawsuit? However, Dr. Guttentag is right to call the policy change misguided since HUD should never have insured any mortgage which did not protect all surviving spouses of borrowers against displacement. What is misguided about the new policy is that it only protects certain classes of spouses from displacement.

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

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Lora Hayda August 22, 2014 at 5:52 pm

How do these new laws affect people that had these type of loans before aug 4 2014 .
Because at this point my husband passed away
in may of 2014 and I am told I have to sell my home
or face forcloser or buy my home at 95 percent of the the appraise came it at 35,000 .My husband passed at 73 I am 51 we were married 24 yrs
the loan was taken in 2010 …….My home is all I have I am in fear of becoming homeless.

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Shannon Hicks August 25, 2014 at 7:34 am

Lora,

Unfortunately the Non-Borrowing spouse policy does not apply to loans prior to August 4th 2014. I would recommend contacting the loan servicer (the company that generates your monthly statements) as soon as possible to discuss your particular situation. I wish I had a cut and dried answer.

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Joyce Howland May 28, 2015 at 8:19 am

I am a 66 year old non-borrowing spouse that was taken off the mortgage on a home that my husband and I built together and that I continue to take care of. I was only 61 yrs old at the time we took out our reverse mortgage to help with mounting medical bills. My husband is 88 years old now. I was told by the reverse mortgage loan officer that when I turned 62 I could get back on the reverse mortgage thereby protecting me from eviction from my home in the event that my husband died. A total lie! So for all of you that believe that we are simply living off the US Government maybe you should get the facts straight before making these kinds of statements. Our reverse mortgage owes more than my home is worth now since these are negative amortization loans. If they foreclose on me when my husband dies they will sell my home for around $350K, we owe almost $500K on the mortgage. Market values have not increased in our area. The notion that I will simply buy the house back for market value is ridiculous. I don’t have the money, nor did we get a big chunk of money out of our equity when we took out the reverse mortgage 5-6 years ago. I will lose half my income when my husband dies and my home. The government took $18,000 from our equity for closing costs at the time we took out our reverse mortgage. It also collects MIP and servicing receipts from this mortgage. STOP RIPPING OFF SENIORS ONCE AND FOR ALL. President Reagan signed this bill in order to help seniors. One day all of you may be in this position. I hope not but remember we are still tax payers and carry our weight even with meager social security income that they have conveniently called “entitlement” income.
If I sound angry, I am. I hope AARP wins this lawsuit and saves all of us even if some of you don’t believe we should have that right.

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rmm May 28, 2015 at 4:06 pm

Joyce,

Call US Representative Waters or US Senator McCaskill and tell them your story.

The law is right and HUD is just plain wrong. I am embarrassed by the stupid remarks of my peers. Who cares what they were taught to parrot when they discussed non-borrowing spouses.

They do not want to look stupid or like how they were fooled but that is their condition. It is astounding how most of them say they originate HECMs because they want to help seniors and then say the nonsense they do.

Ask them where they got their idea about the non-borrowing spouse and it is no different than the remarks I hear: “Well, that is what so and so says.” Hearsay is hearsay. My peers should try reading the law.

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