Hot Topics and Emerging Issues for Legal Aid and Pro Bono Attorneys Representing Homeowners

Transcription

1 Hot Topics and Emerging Issues for Legal Aid and Pro Bono Attorneys Representing Homeowners Jim Brady, Legal Assistance Foundation of Chicago, Chicago, IL Odette Williamson, National Consumer Law Center, Boston, MA The legal tools and resources available to assist homeowners facing foreclosure after default on a forward or reverse mortgage have changed and will continue to change over the next year. This session will include updates and highlights from the recent changes to the rules and regulation governing reverse mortgages, mortgage servicing and loss mitigation in general, including life after HAMP sunsets.

2 2016 ABA/ NLADA Equal Justice Conference Hot Topics and Emerging Issues for Legal Aid and Pro Bono Attorneys Representing Homeowners Reverse Mortgages Foreclosures Resulting from Property Charge Defaults and Death of Mortgagor Spouse Reverse mortgages are a special type of home-secured loan that allows seniors to convert home equity into cash without having to move out and without having to make periodic mortgage payments. In a traditional forward mortgage, the lender advances the principal at origination, and the borrower is required to pay off the loan balance over time. In contrast, reverse mortgage lenders advance funds to the borrower as a lump sum, as monthly payments, through a line of credit, or a combination of these options. No periodic payments are due from reverse mortgage borrowers. Instead, over time, reverse mortgage balances rise as a result of additional advances, accruing interest, and fees. Generally, reverse mortgages become due and payable when the borrower dies, sells the home, or permanently relocates from the home. There are two principal types of reverse mortgages: home equity conversion mortgages (HECMs) and proprietary reverse mortgages. HECM loans are federally insured and make up the vast majority of the reverse mortgage market. The Department of Housing and Urban Development (HUD) administers the program and promulgates regulations with respect to HECM loans. Under the HECM program, private lenders make reverse mortgage loans subject to HUD s regulations and, in return, HUD insures the lender against certain losses in the event of default. Proprietary reverse mortgages are equity conversion products that are developed and backed solely by private financial institutions. These are not governed by the extensive rules covering HECM loans. Generally, these reverse mortgages will be subject to the Truth in Lending Act, as well as state law, unless preempted. Since the beginning of the foreclosure crisis in 2007, very few proprietary reverse mortgages have been originated. This summary focuses on the foreclosure of HECM loans. 1 While no periodic payments are due on reverse mortgages, there are certain circumstances in which foreclosure can be triggered. The most common reasons for reverse mortgage foreclosure are failure to pay property charges and failure to pay the amount due upon maturity of the loan. Overview of HECM Reverse Mortgages Reverse mortgages provided through the Home Equity Conversion Mortgage (HECM) program were designed to meet the needs of older homeowners by reducing economic hardship that results from increasing costs of health, housing, and subsistence needs at a time of reduced 1 This summary is an excerpt from Chapter 16 of National Consumer Law Center, Foreclosures and Mortgage Servicing (5 th ed. 2014) updated at 1

3 income. 2 HUD administers the HECM program and promulgates HECM regulations. 3 Below is a brief introduction to HECM loans. Age Requirements. All HECM reverse mortgage borrowers must be at least sixty-two years of age. 4 Property Requirements. The property serving as collateral for the loan must be titled in the borrowers names and must be the borrowers principal residence. 5 Eligible properties are also limited to certain types of housing. 6 Borrowers must generally own their homes free and clear, or with a minimal amount of outstanding liens. 7 Any existing liens must be satisfied or subordinated to the HECM mortgage. Counseling. HECM borrowers must obtain counseling by an independent third party, usually one from a list of HUD-approved counseling agencies, that is neither directly or indirectly associated with the mortgage transaction. The counseling fee can be paid to the counselor directly by the borrower or subtracted from HECM proceeds at the closing. 8 Income and Credit Qualifications. Until recently, there are no income or credit qualifications for a reverse mortgage, other than a requirement that each mortgagor have a general credit standing satisfactory to HUD. 9 However, HUD recently implemented new underwriting guidelines in the form of a financial assessment to ensure that borrowers have the ability to meet ongoing obligations for taxes, insurance, and other property charges whether through income, assets, reverse mortgage proceeds, or a set aside of reverse mortgage funds. 