HECM protects non-borrowing spouses III

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.


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HECM protects Non-borrowing Spouses II

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.


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HECM protects Non-borrowing Spouses I

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.


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Obstacles to HECM NBS Resolution

July 7th, 2014


Two of the “disqualifying factors” in HUD’s June 24 “Mortgagee Optional Election” or MOE suggestion for resolving the non-borrowing spouses (NBS) problems are clear obstacles to resolution. HUD should remove them so that lenders can assign these problematic HECM loans for NBS who are facing (and those who are expecting) foreclosure and displacement.

 Among the MOE disqualifying factors, the principal limit factor (PLF) and the tax and insurance(T&I)  conditions are especially problematic.The PLF condition is retroactive and may not stand judicial scrutiny. And the T&I condition is silly because Subsection 255(j) defaults preceded the T&I defaults.  Who wants to pay T&I obligations when they are facing foreclosure and displacement? These conditions reek of bad faith given that the NBS problems derived from HUD’s own bad regulations.

Imagine General Motors telling customers who bought GM cars with faulty brakes something like this: “We are sorry our cars have caused accidents on the road as a result of our faulty brakes; we may fix your cars but you must send them to your dealers; however, we will not accept cars with odometer reading of 180,000 and above and we will not accept cars whose owners have had late car payments.”

Americans will be outraged. The media will go ballistic. GM executives will be hauled before Congress to explain their socially and morally irresponsible conditions for fixing their faulty brakes. Personal-injury lawyers will have a field day suing GM and its suppliers.

 HUD’s MOE principal limit factor and tax and insurance conditions amount to subjecting victims of its own bad regulations to unnecessary pain before accepting assignment.

In HECM’s 25-year history, HUD has accepted about 30,593 assignments as of May 31, 2014. That is just three percent of about 875,000 HECMs originated over the same period. Three percent is a very good assignment record in 25 years! So a thousand or so more Subsection-255-j assignments will not harm HUD’s MMI Fund in a strong economy.

HECM Assignments(By Assignment Accepted Date)
Year Count
1993         1
1995         2
1996         4
1997         2
1998       29
1999       66
2000      241
2001      394
2002      460
2003      504
2004      718
2005      810
2006   1,212
2007   1,875
2008   2,292
2009   2,908
2010   2,775
2011   3,158
2012   4,063
2013   5,747
2014   3,332
Total 30,593
*Data as of May 31, 2014

Source: HUD

Property values are on the rise. The economy is looking up. Jobs data keep moving up. Our European trading partners are stimulating their economies, and that is good news for our multinationals, our exports,  our jobs, and our housing. It appears  HUD might actually make money on its HECM NBS assignment portfolio at the end of the day.

 Now, contrast the potentially low financial risk of assignment in the present economy with the possibly high financial, litigation, and reputation risks lenders, HUD, and the industry run by letting the problems drag on indefinitely, and there can be just one conclusion: removing  PLF and  T&I “disqualifying factors” to assignment is a rational path to resolution of existing NBS problems.


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Almost HECM NBS Breakthrough

June 30th, 2014



There is good and bad news in the long-running HECM NBS legal tussle between HUD and non-borrowing spouses (NBS) of dead Hecm borrowers. It is almost a breakthrough.

After arguing that it has “no legal authority” to accept assignment of NBS Hecms twenty-one days before in a court filing in the Bennett case, HUD has suddenly found that “the Secretary does have discretion to accept an assignment upon request of a Mortgagee in exchange for claim payment” in a June 24th court paper in the Plunkett class action NBS case.

The technical name for the assignment is “Mortgagee Optional Election,” or MOE. Why the HUD about-face? That is the subject of another post. It is enough to say that HUD has legal authority to solve the wrenching human, legal, and financial problems its bad regulations have created for NBS and lenders. But that is where the good news end.

In other to qualify for MOE, HUD “wisely” erected some hurdles it is calling, yes, “disqualifying factors,” that lenders and NBS must jump through. Never mind these factors are retroactive in a unique situation that HUD’s own bad regulations and negligence created, never mind that some of these factors are silly, never mind that some of these factors are guaranteed to push many seniors into foreclosures and many lenders into endless litigation. It is what some lawyers would call “abuse of discretion.”

