Reverse Mortgages and Non-Borrowing Spouses: A Case of Unintended Consequences?

On August 8, 2017, the New York Times published the article “2 Senators Question Effects of a Reverse Mortgage Proposal.” This article overviews a joint letter Senator Marco Rubio, R-FL, and Senator Catherine Cortez Masto, D-NV, sent to Ben Carson, the secretary of U.S. Department of Housing and Urban Development (HUD) and Mick Mulvaney, director of the Office of Management and Budget (OMB).

The letter focuses on additional rights and protections that HUD has previously offered to the spouse of a borrower who take out a reverse mortgage and later dies. In the letter, the senators ask whether a small wording change in the Trump administration’s proposed budget request for HUD was intended to take away those additional rights and protections.

In this blog posts, two of Summit’s housing experts—Andrew Netter and Dr. Edward Seiler—provide background on the non-borrowing spouse issue, outline the prior action HUD has taken, and add context to the letter sent by Senators Rubio and Cortez Mastro.

What is a Non-Borrowing Spouse and Why are they an Issue?

Historically, the phenomenon of non-borrowing spouses has been driven by the following three features of HUD’s reverse mortgage, or Home Equity Conversion Mortgage (HECM), program:

• HECM loans can be originated to an individual borrower, or jointly to a borrower with one or more co-borrowers who also occupy the property.
• The Principal Limit Factor (PLF)—that determines how much equity can be potentially drawn from the property—is based-on the age of the youngest borrower/co-borrower at the time of loan closing (age-at-closing).
• The PLF, and hence maximum amount that can be withdrawn, decreases as the age-at-closing decreases.

These three features incentivize borrowers to have the highest possible age-at-closing when obtaining their HECM. In the past, this incentive often led to, in the case of couples, the younger spouse/partner, who otherwise would have been on the HECM loan, being excluded from the HECM loan. By excluding the younger spouse/partner from the HECM loan and using the older borrower’s age to establish the PLF, the PLF and the loan proceeds are higher. When this happens, the younger spouse/partner, who is not on the HECM loan, is often referred to as a ‘silent spouse’ or, more formally, as a non-borrowing spouse.

The proliferation of non-borrowing spouses is problematic for both HUD and the non-borrowing spouse/partner. According to the terms of the HECM loan, the loan becomes due-and-payable when the last remaining HECM borrower dies (to learn more about the details of a HECM loan, and due-and-payable events, read our HECM Program Overview). If the non-borrowing spouse is still living at this time, they must either pay-off the current principal limit of the HECM loan, or satisfy the HECM loan with the net proceeds from the sale of the HECM property. This often leads to a situation where the non-borrowing spouse will either be displaced from their residence shortly after their partner’s death, or HUD will allow the non-borrowing spouse to remain in the property, delaying repayment of the HECM loan and increasing risk (in excess of what was ‘priced into’ the original PLF of the HECM) to HUD.

Essentially, when the non-borrowing spouse is not on the HECM loan, HUD cannot accurately price the risk associated with that individual and thus cannot afford them the same rights as the borrower. The HUD HECM Handbook states that all borrowers “may occupy the property until the mortgage becomes due and payable. A mortgage will become due and payable when the borrower dies, the property is no longer the borrower's principal residence, the borrower does not occupy the property for 12 consecutive months for health reasons, or the borrower violates the mortgage covenants.” If the spouse was added to the HECM loan at origination, the PLF would have been lower–accurately pricing the risk of the younger spouse–and the spouse would be afforded the same rights as the primary borrower.

What has Been Done to Solve the Non-Borrowing Spouse Issue?

Since 2014, HUD has made a concerted effort to solve the non-borrowing spouse issue, both retroactively and prospectively. HUD has issued a number of Mortgagee Letters (ML 2014-07, ML 2015-02, ML 2015-03, ML 2015-11, ML 2015-15, ML 2016-05) to define the term ‘Non-Borrowing Spouse’, create guidelines to determine ‘Eligible’ Non-Borrowing Spouses (verses ‘Ineligible’), and provide guidance to HECM Mortgagees when dealing with Non-Borrowing Spouses.