10 The proposed financial assessment includes residual income and credit history analyses. Available Proceeds. The amount that can be borrowed with a reverse mortgage, also known as the principal limit, is based on the maximum claim amount (MCA), the age of the youngest borrower, and expected average mortgage interest rates. 11 The maximum claim amount 2 12 U.S.C. 1715z-20(a). 3 See 12 U.S.C. 1715z-20(a) U.S.C. 1715z-20(b)(1); 24 C.F.R C.F.R Eligible properties are single-family homes, one-unit to four-unit homes in which the borrower occupies one unit, HUD-approved condominiums, property located in HUD-approved planned-unit developments, and manufactured homes that meet FHA requirements. 12 U.S.C , 1715z-20(d)(3); Dep t of Hous. & Urban Dev., HECM Handbook , REV-1, 3-3, 3-4. HUD s HECM Handbook excludes from eligible properties two unit, three-unit, and four-unit properties, although the basis for such exclusion in light of the statutory language is unclear U.S.C. 1715z-20(b)(4) (defining mortgage as first mortgage or first lien except in the case of a cooperative unit) U.S.C. 1715z-20(d)(2)(B) C.F.R See HUD Mortgagee Letters (Feb. 26, 2015); (Nov. 10, 2014). 11 The expected average mortgage interest rate is determined at origination and is used to determine the amount that the homeowner can borrow. It differs from the note rate (or accrual rate), which is used to calculate the interest added to the loan each month. Any given loan must use either CMTs or LIBOR for both the accrual rate and as an index. 2

4 is the lesser of the appraised value of the home or the maximum amount that HUD will insure. 12 Once the maximum claim amount is determined, the initial principal limit can be calculated by multiplying the maximum claim amount by the applicable principal limit factor (PLF). 13 The principal limit factor depends on the borrower s age at origination and the expected mortgage interest rate. Fees. HECM loans have a number of costs and fees that are borne by the borrower, including origination fees, servicing fees, and mortgage insurance premiums. These costs are commonly financed with the loan proceeds. Origination fees are limited to the greater of (1) $2500 or (2) two percent of the maximum claim amount up to $200,000, plus one percent of any portion of the maximum claim amount that is greater than $200,000, 14 with a cap of $ In addition, HECM borrowers must pay mortgage insurance premiums (MIP) and a monthly servicing fee. The upfront MIP for a HECM loan, which is due at origination, equals either 0.5% or 2.5% of the maximum claim amount, depending on the initial disbursement amount. 16 After the closing, a monthly MIP accrues daily on the mortgage balance at a rate of 1.25% a year and is paid by the lender to HUD. Borrowers also are typically charged a fixed monthly servicing fee, ranging from twenty-five to thirty-five dollars. MIP amounts and servicing fees are added monthly to the borrower s mortgage balance. Distribution of Proceeds. Reverse mortgage lenders advance funds to borrowers as a lump sum, in monthly payments, through a line of credit, or a combination of these options. For example, borrowers may receive a single lump-sum disbursement at origination. 17 This option is the most expensive, as interest on the lump sum is charged from the first day and compounded every month. Alternatively, under tenure plans borrowers can receive equal monthly payments from the lender for as long as they live and continue to occupy the property as a principal residence. 18 Term plans also provide for equal monthly payments, but payments are disbursed for a fixed period of months. 19 Term plans which promise monthly payments for a set period of 12 Until 2008, the maximum amount HUD would insure varied from county to county. The Housing and Economic Recovery Act of 2008 created a national limit for HECM loans set at $417,000. Housing and Economic Recovery Act of 2008, Pub. L. No , 2122 (July 30, 2008), amending 12 U.S.C. 1715z-20(g). HECM maximum loan limits are tied to the loan limitations established under the Federal Home Loan Mortgage Corporation Act. See 12 U.S.C. 1454(a)(2). The limit has been increased to $625,500, at least through December 31, HUD Mortgagee Letter (Dec. 6, 2013). 13 The complete principal limit factor table is available at For HECM Payment Calculation Formulas, see HUD Handbook REV-1, Appendix U.S.C. 1715z-20(r)(1); HUD Mortgagee Letter (Oct. 31, 2008) U.S.C. 1715z-20(r)(6). 16 If the initial disbursement at closing (and during the first 12-month disbursement period) is less than 60% of the principal limit then the initial MIP is 0.5% of the maximum claim amount. For disbursements greater than 60% at closing (and during the first 12-month disbursement period) the initial MIP is 2.5% of the maximum claim amount. See HUD Mortgagee Letter (Sept. 3, 2013). 