It’s a jarring situation: Your spouse dies, and you end up facing the possible loss of your home through foreclosure--just because you aren’t listed as a borrower on a reverse mortgage on your home.
That’s what happened to Robert Bennett of Annapolis, Md., when his wife died in 2008. She was listed as the borrower on a reverse mortgage taken out on their home before her death -- but Mr. Bennett wasn’t. Rules administered by the U.S. Department of Housing and Urban Development allow banks to force surviving spouses who aren’t also listed as borrowers to pay off reverse mortgages, and to foreclose on the property if they can’t.
But a court ruling this week in a case brought against H.U.D. on behalf of Mr. Bennett by AARP Foundation Litigation should lead to regulatory changes that will help him and others like him remain in their homes, said Jean Constantine-Davis, a senior attorney with the foundation.
“The decision marks a turning point for surviving spouses such as our clients and ensures that they will receive the protections guaranteed by the law: that they will be able to remain in their homes, despite the loss of their husband or wife,” she said in a statement.
The United States District Court for the District of Columbia ruled Monday for the AARP, finding that H.U.D.'s rules contradict federal law governing reverse mortgages, which protects surviving spouses. The court sent the matter back to the housing agency for a fix.
It’s not known yet exactly how the agency will correct the problem, Ms. Jean Constantine-Davis said. H.U.D. may have to offer to take over affected loans, since the rules gave lenders the right to foreclose. It’s also unclear how many reverse mortgages are affected, or what their total value is, she said.
A spokesman for H.U.D. didn’t return a phone call seeking comment; a recorded message at the agency’s press office said the office was closed Tuesday afternoon because of the federal government shut down.
No one was available to comment Tuesday at the National Reverse Mortgage Association, which represents lenders.
The decision, Ms. Constantine-Davis said, should help remedy a potentially devastating snag in a financial product that was designed to help older people meet their expenses. “The decision will ultimately affect an untold but substantial number of similar surviving spouses, many of whom have contacted plaintiffs’ counsel over the past few years,” she said.
Reverse mortgages work differently than traditional mortgage loans. They’re only available to you if you’re 62 or older, and they’re meant to help you tap the equity in your house. Instead of you paying the bank, the bank pays you -- either in a lump sum, or in monthly distributions -- and interest accrues. When you die or move, you or your heirs typically sell the home to pay off the loan, and keep any money left over if the house is worth more than the remaining balance.
Here are some questions to consider, before taking out a reverse mortgage:
■ Does this ruling mean that I can now safely take out a reverse mortgage and leave my spouse off the loan?
That’s not a good idea, said Ms. Constantine-Davis. “I would at this point still be very discouraging from doing a reverse mortgage that leaves the spouse off,” she said, until it’s clear precisely what H.U.D. will do to fix the problem.
■ Why would I want to leave my spouse off the loan anyway?
Reverse mortgages are granted based on factors including the age of the borrower; the younger you are, the less money you get, since you are likely to stay in the home longer. Some borrowers may have been advised by brokers to leave the younger spouse off the mortgage to increase the amount of their loan, but borrowers may not have realized that could leave them at risk when the borrowing spouse died.
■ How can I be sure that I understand the risks of taking out a reverse mortgage?
Reverse mortgage borrowers are required to undergo independent counseling before signing loan papers; make sure both you and your spouse attend. New rules governing the loans start taking effect this month. For instance, you may be limited in the amount of money you can access in the first year of the loan. And your finances may get more scrutiny, to make sure you can continue to pay taxes and insurance on the home. More details are available in recent column by my colleague, Tara Siegel Bernard.