Do surviving spouses have the right to remain in a home after the death of the primary borrower on a reverse mortgage? A hearing this week before a U.S. District Court could clarify the matter.

Four such surviving spouses are suing U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan in an effort to require the department to resolve a contradiction in the rules governing reverse mortgages. They are also seeking to halt foreclosure proceedings that are currently underway against their homes.

With a reverse mortgage, a borrower need not repay the loan as long as they remain in the home. Often, this means that the home is sold to satisfy the loan when the borrower dies or enters an extended living facility. The question before the court is whether a borrower's spouse has the same right to remain in the home, even if they were not listed as a co-borrower on the loan.

The hearing is scheduled for this Thursday in Washington, D.C.

Are spouses protected?

The suit stems from a conflict between the original law establishing the Home Equity Conversion Mortgage (HECM) program and regulations later developed by HUD for its implementation. The statue states that the loan need not be repaid until the death of the homeowner, which is also specified to include the homeowner's spouse.

However, HUD regulations implementing the law use the term "mortgagor" instead of "homeowner," and goes on to state that "mortgagor" does not include a borrower's heirs. So while a spouse would be protected if both partners were listed as co-mortgagors on the loan, they wouldn't be under the HUD language if the loan was taken out solely in their spouse's name.

The HECM program accounts for nearly all reverse mortgages. A ruling would clarify which standard would be applied going forward, pending any further appeals.

Three of the four plaintiffs had signed quitclaims to their properties, but are claiming they did so without realizing it meant they would be giving up their homes or that they were mislead into believing they would be protected if they did so.

FHA pressured to act

Lenders and HUD have generally been reluctant to foreclose on senior homeowners in this situation, but increasing losses for the FHA, which backs reverse mortgages under the HECM program, have created pressure to act.

Reverse mortgages are products that are available to senior homeowners (age 62 and above), and are offered as a way to borrow against home equity while still having access to the property. The main attraction is that the loan need not be repaid until the borrower vacates the home, allowing them the continued use of the property as long as they are able without having to worry about repayment. However, costs and fees are higher than on conventional home equity loans.

Published on January 26, 2012