17 As of September 20, 2013, the single lump sum disbursement cannot exceed the greater of: (1) 60% of the principal limit or (2) mandatory obligations plus 10% of the principal limit. HUD Mortgagee Letter (Sept. 3, 2013). Mandatory obligations include, among other things, the initial MIP, loan origination fee, HECM counseling, reasonable transaction costs, and amounts to discharge any existing liens on the property C.F.R (b) C.F.R (a). Though HECM term plans provide monthly payments only for a fixed number of months, they do not mature until the borrower dies, relocates, or sells the home. 3

5 time generally offer larger monthly advances than a tenure plan, where the lender promises to pay a monthly payment for as long as the homeowner is in the house. A line-of-credit plan permits the borrower to draw amounts as needed until the line-of-credit is exhausted. 20 The modified tenure and modified term plans allow borrowers to combine these various features. 21 Payment Obligations. HECM loans do not require the borrower to make periodic loan payments. Instead, over time, the reverse mortgage balance rises as a result of additional advances, accruing interest, and fees. Payment is due only at maturity, which occurs when the last borrower dies, sells, or permanently relocates from the home. 22 HECM loans may be prepaid in whole or in part without penalty. 23 Homeowners do have ongoing obligations to pay their property taxes, insurance and other property related expenses. Repayment Limits. HECMs are designed to be non-recourse loans, which means that the borrower (or their estate) will not owe more than the loan balance or the value of the property, whichever is less. 24 Whether or not the loan is due and payable, the borrower may sell the property for at least the lesser of the mortgage balance or the appraised value. 25 If proceeds from a sale exceed the mortgage balance, any excess funds would belong to the borrower or the borrower s estate. When repayment is due, the home can be tendered to the lender and nothing further is owed. Alternatively, if the mortgage is due and payable at the time a contract for sale is executed, the borrower may sell the property for ninety-five percent of the appraised value. 26 Reverse Mortgage Foreclosure Failure to make monthly payment obligations is the most common cause of mortgage foreclosure. However, unlike traditional forward mortgages, reverse mortgages do not require monthly loan payments. Nevertheless, there are several circumstances under which foreclosure will be triggered. The leading causes are 1) failure to pay property charges, such as real estate taxes and hazard insurance, as they come due; 2) after a maturity event, such as non-occupancy or death of the homeowner, the loan becomes due and payable in full. Irrespective of the reason for foreclosure, HUD imposes numerous obligations on servicers that must be complied with before and during the foreclosure process. The servicer s failure to follow these rules may give rise to a defense to the foreclosure, just as it does in the foreclosure of forward mortgages. Although homeowners do not have a private right of action to enforce the FHA loss mitigation guidelines, many courts have held that the servicer s failure to follow these guidelines provides a defense to a foreclosure. 27 Substantive requirements that HUD mortgagees must follow before and during a reverse mortgage foreclosure include: C.F.R (c). The remaining amount available under a HECM credit line increases every month by the same annual rate charged on the loan balance C.F.R , (d) U.S.C. 1715z-20(j) U.S.C. 1715z-20(d)(3); 24 C.F.R U.S.C. 1715z-20(d)(7) C.F.R (c). 26 Id. 27 See id. 4

6 The mortgage must state the limited circumstances in which the balance will be due and payable in full, i.e., death of the borrower, 28 the property is no longer the principal residence of at least one mortgagor, 29 failure to perform an obligation under the mortgage, etc. 30 The mortgagee must notify HUD. 31 Notice must be given to the mortgagor stating that one of the conditions triggering repayment has occurred, unless the mortgage is due and payable by reason of the mortgagor s death. 32 Even after the foreclosure has been initiated, the mortgagor must be permitted to correct the condition which caused the mortgage to become due and to reinstate the mortgage, unless there was a reinstatement in the past two years. 33 For property charge defaults, loss mitigation options must be offered to the mortgagor. 34 These options must include a realistic payment plan, working with a housing counseling agency, and refinancing the delinquent mortgage if there is sufficient equity. Fannie Mae also has guidelines for the servicing of HECM mortgages, which generally provide that lenders must comply with the HECM regulations and the HUD mortgagee letters. 