HUD Sued by AARP Over Reverse Mortgage Rule Change

The Departmentrnof Housing and Urban Development was sued this week byrnthe American Association of Retired Persons (AARP) onrnbehalf of three homeowners facing foreclosure on HUD guaranteed reversernmortgages that were issued to their late spouses. rnThe Foundation claims that the surviving spouses are facingrn”imminent foreclosure and eviction from their homes” because HUD abandonedrnfederal rules and violated protections assigned to those spouses. </p

The suit, which was filed in the filed in U.S. District Court for thernDistrict of Columbia, seeks an injunction against pending foreclosure and/orrneviction actions and prohibits HUD from abandoning long-standing rules that would allow foreclosure on the surviving spouse of a deceased reverse mortgagor.  That action it says does not just violaternHUDs own rules but violates existing contracts between borrower and lender and negates arnkey purpose for which those borrowers had been paying an insurance premium tornHUD.</p

The three litigants, who reside in Indiana, New York, and Maryland, are allrn69 to 79 years of age and of “modest means.”  For various reasons and in one case what appearsrnto be lender error none were parties to their spouse’s mortgage. </p

HomernEquity Conversion Mortgages (HECM), or reverse mortgages, are popular financialrnplanning mechanisms for equity-rich senior citizens.  Arranged through private lenders butrnguaranteed by HUD, they allow homeowners to draw out the equity in their homesrnthrough either a one-time lump sum payment or periodic cash installments. Whilerninterest accrues and increases the principal balance of the loan, payments arernnot required until ownership of the home is transferred.  The intent of Congress in setting up thernprogram was to allow seniors to remain in their home and still have spending liquidity rather than be forced tornsell it for financial reasons.  </p

Borrowers must be at least 62 to qualify for the program and because of theirrnage and other considerations several protections are in place.  The first is that the payoff of the mortgagernmay not exceed the market value of the house and the second major rule protectsrnhomeowners from being displaced from their homes as long as they own and physicallyrnoccupy it.   HUD has specificallyrnextended the term “homeowner” to the spouse of the borrower even ifrnthat spouse is not party to the mortgage. rnLoans are limited by a somewhat modestrnLTV to buffer it against an underwater mortgage and borrowers pay an annualrnpremium to HUD for guaranteeing the loan and its protections.  </p

The spousal inclusion information has appeared in HUD promotional materialsrnsince 1994 but despite the clear language, AARP’s attorneys maintain HUD hasrnnever recognized the protection this non-displacement provision affords thernspouse of a homeowner and abandoned it in 2008, stating that if spouses orrnheirs wished to retain the house after the death of the mortgagee they had tornpurchase or refinance the house at the full mortgage value.  This, plaintiffs say, means that the effectrnof this change is that a stranger can purchase the property for its appraisedrnvalue, but a surviving spouse cannot and in the current depressed market arnfamily member who wishes to retain the property may not be able to obtainrnfinancing sufficient to pay off the HECM loan. rnIt also means that the surviving spouse, if he or she cannot pay thernfull value of the mortgage, may be displaced from the home.</p

“HUD has inexplicably turned existing reverse mortgage policies upsiderndown,” said Jean Constantine-Davis, a senior attorney with AARP FoundationrnLitigation, in discussing HUD’s actions.  “These are older individualsrnwith limited means who have been blindsided by arbitrary, retroactive decisionrnmaking.”</p

Steven A. Skalet, of Mehri & Skalet PLLC, the Foundations attorneys, stated,rn”Rather than protecting borrowers, HUD retroactively changed the terms of thernloans to make these elderly borrowers’ spouses and heirs pay more to keep theirrnhome than an unrelated purchaser would have to pay to purchase the property.”rn He added:  “This is shameful and we intend to make HUD honor thernrepresentations and promises they made to borrowers when they signed up forrnthese government-insured loans.”</p

HUD has not yet commented on the suit.

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