By November 10, 2013 4 Comments

Bennett v. Donovan: Non-Borrowing Spouses Still Face Foreclosure of Reverse Mortgages

A district court recently found that a HUD regulation for reverse mortgages violated federal law. Despite some news reports, the court did not hold that a lender is prohibited from foreclosing a reverse mortgage when the property is the principal residence of a non-borrowing spouse. As we will see, for now non-borrowing spouses remain at risk of foreclosure.

The Problem of the Non-Borrowing Spouse

In a reverse mortgage, a homeowner borrows against equity in the home, receiving either a lump sum or monthly payments. Unlike a forward mortgage, the borrower does not make regular principal and interest payments on the loan. Instead, the loan comes due when the borrower dies or sells the property.

Reverse mortgages are non-recourse. No matter how large the loan balance becomes, the borrower will never owe more than the property is worth. The lender’s only remedy is to foreclose and sell the property. Reverse mortgages therefore pose some risk to lenders.

To encourage lenders to make reverse mortgages, HUD insures loans that meet certain requirements. One of those requirements is that all borrowers must be at least 62 years old.

When one spouse is too young to qualify, couples are sometimes encouraged to transfer the younger spouse’s interest in the property to the older spouse, who becomes the sole borrower. Sometimes, the transfer occurs to take advantage of higher loan limits available to an older spouse.

The problem is that, upon the death of the borrower, the surviving, non-borrower spouse will face foreclosure and eviction if she does not have a way to pay off the loan. Although some couples take out life insurance sufficient to pay off the loan, absent careful planning a reverse mortgage naming only one spouse can be disastrous for the survivor.

What the Law Says

The federal statute that governs Home Equity Conversion Mortgages (HECM) is supposed to protect elderly borrowers from foreclosure. The statute states that HUD

may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term ‘homeowner’ includes the spouse of the homeowner.

The key word is “homeowner.” That term expressly includes the homeowner’s spouse.

What the statute plainly states is that HUD may not insure a reverse mortgage unless the mortgage defers the obligation to pay off the loan until a sale or the death of the homeowner and the homeowner’s spouse. The statute does not use more restrictive terms, like mortgagor or borrower, used elsewhere in the statute.

Despite the plain language, HUD issued very narrow regulations that fail to protect non-borrowing spouses. The relevant rule, 24 C.F.R. § 206.27, requires an HECM mortgage to state that the:

mortgage balance will be due and payable in full if a mortgagor dies and the property is not the principle residence of at least one surviving mortgagor.

Note the use of “mortgagor” instead of the expansive term “homeowner” that appears in the statute. If the surviving spouse is not also a mortgagor, the loan comes immediately due and, if she cannot pay, she could lose her home.

The AARP Litigation—Bennett v. Donovan

With the help of the AARP, three surviving, non-borrower spouses facing foreclosure of reverse mortgages sued the Secretary of HUD for issuing regulations that violate federal law. The district court initially dismissed all of their claims on grounds that the plaintiffs lacked standing.

Because plaintiffs sought a declaratory judgment, they were required to show that a judgment would redress their injuries—namely, being foreclosed and evicted from their properties. The district court held that, even if HUD’s rule did not comply with the law, the individual lenders still had a contractual right to foreclose. Therefore, finding in favor of the plaintiffs could not stop the foreclosures and therefore would not redress their injuries.

The Court of Appeals for the D.C. Circuit reversed. The court held that plaintiffs’ injury could be redressed because the statute gives HUD authority to “accept assignment of the mortgage, pay off the balance of the loans to the lenders, and then decline to foreclose against [plaintiffs].” In other words, HUD could put an end to plaintiffs’ foreclosures if HUD wanted to.

Notably, the court did not require HUD to do so, but held only that the possibility was enough to confer standing on the plaintiffs. Solely on that basis, the court remanded the case back to the district court for further proceedings.

In doing so, the court acknowledged that “appellants still have no guaranty of relief.” Instead, if plaintiffs prevailed in the district court, it would be left to HUD to fashion a remedy or to deny any remedy at all. If plaintiffs were dissatisfied with HUD’s decision, they would merely “have the option to seek review on the ground that HUD’s actions were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” In other words, don’t pop the cork on that champagne bottle just yet.

When the parties arrived back in district court, they filed cross-motions for summary judgment. As expected, the district court held that HUD’s rule violated the statute, and the court instructed HUD to “fashion appropriate relief.”

Notably, neither the district court nor the Court of Appeals ordered HUD to adopt any specific rule or fashion any specific remedy for these plaintiffs. More importantly for others in plaintiffs’ position, the courts agreed that the lenders had the right to foreclose.

In other words, although HUD must fix its rules and plaintiffs may be able to challenge that fix, nothing in the opinion requires HUD to remedy the immediate problem—pending foreclosures of non-borrowing spouses.

What Does Bennett v. Donovan Mean for Spouses Facing Foreclosure?

It is too soon to tell what the ultimate impact of Bennett v. Donovan will be. Some industry observers believe that HUD will simply issue rules requiring both spouses to be included on all HECM mortgages. Although that might be a good thing, many lenders already stopped making reverse mortgage loans with non-borrowing spouses pending a decision in Bennett.