35 Property Charge Defaults While there are no monthly loan payments required for reverse mortgages, that does not mean that reverse mortgages are payment-free. 36 Rather, the loan documents require reverse mortgage borrowers, like traditional mortgage borrowers, to pay for property charges. These charges include real estate taxes and hazard insurance premiums and, if applicable, condominium C.F.R See also Mortgagee Letter (Jan. 29, 2015)(imposing additional requirements where deceased borrower is survived by a non-borrowing spouse); Bennett v. Donovan, 4 F.Supp. 3d 5 (D.D.C. 2013) (FHA erroneously endorsed HECM reverse mortgages that did not contain language deferring the due and payable status of the mortgages till the death of borrowers spouses). 29 Under 24 C.F.R (c)(2)(ii), this clause is triggered if (f)or a period of longer than 12 consecutive months, a mortgagor fails to occupy the property because of physical or mental illness and the property is not the principal residence of at least one other mortgagor; C.F.R (b) C.F.R (a). See also HUD Mortgagee Letter (Dec. 4, 2003), Home Equity Conversion Mortgages (HECMs) Procedural Guidance (specifying what notice to HUD must include in case of mortgagor s death) C.F.R (a)(2). See James B. Nutter & Co. v. Phillips, 986 N.E.2d 579 (Ohio Ct. App. 2013) (notice of intent to foreclose and right to cure not applicable when sole borrower dies) C.F.R (a)(3). 34 HUD Mortgagee Letter (Jan. 3, 2011), HECM Property Charge Loss Mitigation. 35 See Fannie Mae Single-Family Reverse Mortgage Loan Servicing Manual (Mar. 25, 2015), available at 36 The Federal Trade Commission (FTC) prohibits material misrepresentations in any commercial communication regarding any term of any mortgage credit product. 16 C.F.R The rule, known as Mortgage Act and Practices Advertising Final Rule, applies to mortgage lenders, brokers, and others who engage in mortgage advertising, but not banks, federal credit unions, or other entities excluded from the FTC s jurisdiction. 5

7 association fees, ground rents, or other special assessments. HECM borrowers who closed on their mortgages before April 27, 2015 may have elected to set aside some funds for property charges by withholding that amount from monthly payments to mortgagor, charging amounts to a credit line, or holding back a portion of a lump sum distribution. 37 If, however, sufficient funds are not set aside and they run out, then the borrower is responsible for making these payments directly. 38 Default 39 occurs when the borrower is responsible for, but fails to pay, the property charges. After giving the borrower notice and an opportunity to cure the default, and after obtaining approval from HUD, 40 the lender may accelerate the debt, making all sums due under the loan immediately payable. Technically, the homeowner s failure to pay the property charges can trigger a foreclosure, because the homeowner s failure to pay the property charges is a default. 41 Alternatively, and more commonly, the lender elects to pay the outstanding property charges by withholding amounts from monthly payments or by charging amounts to a line of credit. 42 In this situation, the payment is considered a distribution of available loan proceeds and the borrower is not considered delinquent. 43 This solution works so long as loan funds remain available to draw. When the available credit on the reverse mortgage is insufficient to cover the outstanding property charges (i.e., the principal limit has already been reached), HUD generally requires lenders to advance their own funds, known as loan advances or corporate advances, to pay the property charges. Once there are no longer sufficient funds in the available credit, the loan is then in default and servicers will initiate acceleration and foreclosure. 44 HUD has directed lenders to use various loss mitigation strategies to address outstanding property charge defaults. 45 The loss mitigation alternatives include: (1) establishing a repayment plan for delinquent property charges; (2) referring borrowers to housing counselors or other local resources to resolve the delinquency or to identify and to obtain funds to pay delinquent property charges; or (3) refinance the HECM with a new HECM if there is sufficient equity to satisfy the existing mortgage and delinquent property charges. 46 HECM refinances may be a solution where the loans are older and property values are higher. In 2009, HUD raised the maximum claim C.F.R To date, only a small number of reverse mortgage borrowers have opted to set aside funds for taxes and insurance. 38 See 24 C.F.R (b)(2), (b)(6); Model HECM Mortgage Form 2 (HUD Handbook REV-1, Appendix 1). 