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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 D.C. 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.
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.