Some of HUD’s conditions of assignment are fair and reasonable. For example, to qualify for assignment, the:

  1. NBS must have been married to the dead borrower at the time of the HECM’s origination and remained married throughout the borrower’s life;
  2. NBS has title to property or legal right to remain in the property (marriage confers legal right even where many where removed from title, as HUD itself once advised lenders through a mortgagee letter);
  3. NBS must ensure that all obligations of the dead borrower are met;
  4. NBS must agree that they cannot get cash from the HECM;
  5. NBS must not allow the HECM to go into default for reasons such as taxes, insurance, and maintenance.

MOE is a potential breakthrough in the NBS saga. HUD needs to stop its silly legal maneuvers and solve the existing NBS problems in good faith once and for all.


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HUD’s Dollar-foolish HECM NBS Stand

June 26th, 2014



HUD says it has “no legal authority” to help existing non-borrowing spouses (NBS) endangered by its former NBS policies in Bennett case. In response, the Bennett plaintiffs filed a new lawsuit June 16th challenging HUD’s decision and demanding a jury trial.

If HUD does not have “legal authority” to clean up its NBS mess (a dubious argument given its broad powers under Subsection 255(i) of the National Housing Act ), what about its ethical authority as a federal agency charged with protecting seniors in the HECM program? What about its moral authority as a federal agency with broad regulatory sway over the nation’s housing industry? As a department of the federal government, what about its guardian authority to do no harm to the neediest and the most vulnerable in society?

Technically called “Determination on Remand” (and filed on June 4th), the decision may have been calculated to win a legal battle, but it could cost HUD and the reverse mortgage industry the war. And here is why:

a) Foreclosures and displacements of non-borrowing spouses across the country could bring a fair amount of publicity to lenders, reverse mortgages, and HUD; it could also bring some VA-type scrutiny to the HECM program and its administrator;

b) As the new lawsuit suggests, HUD can expect more lawsuits where its regulatory laundry could come before juries and the public;

c) With allegations of fraud and misrepresentation in loan origination dogging most NBS cases, lenders (thanks to HUD) can expect more litigation in state courts as multiple foreclosure processes move along;

d) The legally-flawed interpretation of a HECM homeowner at the heart of the problem shaped NBS policy for more than 25 years, and much  damage was done; damage cannot be limited to two plaintiffs in the Bennett case, as we can see from the emerging Plunkett class action;

e) Besides NBS facing foreclosures and displacements, many spouses of HECM borrowers are expecting the same fate as soon as their borrowing spouses are buried; for a product that is supposed to bring peace-of-mind in the recreative years of life, HECM is being associated with worry and with nightmares; here is a sample email (edited) from a non-borrowing spouse in Atlanta, Georgia:

My husband took out a reverse mortgage in 2012 and I am a non- borrowing spouse.  I signed the paper acknowledging that if my husband dies before me, the mortgage is due immediately.  In other words I relinquished the rights to the property, was taken off the title, etc.  Since I was only a few years away from being 62, we did not see a problem, as I was told, I could get back on the title and do another reverse mortgage.  I have inquired on how we could refinance when I will be 62 in 2015.  When I talked with a loan person, I was told that it may take thousands of dollars we would have to come out of our pockets in order to refinance.  Now I am worried that we may not have the funds to do this. And, I will never get on this loan.

 Since then, I have researched and found out that HUD revised the policy on non- borrowing spouses and now there is protection for new loans going forward.  However, this will not help me.  I am so worried.  We did this reverse, thinking that we were saving our home and have peace of mind in our golden years.  However, this is a constant concern of ours.” 

HUD’s no-legal-authority stand on the existing NBS problem is penny-wise and dollar-foolish.


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Big HECM NBS Questions

June 2nd, 2014



HUD needs to provide answers to some big HECM non-borrowing spouse (NBS) questions, and we will get to those questions soon.

Sue Jones* of California left a blog comment for me, expressing desperation for help with impending foreclosure proceedings after the death of her borrowing spouse who took HECM reverse mortgage a few years ago.

