Reverse mortgages allow a homeowner not 62 years or older to convert a portion of the equity in their home into cash. The most dominant reverse mortgage product is the Home Equity Conversion Mortgage (“HECM”), insured by HUD’s FHA program. HECM borrowers are not required to make monthly payments and the loan does not come due until one of several events occur such as the death of the homeowner or sale of the property. In many reverse mortgage cases, one of the spouses is convinced to “quitclaim” their interest in the property to the other spouse because the size of the reverse mortgage is partially determined by the age of the youngest borrower.
In Bennett v. Donovan, 2013 WL 5442154 (D.D.C. Sept. 30, 2013), the Court was faced with the issue of whether a surviving spouse not on a reverse mortgage can stay in the home upon the death of the other spouse. The HECM statute stated in part that “The Secretary [of HUD] may not insure a home equity conversion mortgage unless such mortgage provides that the homeowner’s obligation to satisfy the loan is deferred to the homeowner’s death, the sale of the home, or…other events.” The term “homeowner” in the statute is defined to include the spouse of a homeowner. See 12 U.S.C. Sec. 1715z-20(j). The regulations implementing the statute on the other did not protect the spouse of a homeowner and gave the lender the right to foreclose even if the non-borrowing spouse was living in the home. See 24 C.F.R. Sec. 206.27(c). This rule is also known as the spousal displacement rule.
Plaintiff filed suit to challenge the spousal displacement rule. The district court dismissed the lawsuit initially holding that lenders were not parties to the case and the contracts allowed the lenders to foreclose upon the death of a borrower. The D.C. Circuit court reversed because HUD could accept assignment of the Plaintiffs’ HECM and for the first time, found that Plaintiff’s claims were redressable even though the spouses of the deceased borrowers were not signatories to the HECM, granted summary judgment for Plaintiffs and remanded the case to HUD which is now charged with fashioning a remedy consistent with the Court’s ruling.
The Court’s ruling is clear that HUD’s failure to protect spouses from being displaced was an error and HUD will now be required to take steps to protect spouses of reverse mortgage borrowers. The opinions in this blog are solely the author’s and any comments, replies or suggestions should be sent to me at John@jrjoneslaw.com.