11th Circuit Held that HECM Statute Does Not Disallow Lender’s Contractual Right to Foreclose

The Court of Appeals for the 11th Circuit affirmed the district court’s decision when it held that the HECM statute, 12 U.S.C. § 1715z-20, addressed only HUD’s authority to insure reverse mortgage loans and not a lender’s contractual right to foreclose.

Under the HECM statute, the Secretary of HUD is authorized to establish a mortgage-insurance program designed to encourage lenders to offer reverse mortgages.  In particular, the statute states that the HUD Secretary may not insure a reverse mortgage unless it deferred repayment obligations until the homeowner passes away, no longer lives in the home or sells the mortgaged property.  The statute defined the homeowner as both the borrower and the borrower’s spouse.

In the case at hand, the Court of Appeals agreed with the district court and determined the HECM statute did not prevent foreclosure pursuant to a reverse mortgage contract originated prior to August 4, 2014, even if the non-borrowing spouse continued to live in the mortgaged property.  The Court found that the HECM statute only addressed HUD’s authority to insure reverse mortgage loans and did not affect a lender’s contractual right to foreclose on a home once the borrower died.  The Court reasoned that non-judicial foreclosure was governed by contract law because a security deed that included a power-of-sale provision was a contract and its provisions were controlling as to the rights of the parties thereto.  Further, the Court noted that the contract explicitly defined borrower as only the borrowing homeowner.  The Court, therefore, found that the lender had the clear authority to foreclose upon the death of the sole borrower to the mortgage.

However, it should be noted that for FHA-insured HECM loans originated on or after August 4, 2014, HUD provided additional provisions regarding deferring the due and payable status of a loan when an eligible non-borrowing spouse is present.  For HECM loans originated prior to August 4, 2014, when an eligible non-borrowing spouse is present, lenders may elect to defer due and payable status, file a claim and assign such loans to HUD, however, HUD does not always accept such claims.

The Court decision can be found here.