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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 Aug. 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.
Atare Agbamu is author of Think Reverse! With more than 200 articles on reverse mortgages in circulation since 2002, Agbamu wrote Forward on Reverse, the first regular monthly column on reverse mortgages in America’s financial media from 2002 to 2011. Through his advisory, ThinkReverse LLC, Agbamu advises financial professionals, institutions, and regulators across the country.