ML 2014-07: Home Equity Conversion Mortgage (HECM) Program: Non-Borrowing Spouse, published April 25, 2014, prospectively extended “the insurance eligibility “Safeguard” requirement in new HECMs to both the mortgagor and the Non-Borrowing Spouse, including common law spouses, will obviate the need for these Non-Borrowing Spouses to refinance the HECM loan upon the death of the mortgagor.” The ML also defined the term “Non-Borrowing Spouse” as “the spouse, as determined by the law of the state in which the spouse and mortgagor reside or the state of celebration, of the HECM mortgagor at the time of closing and who also is not a mortgagor.” This policy went into effect for case numbers issued on or after August 4, 2014.

This ML also made it possible for a couple to obtain a HECM while still providing protections to the Non-Borrowing Spouse where one borrower is under the minimum HECM-eligible age of 62. That being said, the ML also extended Principal Limit Factor tables to ages below 62 and stated that “where a HECM mortgagor has identified a Non-Borrowing Spouse, the mortgagee must base the Principal Limit on the age of the youngest mortgagor or Non-Borrowing Spouse.” The ML also introduced formal documents that Non-Borrowing Spouses must sign to be covered under the same protections that the main borrower is. If the spouse wishes not to be covered under these protections (Ineligible Non-Borrowing Spouse) they also must sign a document indicating such. This makes the identification of Eligible and Ineligible Non-Borrowing Spouses clear and documented going forward.

ML 2015-15: Mortgagee Optional Election Assignment for Home Equity Conversion Mortgages (HECMs) with an FHA Case Number assigned prior to August 4, 2014, published June 12, 2015, retroactively extended protections to loans with Non-Borrowing Spouses by providing “an alternative option for claim payment for an eligible HECM with an Eligible Surviving Non-Borrowing Spouse.” This ML gave HECM mortgagees the ability to assign a due-and-payable HECM to HUD when there is a Non-Borrowing Spouse present in the home. This avoids the mortgagee having to foreclose on the HECM property if the HECM isn’t satisfied by repayment or property sale.

Together these MLs produced clear rules regarding both existing non-borrowing spouses and those on newly originated HECMs. Furthermore, HUD published the rules contained in ML 2014-07 and 2015-02 in the Federal Register (Vol. 82, No. 12) on January 19, 2017, further solidifying these rules and regulations. A passage in the federal register states that these rules provide “protection to Eligible Non- Borrowing Spouses from foreclosure, and removes incentives for borrowers to obtain higher principal limits than they would otherwise be eligible for by using only the age of the older spouse.”

The President’s FY 2018 Budget

In Senator Rubio and Senator Cortez Mastro’s letter, they state that: “It appears that the President’s FY 2018 budget seeks to make a change to the reverse mortgage program. Namely, Section 223 in the “General Provisions” portion of the HUD budget seeks to amend language in the National Housing Act pertaining to safeguards which protect widows and widowers from displacement.” They requested a written response “outlining the rationale underlying this proposed change.”

The senators interpret the language in the budget as undoing some of the protections that ML 2015-15 provided to Non-Borrowing Spouses. Below is the language in question contained in the HUD section of the FY 2018 President’s Budget:

SEC. 223. HECM Spousal Survival.—Section 255 of the National Housing Act (12 U.S.C. 1715z-20) is amended—

(1) in subsection (b)(2), by inserting before the period ", except that the term "mortgagor" shall not include the successors and assigns of the original borrower under a mortgage"; and (2) in subsection (j), by amending that subsection to read as follows:

"(j) SAFEGUARD TO PREVENT DISPLACEMENT OF HOMEOWNER.—In order for a mortgage to be eligible for insurance under this section, the mortgage shall provide that the obligation of the homeowner to satisfy the loan obligation is deferred until the death of the homeowner, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. The Secretary may, within the Secretary's sole discretion, provide for further deferrals. Section 1647(b) of title 15 and any implementing regulations issued by the Board of Governors of the Federal Reserve System shall not apply to a mortgage insured under this section."

Conclusion

Over the past four years, HUD has committed to fixing the non-borrowing spouse issue. Through the issuance of multiple Mortgagee Letters, HUD has clarified rules and regulations regarding non-borrowing spouses. Senators Rubio and Cortez Mastro interpreted the FY 2018 President’s Budget for HUD as removing some of the protections previously provided to these non-borrowing spouses. We eagerly wait to see how this will be resolved.