Late January, the Federal Housing Administration (FHA) issued new policy guidelines under its Home Equity Conversion Mortgage (HECM) program that allows FHA-approved lenders to postpone foreclosure proceedings against non-borrowing spouses in the event of the death of the last surviving borrower. This latest guidance is similar to policy changes announced by the FHA last year, but those changes only impacted HECM loans that were created on or after August 4, 2014.
The policy update is the latest action from the FHA with respect to non-borrowing reverse mortgage spouses – an issue that has been the subject of several court cases involving non-borrowing spouses, the AARP Litigation Foundation and HUD. In some reverse mortgage transactions, married senior couples will elect to omit the younger spouse from the reverse mortgage transaction in order to maximize the available credit to the couple. This can leave a non-borrowing spouse exposed when the loan becomes due and payable upon the death of the borrowing spouse.
In keeping with the policies announced last year, the FHA stated the following in Mortgagee Letter 2015-03: “FHA’s new guidance will allow reverse mortgage lenders to assign eligible HECMs to HUD upon the death of the last surviving borrowing spouse, thereby allowing eligible surviving spouses the opportunity to remain in the home despite their non-borrowing status.” This process is known as the Mortgagee Optional Election (MOE).
“By electing the [MOE] Assignment, lenders will be permitted to modify their FHA mortgage insurance contracts to permit assignment of an eligible HECM to HUD despite the HECM being eligible to be called due and payable as a result of the death of the last surviving borrower,” the FHA stated.
It is important to note, however, that nothing in the FHA’s announcement should be construed as prohibiting a lender from foreclosing pursuant to the terms of the reverse mortgage if the lender so chooses.