39 Neither HUD Regulations, nor the model HECM loan documents use the term default. HUD, however, has repeatedly used the term when referring to the borrower s failure to make payments for taxes and insurance. 40 Prior to April 2009, HUD had an informal policy of deferring foreclosures based on property charge defaults, because it did not want to foreclose on senior borrowers. See Office of the Inspector General, Audit Report, HUD Was Not Tracking Almost 13,000 Defaulted HECM Loans With Maximum Claim Amounts of Potentially More Than $2.5 Billion (Aug. 25, 2010). 41 See Model HECM Mortgage Form 9(b)(iii), 9(d) C.F.R See HECM Servicing FAQs, ML (rev. Mar. 30, 2011). 44 But c.f. Metlife Home Loans, v. Vereen, 43 Misc. 3d 537 (NY, 2014)(No foreclosure of reverse mortgage allowed for mortgagor s failure to pay the water bill based on the intent of the HECM program to keep elderly homeowners in their homes.). 45 See HUD Mortgagee Letter (April 23, 2015), superseding Mortgagee Letter (Jan. 1, 2011). See also Mortgagee Letter (March 30, 2016). 46 Id. 6

8 amount from $417,000 to $625, As a result, borrowers with properties valued above $417,000 and loans originated before the increase may be able to tap additional equity to refinance their existing HECM and cure a property charge delinquency. 48 Direct aid from nonprofit organizations and government may help delinquent borrowers, but such financial resources are often scarce, especially in tough economic times. 49 Repayment plans are another option for borrowers, and HUD has established a five year limit on the amount of time available to pay back corporate advance amounts. The time period may be further limited to ensure repayment of the arrears before the mortgage reaches 98 percent of the maximum claim amount. Additionally, the monthly payment may not exceed 25 percent of the mortgagor s monthly surplus income as calculated according to HUD guidelines. 50 If the repayment plan is insufficient or unsuccessful, servicers may request an additional option if the youngest living borrower is at least 80 years of age and the servicer determines that the borrower has a critical circumstance such as a terminal illness, substantiated long-term physical disability, or a unique occupancy need (e.g., terminal illness of family member receiving care at the residence). 51 Servicers will request documentation of the illness or circumstance. Reverse Mortgage Maturity Reverse mortgages permit homeowners to remain in their homes until a maturity event occurs. Specifically, the HECM enabling statute states that the homeowner s obligation to satisfy the loan obligation is deferred until the homeowner s death, the sale of the home, or the occurrence of other events specified in the regulations by the Secretary. 52 Permanent relocation from the home will also trigger maturity under HUD regulations. 53 Chapter 16 of the National Consumer Law Center, Foreclosures and Mortgage Servicing (5th ed. 2014) fully covers common issues that arise when foreclosure proceedings follow a maturity event. Non-Borrowing Spouses Under the HECM program, spouses may jointly take out a reverse mortgage if both borrowers are sixty-two years old and both borrowers are on the title to the home. When spouses have a reverse mortgage, the loan does not mature until the borrowers die, sell the home, or permanently relocate from the home. For example, if one spouse dies or moves to a nursing 47 See HUD Mortgagee Letter (Feb. 24, 2009). 48 The benefits from the increased maximum claim amount will be offset by the reduction in available proceeds resulting from reduced principal limit factors effective September 31, See HUD Mortgagee Letter (Sept. 3, 2013). 49 See, e.g., 2011 Or. Laws Ch. 723 (H.B. 2543) (2011), codified at Or. Rev. Stat (2) (eliminating tax deferrals for reverse mortgage borrowers). Several states have funds that are available to reverse mortgage borrowers to cover delinquent property charges. For example, Florida Hardest-Hit Fund Elderly Mortgage Assistance Program will provide up to $25,000 to past due and future property charges for reverse mortgage borrowers. Save the Dream Ohio provides similar assistance to reverse mortgage borrowers. 50 HUD Mortgagee Letter (April 23, 2015). 51 Id U.S.C. 1715z-20(a) C.F.R (c)(2)(ii). 7

