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Court Ruling Protects Surviving Spouses With Reverse Mortgages

Published on 10/25/2013 -

By

A ruling last week in the United States District Court for the District of Columbia could prevent elderly homeowners from losing their homes when their spouses die, according to a report from the New York Times.

The case placed new restrictions on lenders who extend reverse mortgages, a unique type of home financing plan that has left many senior citizens vulnerable to potential foreclosure actions.

Decision May Help Reverse Mortgagors Avoid Home Foreclosure

For years, reverse mortgages have helped senior citizens keep their homes after their incomes fall. In contrast to a traditional loan, in which a borrower pays the lender, in a reverse mortgage, the lender gives money to the borrower.

When the borrower or borrowers die, the estate then sells the property, and the lender, in theory, recoups its investment. But reverse mortgages can also be dangerous, according to sources.

If, for example, one spouse dies, and the surviving spouse is not listed as a mortgagor on the reverse mortgage, that spouse could face the possibility of losing the family home to foreclosure. This loophole has affected many families over the year, but it may finally have been closed.

The dispute that triggered last week’s decision started in 2008, when Robert Bennett’s wife died, leaving him alone in his Maryland house. Bennett’s wife was the sole borrower listed on their mortgage.

Thanks to a rule administered by the U.S. Department of Housing and Urban Development (H.U.D.), Bennett’s lender was allowed to foreclosure on the property because Bennett was unable to pay the loan. To stop the action, Bennett sued H.U.D.

District Court Changes Home Foreclosure Rules

Last week, the court ruled that H.U.D.’s punitive rules regarding reverse mortgages contradict the very purpose of reverse mortgages, which could lead to a significant change in home foreclosure laws.

The court told the federal agency it must correct the problem, although some uncertainty remains over how the agency will cure the loophole. Still, Bennett’s home foreclosure attorney is excited about the decision.

Bennett’s case “marks a turning point for surviving spouses” and likely means that “they will be able to remain in their homes, despite the loss of their husband or wife,” said Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation.

But she warns that elderly couples should usually try to include each other on their reverse mortgages. “I would at this point still be very discouraging from doing a reverse mortgage that leaves the spouse off,” said Constantine-Davis.

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