HUD Issues Non-Borrowing Spouse Guidelines for New HECM Loans

Under Mortgagee Letter 2014-07 (April 25, 2014) released earlier today, HUD announced that, effective for Case Numbers for HECM loans issued on or after August 4, 2014, if and for so long certain new and important requirements are met, the spouses of HECM mortgagors at the time of the closing of their loans, who are not also mortgagors at that time, nevertheless may remain in those homes after the death of such mortgagors, for a newly defined and potentially long duration “deferral period.” 
 
In making its announcement, HUD effectively yielded to the final judicial interpretation in Bennett v Donovan (U.S. District Court for the District of Columbia), of the National Housing Act Non-Borrower Spouse “Safeguard” provision (Section 255(j)). 
 
The new Mortgagee Letter, when effective, makes significant changes to the HECM program.  It creates or confirms important new obligations and opportunities for married senior HECM loan borrowers and their spouses.  It imposes new and ongoing responsibilities upon originators, counselors and servicers.  And, when effective, it will affect the HUD Mutual Mortgage Insurance Fund, in ways that may be clearer when, before its effective date, HUD publishes new Factor Tables that will be the basis upon which originators, in consideration of the age of the youngest mortgagor or Non-Borrowing Spouse, will need to establish the Principal Limit of such HECM loans. 
 
Among the issues related to Non-Borrowing Spouses that HUD clarifies in this new Mortgagee Letter are the following:

  1. The Mortgagee Letter applies prospectively only (as of its effective date), and thus has no effect upon HECM loans made before that date, including to mortgagors with Non-Borrowing Spouses.  It takes the position, with respect to such already closed HECM loans (and HECM loans closed between now and its effective date), that FHA has no authority to alter the existing legally binding contracts that govern such current and older HECM loans, thereby effectively reinforcing the importance of the current ongoing litigation, also in the U.S. District Court for the District of Columbia (Plunkett v Donovan), with respect to those loans and the potential safeguards that may need to be afforded those Non-Borrowing Spouses.  (See also HUD Announcement 2014-19 (Foreclosure Extensions).
  2. The Mortgagee Letter requires a Non-Borrowing Spouse to, among other things, establish within 90 days of the death of the last surviving HECM mortgagor, legal ownership or another ongoing legal right to remain in the home securing the HECM loan, and to undertake responsibility for meeting all of the obligations of the HECM mortgagor described in the loan documents, and it permits servicers to declare the loan immediately due and payable (and thereby bring to an immediate end the deferral period and Non-Borrowing Spouse safeguards if and when those and other specified requirements are not met)—all without necessity for the servicer to obtain HUD approval to do so.
  3. It clarifies that HECM loans are not assumable during the deferral period (and thus that otherwise available proceeds under the HECM loan generally will be not available to the Non-Borrowing Spouse during the deferral period), but that the HECM loan continues to accrue interest during the deferral period, and also that it generally may continue to be assigned to HUD after the mortgagor’s death if the loan balance reaches 98% of the Maximum Claim Amount. 
  4. It establishes and specifies the content of important new and ongoing certification requirements for both HECM mortgagors and their Non-Borrowing Spouses, and related and new counseling and servicer requirements.

HUD also announces in the Mortgagee Letter that it will publish a notice in the Federal Register no later than May 2, 2014, seeking public comments on it (with HUD having published it at this time, though with its prospective effective date, under the authority granted to HUD under the Reverse Mortgage Stabilization Act (a law enacted with the strong support of NRMLA)).

The Mortgagee Letter is 14 pages long, and this is not a complete or comprehensive summary of it.  You will want to review this Mortgagee Letter in detail.