October 3, 2013
by Elizabeth Loefgren
Sirote & Permutt, P.C. – USFN Member (Alabama)
On August 9, 2013, President Obama signed the Reverse Mortgage Stabilization Act (HR 2167) in an attempt to revitalize the FHA Home Equity Conversion Mortgage (HECM) Program. This Act amends 12 USCA § 1715z-20 of the National Housing Act (NHA) by giving the Secretary of Housing and Urban Development (HUD) the authority to make administrative and policy changes to the Federal Housing Administration’s (FHA) HECM program without the constraints of a lengthy, formal regulatory process.
Prior to this change, HUD followed a regulatory process, which typically took up to 18 months to make an administrative or policy change. During these 18 months, FHA could continue to lose money. The new bill allows HUD to bypass this time-consuming process and issue a notice or mortgagee letter when a change is “necessary to improve the fiscal safety and soundness of the program.” Any administrative or policy change will be effective upon issuance of the notice or mortgagee letter.
HUD plans to use the new procedures available to them in HR 2167 to add consumer safeguards and improve financial performance of the HECM insurance fund. HUD issued its first mortgagee letter pursuant to the new procedures on September 3, 2013. Effective September 30, 2013, seniors have more options at closing in order to preserve some of the equity in their homes to help pay taxes and insurance. Effective January 13, 2014, lenders must conduct financial assessments of potential HECM borrowers to determine whether a reverse mortgage is appropriate for their financial situation.
FHA’s HECM program provides reverse mortgages to those who are 62 years or older and allows elderly homeowners to obtain additional income by borrowing against the equity in their homes. The loan obligation is deferred until the death of the homeowner, the sale of the home, or the occurrence of other events. Under HUD mortgage insurance guidelines and the NHA, the term “homeowner” includes the spouse of the borrower. This results in displacement safeguards for the spouse of the borrower even if the spouse did not sign the note at the time of loan origination. Because of this, servicers face challenges when attempting to foreclose a reverse mortgage due to the death of the only party who signed the note when the surviving spouse still lives in the home. Servicers face similar challenges when a titleholder who occupies the property executes the mortgage and not the note, yet is defined as a “borrower” under the terms of the mortgage.
In order to prevent these challenges, the lender should identify all parties with an interest in the property at loan origination, including not only the spouse but also parties who have a title interest in the property. The lender should also consider requiring all parties with such an interest to execute the note. Otherwise, servicers will continue to face challenges when foreclosing reverse mortgages when the reason for default is due to the death of the borrower who signed the note and the property is still occupied by the surviving spouse or the party with a title interest in the property.
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