Can Reverse Mortgages Foreclose on Surviving Spouses?

AARP's legal arm sued the Department of Housing and Urban Development HUD) on behalf of three now-deceased borrowers' surviving spouses, charging that reverse mortgage borrowers were caught in what amounts to a regulatory bait and switch. They were facing imminent foreclosure and eviction from their homes.

Problems With Home Equity Conversion Mortgages 

The case involved the spouses of individuals who took out Home Equity Conversion Mortgage (HECM), which is the most widely available reverse mortgage administered by HUD. A reverse mortgage allows homeowners who are at least 62 years old to borrow money on their houses. The loans don't have to be repaid until the last surviving borrower dies, sells the home, or permanently moves out.

The borrowers in the AARP case all died, leaving their spouses, who were not listed on the loan documents, living in the mortgaged homes. Because of the housing downturn, the homes were worth less than the balance due on the reverse mortgage. None of the three spouses -- residents of Indiana, New York, and Maryland -- could obtain loans for more than their homes were worth and faced eviction.

2008 Policy Change

Since 1989, HUD rules governing reverse mortgages have stated that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end of 2008, the Bush administration abruptly changed this policy and said that an heir -- including a surviving spouse who was not named on the mortgage -- must pay the full mortgage balance to keep the home, even if it exceeds the value of the property. This, AARP said, violates existing contracts between reverse mortgage borrowers and lenders.

The US District Court for the District of Columbia ruled in 2013 that HUD violated federal law by failing to protect the plaintiffs. The surviving spouses of holders of reverse mortgages are protected from foreclosure as a result of the death of the spouse named on the mortgage, and HUD had to remedy the problem. As a result, surviving spouses are assured that they will be able to remain in their homes, despite the loss of a spouse.

How This Happened in the First Place

A reverse mortgage is a loan that allows older homeowners to convert a portion of home equity into cash. The borrowers are not required to make monthly payments to repay the loan.  Instead, the loan balance increases over time, and the loan doesn't become due until one of several specific events occurs. In this case, the loans became due because the borrowing spouse died.

A surviving spouse might not be named on the mortgage for a number of reasons:

• One spouse may have taken out the reverse mortgage before the marriage
• One spouse may be under age 62 and ineligible
• Lenders often encourage the younger spouse not to be named a borrower so that the loan amount can be higher.

AARP notes that, perversely, under HUD's old rule, a stranger could purchase the property for its current appraised value, but a surviving spouse couldn't. The policy also negates a key purpose for which borrowers pay for insurance to protect against owing more than their homes are worth.

Unfortunately, for several years following the economic crisis in 2008, nearly one-quarter of all mortgaged homes were underwater, according to CoreLogic, a housing data firm. The economy has since rebounded, but historically, it can happen again. Knowing that this issue has been resolved can allow couples to safely take out reverse mortgages without worry.

The Need for Senior Advocates

Struggling Americans over 50 often face serious issues regarding housing, hunger, income. and isolation. This is why companies like AARP use their legal resources to help protect them. Elder law attorneys are also advocates for seniors who educate families about the problems seniors face, especially as their health declines. Looking into reverse mortgages usually means a couple needs additional income to remain in their home. One reason the budget gets tight is increasing medical expenses.

Contact an elder law attorney near you to assess your current financial situation and develop a long-term care plan that considers strategies like reverse mortgages as well as applying for government benefits. Preparation for medical emergencies is crucial for those on a fixed income.