HECM Lenders Can Suspend Foreclosures for 60 Days

The Federal Housing Administration will allow lenders to suspend foreclosures on government-insured reverse mortgages for up to 60 days so the deceased borrowers' younger spouses can stay in the homes.

Carol Federighi, an attorney for the Department of Housing and Urban Development, told a federal judge Thursday that the FHA, which HUD oversees, will cover the costs of this two-month suspension.

Lenders can also seek FHA approval to stop foreclosures on a case-by-case, she told U.S. District Court judge Ellen Huvelle at a hearing in Washington.

The HUD attorney told the U.S. District Court for the District of Columbia judge that the FHA will be issuing a new policy soon to address the spousal issue for new Home Equity Conversion Mortgages. But it will take longer to address the main issue before the court: how to protect non-borrowing spouses who are facing foreclosure now. 

HECMs are the predominant form of reverse mortgages. Foreclosures on these FHA-guaranteed loans have become a big issue because during the recession many seniors took out HECMs as a way to pay off their regular mortgage and avoid foreclosure.

To get the maximum proceeds, a younger spouse's name would be removed from the title. That puts the spouse in jeopardy of losing the home when the older spouse dies. 

Many reverse lenders required seniors to sign documents acknowledging this risk.

The AARP Foundation has sued HUD to these stop these foreclosures, arguing HUD has a duty to protect the surviving spouses.

The U.S. District Court judge did not seem to be impressed with the temporary measures HUD is taking to avert foreclosures. She pressed Federighi on what policies HUD intends to adopt to deal with non-borrowing spouses who are facing foreclosure. 

"I don't know where they are going to go," the HUD attorney admitted.

AARP Foundation attorney Jean Constantine-Davis said HUD seems to be "unable to take broad action" to protect the spouses.

Judge Huvelle indicated she is moving toward granting class action status to AARP's lawsuit to protect spouses from foreclosure. The judge gave HUD 20 days to respond to AARP's motion for certification of the class action.

Meanwhile, reverse mortgage lenders are anxiously waiting for FHA to issue a policy on how to deal with spouse signings on new HECM loans.

Observers say the FHA has two options: require both spouses to sign the title or consider the age of the younger spouse in determining the loan proceeds. They are wondering why it is taking HUD so long to issue its policy.

Despite the litigation, originations of HECM originations are holding up pretty well. The latest FHA Production Report shows that reverse mortgage lenders endorsed nearly 18,150 HECMs during the first four months of fiscal 2014, compared to 17,260 during the same period a year earlier.

In January, FHA endorsed 5,050 HECMs with a maximum claim amount totaling $1.4 billion.