9 facility, the reverse mortgage will not be affected so long as the other spouse continues to live in the home. There are some instances in which only one spouse takes out the reverse mortgage. For example, if one spouse is over and the other spouse is under sixty-two years of age, to obtain a reverse mortgage only the older spouse can be a borrower. Because available loan proceeds are based on the age of the youngest borrower, couples seeking to maximize the available proceeds from a reverse mortgage may also decide that only the older of the two will be a borrower. Prior to closing, the non-borrowing spouse (generally the wife) will deed over her interest to her husband. Unfortunately, couples rarely understand the consequences of taking the younger spouse off the title and taking out the reverse mortgage only in the name of the older spouse. Loan brokers or loan officers often lead the younger spouse to believe that they may assume the loan and remain in the home after their spouse dies or moves to a nursing facility. These types of claims or promises were simply not true, as historically neither HUD nor reverse mortgage lenders permitted the loan to be assumed by the non-borrowing spouse. HUD regulations require the mortgage to state that it is due and payable upon the death of all surviving mortgagors. 54 In the past servicers and HUD have taken the position that when the mortgagor dies, and even if a non-borrowing spouse continues to occupy the property as a primary residence, the loan matures and becomes due. Unless the non-borrowing spouse pays loan in full, servicers were proceeding to foreclose. 55 Yet, in contrast to the regulation and loan documents, the statute permits the homeowner to remain in the property until a maturity event. 56 Homeowner is defined in the statute to include the spouse of the homeowner. 57 Based on the statutory language, the loan does not mature so long as the non-borrowing spouse remains in the property. Several cases have been filed challenging HUD on this issue. In 2013, the DC federal court held that the HECM statute only permits HUD to insure reverse mortgages that come due after the death of both the homeowner-mortgagor and the spouse of the homeowner, regardless of whether that spouse was also a mortgagor. 58 The district court invalidated the regulation allowing HECM mortgages to contain language that permits the lender to demand immediate payment on the loan if the borrower dies and the property is not the principal residence of at least one surviving borrower. 59 The court held that this regulation, along with the contractual language it required, violated federal law because it did not protect the non-borrower spouse from foreclosure at the death of the borrower spouse. 60 A subsequent case, also filed against HUD in the same court Plunkett v. Castro which C.F.R , the regulation has been held to be invalid. See, Bennett v. Donovan, 4 F.Supp.3d 5 (D.D.C. Sept. 30, 2013). 55 See, e.g., Jessica Silver-Greenberg, A Risky Lifeline for the Elderly Is Costing Some Their Homes, N.Y. Times, Oct. 15, 2012, at A U.S.C. 1715z-20(j). 57 Id. 58 Bennett v. Donovan, 4 F.Supp.3d 5 (D.D.C. Sept. 30, 2013). 59 Bennett v. Donovan, 4 F.Supp.3d 5 (D.D.C. Sept. 30, 2013). 60 Id. 8

10 was consolidated with the Bennett v. Castro case, challenged HUD s determination that the surviving spouses were ineligible for any relief even after the regulations and the contractual provisions had been found to be illegal. The district court parsed through the different options made available by HUD to both the named plaintiffs, and other non-borrowing spouses in the same situation. 61 HUD had identified a remedy that it said was automatically dictated by the court s invalidation of the regulation making the mortgages due and payable upon the death of the mortgagor when there was a non-borrowing spouse still in the home. 62 This remedy was identified as the trigger inapplicability decision or TID. 63 Yet inexplicably HUD had refused to apply this remedy to anyone other than the named plaintiffs. The court held that it could not require HUD to take specific action, but held that HUD s failure to apply the TID to other non-borrowing spouses was arbitrary and capricious. 64 HUD has since issued several Mortgagee Letters attempting to advise reverse mortgage servicers on how to evaluate and deal with non-borrowing spouses who are in danger of having their mortgages declared due and payable upon the death of their borrowing spouse. 65 Mortgagee Letter outlines two options that servicers may elect if there is a nonborrowing spouse, either foreclose according to the terms of the mortgage or elect an option called the Mortgagee Optional Election (MOE) Assignment. As with similar MOEs offered in the past a lender may elect to assign a mortgage originated prior to August 4, 2014, HECMs to HUD if the loan and the non-borrowing spouse meet certain requirements. Early assignment of the mortgage to the agency would satisfy the claim of the lender, and defer the due and payable status of the loan until the death of the non-borrowing spouse, under certain conditions. 