… unintended consequences… bad news for seniors
The Department of Housing and Urban Development will be forced project anticipated future losses from its reverse mortgage program following a ruling Monday ignoring the contractual obligation resulted in some homeowners facing foreclosure following the death of a spouse.
Dealing with the death of a spouse is stressful enough … if it also means losing your home because the reverse mortgage is now due, adds to the tragedy and makes sensational headlines. However, in most cases the issue is a poor choice made when the homeowner obtained the reverse mortgage in the first place. This ruling simply bails out those few who made an ill-advised decision to drop a spouse from title to get more money out of their reverse mortgage, and will negatively impact every senior that obtains reverse mortgage going forward. A terrible ruling in my opinion.
The federally insured program allows homeowners 62 or older to borrow against the value of their homes. If the borrower moves or passes away, the loan must be paid back either through the sale of the home or refinance into a traditional mortgage. Should the proceeds from the sale be short of the current loan balance – FHA insurance that the borrower pays for – up front and monthly – steps in and makes up the difference.
Some homeowners, because their names were not on the reverse mortgage or deed, found themselves facing foreclosure after their spouses died, according to a Wall Street Journal report.
The AARP filed a lawsuit two years ago against the Department of Housing and Urban Development, alleging that HUD violated federal law when it required surviving spouses to pay off their mortgages in full or be foreclosed upon, the Journal reported.
The Federal Housing Administration, which falls under HUD, issues reverse mortgages by using actuarial tables to determine the size of the payment a borrower will receive. Older borrowers receive larger payments.
Here is where stupid decisions were made … advisors would allow prospective borrowers to put only the name of the older spouse on the application and take the younger spouse off title entirely. Since the “younger” spouse is not on the loan or deed of trust – in the event of the older spouse passing away.. they are out. It is a dumb strategy and should never be done.
There are situations where a borrower marries after he/she has obtained a reverse mortgage … and that is a difficult situation. The new spouse is not on the mortgage and unless they are of a similar age there is no practical way to add them to the reverse mortgage. This is a tough call and should be discussed thoroughly as part of their financial planning with a later in life marriage. Ideas like the new spouse keeping their current home and renting it might be the best option. It gives them a home to return to if something happens to their spouse.
HUD made a motion in 2011 to dismiss the AARP’s lawsuit, claiming that allowing surviving spouses to stay in their homes and continue receiving payments would “eviscerate” the “actuarial balance of the program,” according to the Journal.
But U.S. District Judge Ellen Huvelle sided with the seniors’ advocacy group.
Imagine HUD having to anticipate the possibility of a much younger spouse either not included as a borrower on purpose … or the possibility that a borrower might marry someone younger later. This creates uncertainty and is very expensive to project for the reserve fund – especially with no history to draw on. Every new borrower is going to pay for this uncertainty going forward. And all because of a stupid decision by a borrower that is not using the reverse mortgage as it is designed … this ruling will have significant negative consequences.
The decision will mean even bigger losses for the FHA, which last week announced it would be taking a $1.7bn cash infusion from the Treasury to cover losses already sustained from the reverse mortgage program.
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