Reverse Mortgage Loophole Threatens Some Retirees with Homelessness

Feds to curb reverse-mortgage evictions

May 1, 2013

Market Watch - Federal officials say they’re now addressing a loophole in the reverse-mortgage process—one that was threatening some retirees with homelessness.

Reverse mortgages allow people age 62 or older to convert their home equity into cash, and almost 600,000 reverse mortgages are currently outstanding nationwide. But the balances on these mortgages become due with interest when the borrower dies. Consequently, a surviving spouse can face eviction if he or she is not listed on the mortgage.

In 2011, AARP filed a lawsuit against the U.S. Department of Housing and Urban Development, seeking to protect seniors from being evicted in such circumstances. The retiree advocacy group has said in the past that the number of people faced with potential eviction could number in the thousands.

Now, HUD officials say they are discussing ways to prevent the problem from arising in the first place. Charles Coulter, deputy assistant secretary for single-family housing at HUD, says the agency is “likely to have some provision that addresses non-borrowing spouses” in place by Oct. 1, the start of the federal government’s new fiscal year.

Sometimes, problems have arisen for surviving spouses because only the deceased spouse is listed as a property owner on the deed. In other cases, couples opt to put a reverse mortgage in the name of the older spouse in order to maximize the loan’s proceeds. (The older the borrower, the more home equity he or she is eligible to tap.)

Represented by AARP Foundation Litigation, the plaintiffs in the suit against HUD include a Brooklyn, N.Y., woman who claims she was “removed from the deed to her property when her husband, suffering from dementia, entered into the reverse mortgage,” according to AARP. Another plaintiff, a man from Maryland, claims he was removed from his property’s deed at the time his reverse mortgage was executed. When his wife died a month later, he faced eviction.

Jean Constantine-Davis, senior attorney with AARP Foundation Litigation, says the District of Columbia Court of Appeals recently remanded the case to a lower court for a ruling.

An industry source says that regulators have discussed ideas including requiring lenders to put both spouses on the reverse mortgage, even in cases in which one spouse isn’t listed on the property’s deed.  Regulators have yet to work out how they will address such complexities as including a spouse who is younger than 62. Another potential wrinkle pertains to couples who marry after one spouse already has a reverse mortgage.

When taking out a reverse mortgage, a borrower can elect to receive a lump sum, a line of credit or monthly payments. With a conventional loan, such as a home-equity line of credit, a borrower can tap into a home’s equity but must make monthly repayments. Reverse mortgages, in contrast, require no repayments until they come due, when the borrower dies, moves or sells the house.