Reverse Mortgages were marketed to provide cash to older Americans during their retirement by borrowing against the equity in their homes. The payments were generally based on the life expectancy of the borrower. In order to maximize payments, some couples would transfer the property to the older of the two so that the payments would be higher. The older spouse dies and that is how we end up with a non-borrowing surviving spouse living in a property subject to a reverse mortgage.
Because of how Reverse Mortgages are written and regulated, the Garn St. Germain Act's prohibition wasn't applicable. (Garn St. Germain generally prohibits a lender from calling a mortgage on the death of the borrower.) This ended with many surviving spouses at risk of losing their homes.
The US Department of Housing and Urban Development (HUD) clarified this with Mortgagee Letter 2015-15 this summer. This letter allows the Mortgagee (Lender) to do two things:
“Mortgagee Optional Election (MOE) Assignment” means the optional assignment elected by a mortgagee for an eligible HECM assigned an FHA Case Number prior to August 4, 2014, and associated with an Eligible Surviving Non-Borrowing Spouse.
“Mortgagee Optional Election Assignment Deferral Period” means the period of time following the death of the last surviving borrower for an eligible HECM assigned an FHA Case Number prior to August 4, 2014 and associated with an Eligible Surviving Non-Borrowing Spouse during which the due and payable status of a HECM is further deferred based on the continued satisfaction of the requirements for an Eligible Surviving Non-Borrowing Spouse under this Mortgagee Letter and all other FHA requirements.
How is a non-Borrowing spouse defined:
“Eligible Surviving Non-Borrowing Spouse” means a Non-Borrowing Spouse of a HECM borrower where the HECM was assigned an FHA Case Number prior to August 4, 2014 and who:
1. Was either: a. legally married - as determined by the law of the state in which the spouse and borrower reside(d) or the state of celebration - to the HECM borrower at the time of loan closing and who remained married to the HECM borrower until the HECM borrower’s death; or
b. engaged in a committed relationship with the borrower akin to marriage but was prohibited, at the time of HECM loan origination, from legally marrying the HECM borrower based on the gender of both the borrower and Non-Borrowing Spouse, but was legally married prior to the death of the borrower, as determined by the law of the state in which the spouse and borrower reside(d) or the state of celebration, to the HECM borrower and remained married until the death of the borrowing spouse;
2. Currently resides and resided in the property secured by the HECM as his or her principal residence at origination of the HECM and throughout the duration of the HECM borrower’s life; and
3. Who has or is able to obtain - within 90 days following the death of the last surviving borrower - good, marketable title to the property or a legal right (e.g., executed lease, court order, etc.) to remain in the property for life.
What this means is that Mortgage companies have the option of allowing surviving spouses to remain in their homes.