Archive for May, 2010

The Underage Spouse in Reverse Mortgage Situations

Friday, May 21st, 2010

 

A “Forward on Reverse” reader from Moline, Ill. sent the comment below. She asked two questions we will attempt to answer, expecting to learn from her situation.

 Dear Atare:

 I read your column regularly and enjoy it. I have closed a handful of reverse mortgages in the past and I have an issue with one I closed in November 2005. As required, the underage spouse was taken off title to complete a Home Equity Conversion Mortgage (HECM).

 They had done a line of credit and have since drawn the remaining available cash. They want to refinance to put him back on title, but now their available cash is negative $10,000. So, my understanding is that I cannot refinance this loan. I understand where the figures come from. What I don’t understand is why an underage spouse must be removed from title. And what can be done legally to protect that spouse if the one in title passes away? [emphasis added] I have contacted my lender and they haven’t given me any information. Can you shed some light on this?

—Sue. L. of Moline, Ill.

 Dear Sue:

 Thank you very much for your kind response and for your questions. We’re going to attempt an answer. Let’s begin with your first point: “What I don’t understand is why an underage spouse must be removed from title.”

 This is my guess: the couple desperately needs cash, and they conclude that a reverse mortgage is their only option. The underage spouse makes them ineligible and they decide he has to get off the title for the deal to go through. In other words, they determined the cash from a reverse mortgage is of greater immediate value to them than the property rights of the underage spouse. No matter how you look at it, it is a difficult situation.

 “I’m afraid there are no easy answers here. If the younger spouse stays on title, they may not qualify for the loan. If the younger comes off title, he could be subject to divestment at maturity,” said a prominent regulatory compliance attorney from Washington, D.C.

 It’s usually a family decision that a lender should not even suggest. It’s also a legal issue. If a situation comes up that could lead to an underage spouse being taken off title, the reverse mortgage originator should ask the couple to consult an attorney, as well as an experienced U.S. Department of Housing & Urban Development (HUD)-approved reverse mortgage counselor.

 In Mortgagee Letter 2006-25, dated Sept. 28, 2006, HUD mandates HECM counseling for the underage spouse. Here’s what the Mortgagee Letter said about the matter:

 “During counseling, all parties must be made aware that the Federal Housing Administration (FHA)-insured HECM cannot be assumed by the non-borrower spouse [or the underage spouse] upon the HECM borrower’s death or change of primary residence. In other words, the HECM becomes due and payable upon the HECM borrower’s death, or when the real estate, which serves as the security for the FHA-insured HECM, is no longer the primary residence of the HECM borrower.”

 Mortgagee Letter 2006-25 answered your second question: What can be done legally to protect that spouse if the one in title passes away? Thomas D. Christensen, an attorney and president of Burnsville, Minn.-based RealStar Title, agreed that the underage spouse is on rough legal terrain.

 “Not much can be done for the underage spouse unless the property is located in a state such as Minnesota, where a spouse has certain spousal rights to real property despite not being in title,” Christensen said. “In the event the spouse holding title passes away, then the underage spouse may be able to acquire the property through probate.”

Even in states such as Minnesota, where spousal right in property is protected, the Washington, D.C.-based regulatory compliance lawyer observed that most lenders would require the non-titled spouse to sign the mortgage (deed of trust) to fortify their lien position on the property at maturity. By signing the mortgage, he essentially subjects any spousal rights that he has in the property to the lien of the lender. If he refuses to sign, the lender would refuse to make the reverse mortgage loan.

 Christensen, whose company closes several reverse mortgage transactions each month, said whatever rights the underage spouse gets will rest on state law. “… The laws of some states may allow the spouse who retains title to dispose of the property however that spouse sees fit, without the underage spouse’s consent. In that instance, the underage spouse may have absolutely no rights to the property or proceeds of sale. It all depends upon the laws of the particular state,” he said.

 Again, taking an underage spouse off title should be the couple’s decision without input from the reverse mortgage originator. Often in these situations, the couple has decided that cash from the reverse mortgage is more valuable to them than the underage spouse’s property rights. The underage spouse may or may not have spousal rights to the property, depending on state law.

 As HECM’s insurer, HUD notes in Mortgagee Letter 2006-25, that the underage spouse is out of luck should the borrowing spouse die. The originator must ensure that the couple gets HUD-approved reverse mortgage counseling before they proceed with the transaction. HUD’s reverse mortgage counseling for the couple should provide some cover for the originator.

 With many second, third, even fourth and fifth marriages in baby-boomerland and HUD’s tough (if shaky) stand against underage spouses, there are yet unrecognized risks for HUD, lenders, and investors in reverse mortgage situations with an underage spouse.

 

A version of this article was first published under my column, Forward on Reverse in The Mortgage Press in February 2007.

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