Archive for August, 2014

HECM protects non-borrowing spouses IV

Monday, August 25th, 2014

 

 

 

The HECM Non-recourse Connection

It was one of the puzzles of the non-borrowing spouses’ (NBS) litigation saga which began in March 2011.

Within a month of Bennett v. Donovan, in which non-borrowing spouses sued HUD alleging failure to protect them from displacement when their borrowing spouses died (as required by HECM law), HUD took a seemingly unrelated action.

It revoked the infamous Mortgagee Letter 2008-38 (ML-08-38), a supposed “clarification” of HECM non-recourse policy. So what is the connection between the NBS problem and HECM non-recourse policy? More importantly, how did HECM non-recourse policy both masked and exposed the NBS trouble?

To our first question, the connection is consumer protection: the section of HECM law the non-borrowing spouses claimed HUD failed to implement protects non-borrowing spouses against displacement while original  non-recourse (not ML-08-38) shields HECM borrowers, their heirs, and estates from unlimited financial loss at loan’s payoff.

As we saw in part three, the central risk in reverse-mortgage lending is that the loan balance can grow larger than the home’s value (crossover risk). Without non-recourse protection, lenders can go after borrowers’ other assets to satisfy the loan balance. Original non-recourse limits this risk to the loan’s balance or to 95 percent of the home’s market value at payoff, whichever is less. Original non-recourse further decrees that no other assets of the borrower but the home can be used to satisfy the reverse-mortgage loan.

It is a bedrock feature of the HECM reverse mortgage. It gives borrowers peace of mind, knowing that their other assets are safe from recourse risk and that their heirs and estates are protected from similar danger. Original non-recourse made it easier to market reverse mortgages to scam-weary elders and their families. It did something else.

Original non-recourse unintentionally masked the core NBS problem (HUD’s failure to extend displacement protection to non-borrowing spouses) because for years borrowers, their heirs, and their estates could satisfy the HECM loan by simply paying the loan balance or 95 percent of the home’s market value, whichever is less. That was before the travesty of ML -08-38.

Then came ML-08-38, which itself was an attempt to justify or “clarify” a needless breach of original non-recourse policy that began around 2006 at HUD’s servicing unit in Tulsa, Oklahoma.

For the first seventeen years in the US market, original HECM non-recourse was the governing rule. Customers, counselors, lenders, HUD, investors, regulators, and the public relied on it.

Around 2006, unknown to HECM customers, industry, and the public, officials at HUD’s Tulsa servicing unit began forcing dead HECM borrowers’ heirs to repay the full loan balance if they want to keep their homes, even if loan balances exceed homes’ values. This practice, which made original non-recourse policy conditional, was mentioned to HECM counselors during a February-2006 training session in Tulsa.

Stunned counselors who attended the Tulsa training sought clarification from HUD. In July 2007, a lawyer at HUD opined that original non-recourse was “not quite accurate,” giving legal blessing to a practice that was clearly at odd with HUD’s stated original non-recourse policy.

Equally alarmed by the abrupt policy change, senior-lobby colossus AARP asked HUD to harmonize its practice with its stated original non-recourse policy. ML-08-38  was HUD’s response.

And it exposed the NBS problem because spouses who wanted to pay 95 percent of their marital homes’ market values to keep their homes following their spouses’ deaths were, for the first time, rebuffed by perplexed lenders, citing ML-08-38 as the legal basis for their refusal to accept anything but the full loan balance. One of the original Bennett plaintiffs in Indiana sent payment (95 percent of her home’s then market value) to a lender and her payment was rejected and the lender began foreclosure proceedings.

Caught between HUD’s modified non-recourse policy and hapless lenders who had to use it to effect foreclosures and displacements, non-borrowing spouses turned to AARP Foundation Litigation (AFL) for help.

As AFL lawyers and their partners at the Washington DC Law Firm of Mehri & Skalet looked into HECM law to find help for their clients, they found a problem: regulations HUD issued to implement Section 255 (J) of HECM law denied displacement protection to non-borrowing spouses for more than two decades.

If HUD’s denial of displacement protection to non-borrowing spouses was a wound (it was and still is for existing non-borrowing spouses at this writing), original non-recourse was a band-aid which masked the injury until HUD’s ML-08-38 or “clarified” non-recourse exposed the festering sore that led to the lawsuits.

And that, among other reasons, was why HUD had to revoke it, but it was too late, the damage was done, the NBS genie was out of the bottle. HUD’s initial responses to the NBS lawsuit is the gist of our next post.

 

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved

HECM protects non-borrowing spouses III

Monday, August 18th, 2014

 

 

Fear of Crossover Hole

Risk (or the chance of loss) is common to any type of mortgage lending but reverse-mortgage lending carries an uncommon risk. Insiders call it crossover risk.

Imagine this: you lend $100,000 to a 76-year-old borrower, secured by a home valued at $200,000; because there are no monthly repayments of principal and interest until the borrower moves, sells, or dies, the loan balance (debt) rises while the home’s equity falls, the opposite of what happens with a traditional forward mortgage loan.

