If you're married and got a reverse mortgage, check your paperwork. Did your spouse also sign the loan paperwork?

If the answer to the question is “no,” you may have a problem if your spouse outlives you and your house is worth less than the loan balance.

HUD sets the rules for nearly all reverse mortgages issued in the US. One of the attractions of a reverse mortgage is supposed to be that even if your loan is for more than the value of the house, the most the lender can collect in a foreclosure is the proceeds from the sale of the house. When the borrower dies, the survivor has twelve months to pay off the loan — but every borrower I have worked with is told that the payoff is not supposed to be for more than the value of the house. Further, there are HUD rules which are supposed to protect the surviving spouse living in the home even if that spouse is not on the mortgage, so that the potential for forced sale is abated until the surviving spouse either permanently moves out or dies.

Somewhere along the line, the rules got changed.

Now, AARP has brought a class-action suit against HUD alleging that the changes in the rules allow underwater homes with reverse mortgages to be sold to strangers in arm's-length transactions for less than the full mortgage balance, but require some spouses or heirs who were not co-signers on the loan to pay the full amount. Not only that, Finally, the suit says HUD is ignoring its own provisions against displacing a surviving spouse.

Here's a quote from the New York Times article illustrating the problem:

One plaintiff, Delores Jeanne Moore of Covington, Ind., was not on the reverse mortgage because her husband had owned the house before they married. He died in 2008. Under the new HUD rules, the suit says, if Mrs. Moore wants to keep the house, she must pay the balance of the loan, $91,000. But a third-party buyer could get the house for 95 percent of its appraised value, or about $81,000.

What's the moral here? Reverse mortgages can be a real lifesaver, especially if you're a senior facing foreclosure on a conventional mortgage which is “underwater.” But you MUST read the fine print in the loan. Weigh carefully whether both spouses should be on the loan. And consult with an attorney who is experienced handling these deals to be sure you know what you're getting yourself into.

For further discussion on this important topic, go here.