Jessica Levy* of Georgia sent an email and followed with a phone call, saying she is worried that if her husband dies, she will lose her home because she was left off the HECM loan.

The plight of these two existing non-borrowing spouses highlights the unfinished and thorniest parts of the 25-year-old HECM NBS problem, despite the publication of Mortgagee Letter 2014-07 on April 25, which signaled HUD’s desire to solve the problem for prospective loans, for which HUD should be commended.

But more needs to be done to solve the other parts of the NBS problem: existing spouses facing foreclosures and existing spouses expecting foreclosures when their borrowing spouses die. Here are four big questions begging for urgent answers from HUD:

1) How many existing HECM non-borrowing spouses are currently facing foreclosures?

2) How many existing HECM non-borrowing spouses could face foreclosures if their borrowing spouses die tomorrow?

3) What is the total dollar amount of the legacy NBS problem for current and prospective foreclosures?

4) How is HUD going to solve these problems?

The we-can-do-nothing-about-existing-NBS-loans approach indicated in ML 2014-07 is a non-starter as future posts on this blog will argue.


*Names altered for privacy




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How Option Four Solves HECM NBS Problem

February 17th, 2014



Following this RMD news report that HUD is considering reworking its actuarial tables to welcome the non-borrowing spouse (NBS) in HECM transactions, an option for resolving the NBS problem I proposed in an article in National Mortgage News more than a year ago, some in the industry asked me to explain how option four solves the 25-year-old NBS problem. This post is an attempt at explanation.

Let’s begin by reviewing my January 15, 2013 proposal in the National Mortgage News Blog:

Option 4:

Reworking HECM actuarial assumptions to account for risk of eligible non-borrowing spouse. By regulation or amendment to HECM law, HUD could propose a rule to set the age of an eligible non-borrowing spouse at, say 59. It could then use this age (59) or any other age it deems actuarially sound as a variable in its actuarial formula for calculating loan limits for the borrowing spouse.

If the RMD story is correct, this is what HUD is planning to do soon to solve the NBS problem for future or prospective HECM loans. Option four would actuarially and contractually graft or incorporate the NBS into the loan, whenever there is an eligible spouse.

In other words, where there is an eligible spouse and a HECM loan transaction, there can be no NBS and no NBS problem. They would be priced into the loan actuarially, and they would be roped into it contractually.

Actuarial pricing satisfies HUD’s legitimate concern about actuarially unsound HECM loans and risk to its insurance fund, while the contractual umbrella extends protection (from displacement) to NBS, enshrined in Subjection J of HECM law. By addressing these two core issues, option four is a win-win for NBS, for lenders, for HUD (taxpayers), and for the industry.

So who is an eligible spouse? That is for HUD to define through regulation, but it could be the legitimate spouse at the time the loan is signed, whether or not they are 62 or older or 61 or younger. Even the actuarially dreadful Hugh-Hefner scenario (a 75-year-old with a 25-year-old spouse) can be priced, but the net principal limit may force prospects to look for alternatives to HECM.

Although option four removes the NBS problem for future loans, there is a downside to this solution for HECM borrowers: When they are released, the principal limit factors (PLFs) for these special-situation HECM loans could be so conservative and so restrictive as to drastically reduce the amount borrowers could receive in these transactions, as well as the volume of these loans. Perhaps, that is a good thing. Why should spouses be displaced from their homes because of a few extra dollars of debt?

Also, option four leaves existing NBS-loan problems unsolved. That is where option one in my proposal comes in (you may want  to review my National Mortgage News article at this point): HUD must take some losses on existing loans and it must use its assignment powers under HECM law to help lenders unload these loans.  Long term, that may well be a small price to pay for fixing a thorny 25-year-old problem that has been ignored until now.

The leadership at HUD deserves credit for recognizing, if belatedly, that resolving  the NBS problem now is smart HECM policy.

