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By Jennifer Bowen and John C. Lynch
Since its creation in 2009, the Home Equity Conversion Mortgage (“HECM”) reverse mortgage program created by the Federal Housing Authority has helped numerous senior citizens stay in their homes by allowing them to convert the equity in their home into useable funds instead of having to sell their homes to supplement their retirement income or pay for unexpected expenses. However, the death of the last surviving borrower typically has rendered the HECM loan payable in full, and reverse mortgage lenders have been permitted to initiate foreclosure proceedings against the property if the heirs or estate could not repay the loan.
On January 29, the FHA issued Mortgagee Letter 2015-03, announcing that FHA-approved lenders now have an alternative path to claiming payment for HECM loans assigned prior to August 4, 2014. Utilizing a Mortgagee Optional Election (“MOE”) Assignment, a lender can assign an eligible HECM loan to the Department of Housing and Urban Development until the death of the surviving non-borrowing spouse.
The FHA Mortgagee letter describes the steps necessary to elect a MOE assignment. Generally, the mortgagee must notify HUD of the election within 30 days after the servicer receives notice of the borrower’s death. Then, the mortgagee must conduct an assessment within 30 days to determine whether the surviving spouse and the HECM loan meet the eligibility requirements, which are also detailed in the letter.
A surviving spouse is eligible for the MOE assignment if he or she: (1) was legally married to the borrowing spouse at the time of the HECM loan origination, or if legal marriage was prohibited at the time of origination, sometime before the death of the borrowing spouse; (2) remained married until the death of the borrowing spouse; (3) currently resides, and continues to reside, in the property secured by the HECM; and (4) has or is able to obtain good, marketable title to the property or a legal right to remain in the property for life.
A HECM loan is eligible for the MOE assignment if, among other things: (1) there is an eligible surviving non-borrowing spouse; (2) the current unpaid principal balance is less than or equal to the Maximum Claim Amount, and certain factors are satisfied; (3) the surviving spouse agrees to annually certify his or her continued satisfaction of the eligibility requirements; and (4) the HECM is not in default or eligible to be called due and payable for any other reason. The remaining requirements regarding validation, legal enforceability, and indemnification can be found in the FHA Mortgagee letter.
HUD and the FHA recognize that this alternative MOE assignment option is “costly” and “poses a significant financial impact to the FHA insurance funds.” On February 6, HUD published a notice soliciting comment on the alternative MOE assignment. Interested persons may submit comments by mail or online at http://www.regulations.gov/, referencing Mortgagee Letter 2015-03.
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