So far, HUD has remained mum on how it intends to fix the rules. HUD has given no indication publicly that it will accept assignments of reverse mortgages after the death of the borrowing spouse. For non-borrowing spouses facing foreclosure, that is the best possible outcome and, arguably, the only fair one. But it could be costly for HUD.

In the meantime, for non-borrowing spouses currently facing foreclosure, it appears that Bennett v. Donovan may be of little help. While the court held that HUD should not have insured reverse mortgages that did not adequately protect the non-borrowing spouse, both the district and appellate courts recognized that the inappropriate mortgage terms were still enforceable by the lender in a foreclosure action.

Perhaps we will soon see HUD joined as a third party in a foreclosure action. Or perhaps HUD will quietly accept assignments of the mortgage if the non-borrower spouse challenges a foreclosure. But for now, we suspect that the foreclosure train will keep chugging along as it has for the past five years, running right over innocent spouses stuck on the tracks.

Photo © 2013 by Click under a MorgueFile license.
Posted in: Cases

4 Comments on "Bennett v. Donovan: Non-Borrowing Spouses Still Face Foreclosure of Reverse Mortgages"

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  2. Sandy Jolley says:

    Advocates: Grandma May Get Run Over
    By HUD’s New Reverse Mortgage Policy
    Washington DC- March 11, 2015: Earlier this week, a group of consumer advocates and attorneys sent a letter to the Department of Housing and Urban Development (HUD) about a new HUD policy that was supposed to help widowed homeowners and surviving heirs after a reverse mortgage borrower passes away. A federal judge ordered HUD to create a new policy, but advocates charge that HUD’s new policy is so restrictive that virtually all surviving non-borrowing spouses will be excluded from relief.
    Reverse mortgages can be used by seniors who are aged 62 or older as a last resort option to supplement their income. In the past, with HUD turning a blind eye, mortgage brokers encouraged couples to leave the younger spouses off of the mortgage as a way to qualify for the mortgage (if the younger spouse wasn’t yet 62 years old). In most cases, the couples were promised that if the older spouse passed away, the younger spouse could remain in the home even if they weren’t listed on the mortgage. Unfortunately, that has not been the case, and widows and widowers are facing foreclosures and evictions as a result.
    After a lawsuit brought by AARP, a federal judge ordered HUD to revise its policies in order to address this problem and HUD announced the new policy in January 2015.
    Advocates have widely denounced the new policy, citing the eligibility requirements as nearly impossible for the majority of surviving spouses to meet. Under the new policy, a reverse mortgage service could assign the loan to HUD. However, even if the servicer chose this option (at their discretion), the surviving spouse would then most likely need to make a large, lump-sum payment to meet the Principal Limit Test, something that most surviving spouses will be unable to do.
    Kevin Stein, associate director of the California Reinvestment Coalition, comments: “At a Federal Reserve and OCC hearing last month, a bank CEO remarked that foreclosing on seniors is happening in part because of HUD policy. While we don’t absolve the industry for its role in this, it’s clear this new policy is a disaster for surviving spouses. HUD can and should do better, and reverse mortgage servicers should stop all foreclosures on surviving spouses until then.”
    Odette Williamson, staff attorney at the National Consumer Law Center, adds: “HUD needs to go back to the drawing table on this policy and it needs to fully disclose how it is making this policy, how many people are potentially affected, and what the costs and benefits are with various options. Until a new policy is in place, HUD should enact an immediate moratorium on foreclosures for surviving spouses.”
    Craig Briskin, a partner with Mehri & Skalet, PLLC in Washington, DC, who represents the plaintiffs in the Bennett and Plunkett cases, and who filed a challenge to the new policy last week, comments: “HUD has betrayed its obligation to seniors, whom the reverse mortgage program is supposed to protect. We will continue to fight until HUD obeys federal law and protects spouses of reverse mortgage borrowers from foreclosure.”
    Maeve Elise Brown, executive director of Housing and Economic Rights Advocates, comments: “It is shocking that HUD would not take action to protect vulnerable seniors as much as possible. We encourage HUD to take this opportunity to do so.”
    Sandy Jolley, a reverse mortgage suitability and abuse consultant adds: “It is disgraceful that HUD is deliberately violating the intention of the HECM program to keep seniors in their home, and forcing the foreclosure and eviction of surviving spouses shortly after the borrower spouse dies.”
    Shawna Reeves, director of elder abuse prevention at the Institute on Aging, says, “Vulnerable elders will continue to wind up homeless under HUD’s new policy on surviving spouses of reverse mortgage borrowers. This is unacceptable and needs to change. Elders’ lives are at stake.”
    Prescott Cole, California Advocates for Nursing Home Reform Senior Attorney, adds: “The problems aren’t simply the spouses being faced with foreclosure after the death of their loved ones, when the borrower dies everyone living in the home will be evicted if the loan cannot be repaid.”

  3. joyce saltzman says:

    if the reverse mortgage is taken and later the person remarries is the new spouse entitled to remain until her dealth after the passing as the holder of the mortgage?

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