A federal court has thrown a life preserver to some surviving spouses who are facing foreclosure due to an “underwater” reverse mortgage.
In a traditional mortgage, you borrow money against your house and pay it back in monthly installments over time. With a reverse mortgage, you borrow money against your house, but you don’t have to pay it back until you die, sell the house, or move – which means you don’t owe anything as long as you stay in your home. In most cases, to qualify you must be at least 62 years old.
Sometimes, only one spouse has his or her name on a reverse mortgage. This might be because the other spouse was under age 62 when the mortgage was taken out, for example. In the past, some lenders have encouraged couples to put only the older spouse’s name on the mortgage because the couple could borrow more money that way.
The problem is that if only one spouse’s name is on the mortgage, and that spouse passes away, the entire mortgage comes due, and suddenly the other spouse has to pay it all off or lose the home. If the house is “underwater” (worth less than the balance due on the mortgage), the surviving spouse may be unable to refinance and repay the loan, and may face foreclosure and eviction.
Recently, the AARP filed a lawsuit on behalf of several spouses in this situation against the U.S. Department of Housing and Urban Development, which administers a reverse mortgage program. AARP claimed that HUD had a legal duty to protect surviving spouses from foreclosure.
In September, a federal court in Washington, D.C. agreed with AARP, and ordered HUD to find a way to shield surviving spouses from eviction.
It’s not clear yet how HUD will solve this problem. One possibility is that the agency may take over affected loans from the banks that hold them.
However, while the court ruling is very good news for spouses in this situation, seniors should still be very careful about taking out a new reverse mortgage with only one spouse’s name on it, at least until it becomes clear what rules HUD will create in response.