To recoup your investment in reverse mortgage loans, you are restricted by law to the home’s market value. Then your borrower dies at 86, and loan repayment must be made. Meanwhile, the loan balance has climbed to $180,000 over 10 years, but the home’s value has dropped to $160,000. After selling expenses, your net is $150,000, so you are $30,000 in the hole, or the amount by which the loan balance crossed over the home’s net value, thus the crossover risk.

Since your reverse mortgage was a HECM and HUD insures it up to $200,000 (home’s value at origination), you get a $30,000 check to cover your crossover hole.

Assuming other factors remain the same, your crossover loss could have risen to $45,000 if your borrower were 5 years younger and had lived to 86. Because it is designed like an insurance product, younger borrowers present risk of larger losses than older ones.

In an April 8, 2011 paper filed with the Federal District Court for the District of Columbia, HUD’s fear of non-borrowing spouses (especially younger ones) generating insurance losses surfaced as the reason it denied them protection from displacement in its regulations for 25 years:

The mortgager [mortgagor] could even marry a much younger person after taking out the mortgage, thus requiring the lender to wait decades more than anticipated for repayment while interest continues to accrue beyond the value of the house. The lender’s losses would then be passed on to HUD through an insurance claim. (pp.29-30)

Crossover losses are real for HUD, the program was new and untested when the now invalid regulations were written, so we must assume HUD acted with good intentions. But how did HUD’s good intentions lead to the non-borrowing spouse problem? In our next post, we look at the role of HECM non-recourse feature in both masking and exposing the problem.

 

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved

 

HECM protects Non-borrowing Spouses II

Monday, August 11th, 2014

 

 

Regulatory Origin of  NBS Problem

Interpretation of law is a big deal. The non-borrowing spouses’ (NBS) problem sprang from an interpretation of HECM law which excluded NBS from protection against displacement.

As we saw in part one, Congress wanted HECM “homeowner” shielded from displacement, and it defined “homeowner” to include the “spouse” of the homeowner without difference between a borrowing and a non-borrowing homeowner.

However, in the real world of HECM reverse-mortgage lending, some spouses cannot be borrowers for any number of reasons: they may be under the qualifying age of 62; or they may be spouses of qualifying age but chose not to be borrowers and had their names removed from title with or without adequate legal advice; or they may not be spouses when the loans were originally taken out.

Faced with the challenge of making regulations to protect “homeowner” (without differentiation) from displacement as HECM law called for, HUD’s interpretation of “homeowner” took a path that seemed prudent: it limited the term “homeowner” to mortgagors (borrowers) 62 and older who actually signed the loan documents. Below is HUD’s regulation (to HECM lenders) which governed protection of “homeowner” from displacement for more than 25 years until August 4, 2014:

The mortgage shall state that the mortgage balance will be due and payable in full if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor, or a mortgagor conveys all of his or her title in the property and no other mortgagor retains title to the property.  24 C.F.R. § 206.27 (c) (1)

To be a mortgagor or a surviving mortgagor you have to be 62 and older and sign the mortgage papers. Non-borrowing spouses were fenced out by HUD regulation even though HECM law wanted “homeowner,” borrowing as well as non-borrowing, protected from displacement. This was the regulatory origin of the NBS problem. Why did HUD choose a limited instead of an expanded interpretation of Section 255(J)?

From HUD’s argument in court papers during ongoing NBS litigation (no HUD official will speak for the record even if they have the technical and historical knowledge of the HECM program to do so), we have a two-word answer: risk management. And what is that? The nature of  HECM reverse-mortgage risk and how it influenced HUD’s now flawed interpretation of Section 255(J) are the focus of our next post.

 

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved

HECM protects Non-borrowing Spouses I

Monday, August 4th, 2014

 

 

Beginning today, HECM protects non-borrowing spouses (NBS), and the main reverse mortgage product in the US is stronger for it.

If you are a non-borrowing spouse, the one who did not sign the loan papers, and if your status was disclosed to the lender (and certified) at loan origination, you are protected from foreclosure and displacement if your borrowing spouse dies.

It is the first time non-borrowing spouses are getting this vital congressionally bestowed protection in the program’s 25-year history. Why did it take 25 years if Congress granted it more than 25 years ago in HECM’s enabling law? What does this protection mean for borrowers, non-borrowing spouses, lenders, HUD, and the industry? This series is an attempt to answer these questions.

Now, if the U S Congress conferred this protection to non-borrowing spouses when the HECM law was enacted in 1988, why did it take more than 25 years for it to be realized in the program?

The short answer is flawed implementing regulations decreed by the U S Department of Housing and Urban Development (HUD), the program’s insurer and administrator. But a longer answer is needed for better understanding and for lessons in the consequences of bad regulations.

In Section 255 (J) of HECM law, Safeguard to prevent displacement of homeowner, Congress says:

The Secretary 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 a homeowner.

We highlighted the last sentence of the section because HUD’s regulations defined a “homeowner” in a language which excluded non-borrowing spouses from protection from displacement. And it did so for good reasons and with good intentions.

In the next post, we  look at why HUD’s interpretation of “homeowner” barred non-borrowing spouses and set the stage for the problems that the new regulations which went into effect today were designed to solve.  At this writing, a part of the problem (involving existing non-borrowing spouses who face and who expect foreclosure and displacement) remains unsolved. But there is progress.

 

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved.