Fixing a reverse mortgage trap

Servicers can now assign the loan back to HUD, make a claim for money owed

From left: Henry Winkler and Fred Thompson
From left: Henry Winkler and Fred Thompson

Soon after Judy Stephens of Lafayette, Louisiana, lost her husband this past January, she got hit with more bad news, this time from the mortgage company. She needed to come up with $107,000 — the amount of principal, accrued interest and fees racked up by the reverse mortgage on the home she owned with her husband for the past 16 years — or face foreclosure.

She didn’t have the money, nor could family members come up with the cash needed to buy the house. So, Stephens told me last week, the mortgage company informed her that it would foreclose in mid-August.

Why? Because like an estimated 12,000 other widows and widowers around the country, Stephens, 65, is a “surviving spouse” whose name does not appear on the reverse mortgage note. Though she and her husband, Raymond, had been assured multiple times since 2009 by loan officers and others that in the event of her husband’s death, she could continue to live in the home indefinitely, the reality turned out to be starkly different. She was not protected.

The mortgage company servicing the loan, James B. Nutter & Co. of Kansas City, “was sympathetic” after Stephens’ husband’s death, she recalls. “They said they were sorry about his passing,” but the letter they sent was all business: Pay up what’s owed or we will foreclose as required under federal reverse mortgage rules. Later on, Stephens said, representatives of the mortgage company posted notices on her front door urging her to call James B. Nutter & Co. immediately.

“I did,” she says, “and they told me ‘you’ve got six months'” until the scheduled foreclosure. That’s the last official information she’s received about the fate of her home.

But thanks to a far-reaching policy shift announced last week by a federal agency, Stephens may be able to stop worrying about the August deadline.

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Here’s the story — one that could touch many of the thousands of people facing potentially similar situations. A reverse mortgage allows seniors 62 and older to withdraw funds against their home equity and not pay back the debt until they die, move out or sell the property.

The most popular type of reverse mortgage is run by the Department of Housing and Urban Development and accounts for more than 90 percent of all loans outstanding, including the one on Stephens’ home. You see these loans hawked regularly on TV by pitchmen such as Henry “Fonzie” Winkler and former Tennessee Republican Sen. Fred Thompson.

But HUD has been buffeted by substantial criticism and lawsuits over its controversial rules regarding spouses who live in the house but whose names were not included on the reverse mortgage documents. Sometimes those omissions can be traced back to a loan broker who promised a higher maximum mortgage amount to the applicants if only the older spouse was on the note. The broker may not have disclosed that the higher loan amount also earned the broker a larger commission.

Other times, as in Stephens’ case, one spouse had not yet reached the required borrower threshold age of 62 — she was 58 at the time of the reverse mortgage closing — but was assured that she could have her name included on the note when she reached 62. When she requested inclusion at that age three years ago, however, Stephens says she was told by a loan servicing agent that it was totally unnecessary and that including her name would cost the couple $17,000 in new fees.

Until last week, all non-borrower surviving spouses whose loans were insured before Aug. 4, 2014, were subject to demands such as what Stephens received — pay up or we foreclose. But on June 12, HUD changed its policy and told loan servicers that they now had a new, more consumer-friendly option: Instead of foreclosing on non-borrower surviving spouses, they could assign the loan back to HUD and make a claim for monies owed against the agency’s FHA insurance fund.

Where does this leave Judy Stephens? I asked James B. Nutter & Co. for comment. Here’s what the company said: Though it can never discuss individual customers’ situations, “we view HUD’s new (policy) as a very positive development … and a potential game-changer that will help us keep a lot of good people in the homes they love.”

Game-changer sounds encouraging. Though the final decision is up to Nutter, maybe Judy Stephens won’t be forced out of her house in August. We’ll check back then.