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The Rule of 95

The Industry Leader Update by Reverse Focus

FHA recently announced their solution to the displacement of younger non-borrowing
spouses which beginning August 4th will allow the inclusion of spouses under the age of
62. While certainly good news for future borrowers 62 and older with younger spouses
the nagging issue remains for spouses currently not on title now that their spouse and
primary borrower has passed. However surviving spouses are not the only party at risk
of foreclosure. What about the heirs of reverse mortgage borrowers who wish to keep
the home?

Last Wednesday two U.S. senators have sent a letter to HUD calling for better
enforcement of existing rules which may prevent foreclosure for heirs of HECM
borrowers. Senators Barbara Boxer & Charles Schumer implored the agency to take
measures to ensure heirs of a deceased borrower are not forced out of their homes
illegally. At the crux of the matter is the rule of 95. According to the senator’s letter
HECM lenders are required to offer heirs the option of satisfying the reverse mortgage
by paying 95% of the home’s present appraised value. According to a recent New York
Times article this option is not always offered. The article prompted senators Boxer and
Schumer to write “ “The failure on the part of the mortgage companies to offer the
option of satisfying the loan by paying ninety-five percent of the home’s appraised
value unfairly penalizes a borrower’s family members and heirs, who are unable to
obtain refinancing to pay off the loan.” While anecdotal evidence points to a problem
the question is how wide spread it such a predicament?

For situations where the deceased borrowers had substantial equity left in the home
heirs may be motivated to keep the home. National Reverse Mortgage Lenders
Association president and CEO Peter Bell told Reverse Mortgage Daily “The Times has
part of the story. It doesn’t fully explain this is an issue that results when there has been
no post-death conveyance of the property. HUD’s rules have required that there be a
post-death conveyance in order for the 95% rule to be applicable.” The catch is postdeath
transfers and title. Bell explains that in cases where a spouse or child is added to
the home’s title to avoid probate the 95% purchase option would not be available. A
post-death transfer is required and lenders who act to foreclose when no such transfer
is present are showing ‘proper and compliant behavior’. The senator’s letter urges HUD
to issue a mortgagee letter clarifying how the existing reverse mortgage loan obligation
can be met and clarification to loan servicers.

I would be safe to say if such steps are taken we will see additional disclosures in the
near future. What are your thoughts? Have you dealt with foreclosure of a property the
surviving heirs wished to keep? How widespread do you feel the problem is? Leave
your thoughts in the comment section below and have a great week!

“These materials are not from HUD or FHA and were not approved by HUD or a government agency.”
(ML 2014-10)

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