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Bogus HECMs Imperil Reforms

January 30th, 2014
      The old industry-negating game of running end-runs around regulations for short-term profit is shamefully beginning anew in the reverse mortgage industry, and HUD should stop it.
     On this blog last month, I drew readers attention to two “new products” from two major lenders. Just days ago, one of the lenders, Live Well Financial, announced another “new product” it is calling HECM “Fixed Fourtune.”
    Claiming to be fully compliant with FHA new HECM payout rules and suggesting FHA’s cooperation in concocting these bogus HECMs, these lenders (and others that may be compelled by business-survival-imperative to follow them) are shamelessly and irresponsibly trying to game the new payout rules. The new rules were designed to stretch HECM payouts over retirement years  that may be longer than usual for elders with home equity.
     But the emerging slew of bogus “new HECM products” attack the spirit of FHA payout reforms. Live Well Financial’s so-called “HECM Fixed Advantage” invite consumers to take out their entire home equity on day 366 after initial payout while its “HECM Fixed Fourtune” encourage consumers to use their home equity within four years.
     To its credit, Reverse Mortgage Funding’s “HECM Choice” does not ask consumers to take their home equity and run like its more rapacious competitor. Its pitch is more nuanced and subliminal and equally objectionable because its leadership is among the industry’s most experienced and sophisticated, and it should know better.
     Recent FHA MMI Fund experience says that fully-drawn fixed-rate HECMs are damaging financially to taxpayers because they are strongly associated with borrower tax and insurance defaults. Their appeal to younger borrowers in their 60’s mean many may find themselves without their home-equity cushion later in life when they really need it.
     Besides, if proliferation of  bogus “HECM products” goes unchecked, complexity and confusion, twin concerns that have long dogged reverse mortgages, will resurface as major issues. It is possible that FHA’s HECM Traditional, a fusion of the former HECM Standard and HECM Saver, may have been created, in part, to address the product complexity and confusion highlighted in CFPB’s 2012 report on reverse mortgages to Congress.
     After the near-death experience of the MMI Fund and with the additional tools afforded by the Reverse Mortgage Stabilization Act, HUD could and should stop the “new HECM products” merry-go-round before it gathers lethal steam.
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A Fixed Disadvantage

December 24th, 2013


A major reverse mortgage lender, Live Well Financial, recently introduced a “new” fixed rate HECM reverse mortgage product it is calling HECM Fixed Advantage. On the heels of another “new” fixed rate product from a new major lender (Reverse Mortgage Funding), it suggests that we are going to see permutations of “new” fixed-rate HECMs in 2014, concocted to comply with the letter if not the spirit of drastic new FHA rules governing reverse mortgage funds disbursement.

According  to a report in ReverseMorgageDaily (RMD), the Live Well Financial product  “allow the borrower to withdraw the remaining funds from a fixed rate reverse mortgage one year after the loan has closed, after initial use limitations apply for the first year post-closing.”

In contrasting its “product” with RMF’s HECM Choice in the RMD news report, Bruce Barnes, an executive at Live Well Financial, said:  “Instead of requiring a borrower to take a term or tenure payment to obtain the additional funds, the HECM Advantage will automatically provide the borrower with 100% of their remaining funds on day 366. This is a significant difference [between the HECM Advantage and the HECM Choice] and one that we believe borrowers and lenders will prefer.”

It is not clear whether any responsible lender in the reverse mortgage industry will encourage or require borrowers to take 100 percent of their principal limit on day 366. The new rules rule out 100-percent draw on day one, but it is silent about the remaining 40 percent on day 366. Live Well Financial’s HECM Fixed Advantage is clearly designed to exploit that loophole.

While the HECM Fixed Advantage may not have violated the letter of recent FHA rules about HECM funds usage, it clearly offends the spirit of the new rules.

Why did FHA impose the new rules that became effective October 1st to begin with? Simply put: Fully-drawn fixed-rate HECMs almost destroyed the MMI Fund and the reverse mortgage industry. That is why major industry players have a duty to obey not just the letter of the new rules but its spirit as well. If they do not, then FHA will come down with new possibly more restrictive regulations.

A fully-drawn fixed-rate HECM, whether drawn on day one (no longer an option under the new rules) or on day 366 (as Live Well Financial’s HECM Fixed Advantage is being sold), is a dangerous and irresponsible product, and  a fixed disadvantage to borrowers, to FHA’s MMI Fund, and to the reverse mortgage industry.


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