66 The latest MOE Assignment option deleted an ill-defined PLF test that would have disqualified most non-borrowing spouses. In other cases, often a slightly different analysis is used. 67 In one case from California, the borrower sought to reform the contract after the lender sought to foreclose on the nonmortgagor spouse after the mortgagor died. The court rejected the lender s argument that it was too late to reform the contract to protect the surviving spouse, noting that HUD rules permit a recasting of a mortgage loan without HUD approval when the default was caused by circumstances beyond the control of the mortgagor. 68 If the non-borrowing spouse did not sign the security instrument, the state s dower, curtesy, or community property laws may limit the mortgagee s right to foreclose against the 61 Plunkett v. Castro, 2014 WL , (D.DC, August 28, 2014). 62 Id. at Id. 64 Id. at Mortgagee Letters (June 12, 2015); (January 29, 2015). 66 HUD regulations allow lenders to file an insurance claim if the lender forecloses on the property, the mortgage is assigned to HUD, or the borrower sells the property for less than the mortgage balance. 24 C.F.R See also 24 C.F.R , See, e.g. Kostopoulos v. Onewest Bank, FSB, ---F.Supp.3d---, 2014 WL (E.D.Mich, Oct. 17, 2014)(As non-borrowing spouse was not listed on the mortgage, pursuant to the reasoning in Bennett, she was a nonborrowing spouse, and could not be foreclosed upon.) 68 HUD Housing Handbook A; Kerrigan v. Bank of Am., 2011 WL , at *4 (C.D. Cal. Aug. 12, 2011). 9

11 non-borrowing spouse after the death of the borrower. 69 This was essentially the line of reasoning in a Delaware case where the non-borrowing spouse still owned the home when the reverse mortgage was closed, so the court devised an equitable trust to allow the nonborrowing spouse to stay in the home. 70 Surviving spouses may also have legal claims based on the manner in which the reverse mortgage was originated. For example, a Maryland court permitted a non-borrowing spouse to raise multiple tort claims against the mortgagee and others involved in originating the loan. 71 The non-borrowing spouse had owned the property jointly with her husband before the reverse mortgage. The widow s complaint alleged that the couple had intended for both parties to reside in the home until death. She alleged that the lender and the broker, along with others, participated in the intentional misrepresentation of the consequences of signing the various papers necessary to obtain the reverse mortgage. The broker had recommended that the couple reserve a life estate for the wife and promised that, by doing so, she would be entitled to live in the home even after her husband s death. 72 The court allowed the case to proceed with claims for mortgage fraud, fraud, and violations of the consumer protection act (with an amended complaint required in some instances). Unfortunately, not all courts permit these claims to proceed. 73 In a similar case, a Pennsylvania court allowed a state UDAP claim to proceed against all parties involved with the origination of the reverse mortgage. 74 The complaint noted that the widowed spouse had not been provided a Non-Borrower Spouse Ownership Interest Certification Form, which is a standard form that is designed to explain to a borrower and non-borrower spouse the consequences of making a reverse mortgage to just one member of a husband-wife team. 75 The statute of limitations relating to challenging the invalidity of the original mortgage documents has been tolled, because the problems were not discovered until after the death of the borrower, and the dispossessed spouse was not a signatory to the original loan documents. 76 The practical methods saving the home of a non-borrowing spouse is in flux. As explained above, challenges to the servicer s calling the mortgage due have been somewhat successful, but they may involve litigation in federal court. 69 Durrell v. Fannie Mae, 2013 WL (E.D. Mich. Jan. 29, 2013) (acknowledging interest marital property interest, but holding that challenge by non-borrowing spouse based on that interest must be raised before right of redemption expires). 70 Wells Fargo, N.A. v. Richardson, 2013 WL , (Del., April 30, 2013). 71 Wiseman v. First Mariner Bank, 2013 WL (D. Md. Sept. 23, 2013). 72 Id. 73 Johnson v. Senior Funding Associates, Inc., 2014 WL (Cal., Nov. 26, 2104)(claims for fraud, elder abuse, quiet title, intentional infliction of emotional distress, and negligence all dismissed for insufficient pleading); Bombet v. Donovan, 2015 WL 65255, (M.D.La., Jan. 5, 2015)(no claims available against mortgagee for fraud and deceptive promises relating to the wife s ability to stay in home after husband s death, because of Louisiana state law that requires a writing for all promises made by creditors.); but c.f. Nationstar Mortgage LLC v. Carey, 2014 WL (Del., Nov. 26, 2014). 74 Morgan v. World Alliance Fin. Corp., 2013 WL (E.D. Pa. Jan. 31, 2013). 75 A copy of this form is available at http.://webcache.googleusercontent.com/search?q=cache:iwwtdq4_l8cj: 76 Ray v. Nationstar Mortg. LLC, 2014 WL (S.D.Cal., June 6, 2014). 10