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.