HUD sued over reverse-mortgage rules

AARP says change to federal rule is forcing surviving spouses out of homes.

By MSN Money Partner Mar 9, 2011 7:44PM

This post comes from Amy Hoak at partner site MarketWatch.

 

MarketWatch on MSN MoneyFacing foreclosure, the surviving spouses of three reverse-mortgage borrowers are suing the U.S. Department of Housing and Urban Development, the AARP said in a news release this week.

 

In the lawsuit, three plaintiffs ranging in age from 69 to 79 say that HUD changed long-held federal rules that protect a surviving spouse when the reverse-mortgage borrower dies, and as a result they are "facing imminent foreclosure and eviction," according to the release. AARP Foundation Litigation and the Washington, D.C., law firm of Mehri & Skalet PLLC, are representing the plaintiffs. Post continues after video.

In 2008, HUD changed rules that had been in place since 1989 that said reverse-mortgage borrowers and their heirs would never owe more than the home was worth at the time of repayment, according to the AARP release. Under the new HUD policy, an heir or surviving spouse must pay the mortgage balance to keep the home -- even if that loan balance is higher than the property's value.

 

A reverse mortgage is a way that older homeowners can convert the equity in their homes into cash. The loan balance increases over time, and becomes due and payable when the homeowner dies, moves permanently or sells the home.

 

With home prices down steeply since the housing downturn, surviving spouses may be forced to pay an amount higher than the home’s value. "Many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property," the AARP release said.

 

A HUD spokesman on Tuesday said the agency had no comment on the lawsuit given that the litigation is pending.

The 2008 policy change was referred to as a "clarification," so it wasn’t required to go through an approval that would have given the public an opportunity to comment, said Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation.

 

Another protection in the Home Equity Conversion Mortgage program is called "Safeguard to Prevent Displacement of Homeowner," and says that HECM homeowners can't be displaced from their homes until the loan terminates, adding "for purposes of this subsection, the term 'homeowner' includes the spouse of a homeowner," according to AARP. HUD has never recognized this protection, the lawsuit states.

 

"We’re talking about three people who were married to folks who were reverse-mortgage borrowers but they were not named on the reverse mortgage," Constantine-Davis said. The lawsuit claims that they will suffer "substantial hardship" if they’re forced to repay the original, higher mortgage cost to retain their homes.

In a news release, Constantine-Davis said the plaintiffs have been "blindsided by arbitrary, retroactive decision making."

 

According to AARP, the new HUD policy violates existing contracts between borrowers and lenders and negates a reason why borrowers had been paying insurance premiums. Also, the policy allows a stranger to buy the property at its current value, but the surviving spouse is prevented from doing so, according to the release.

 

"Rather than protecting borrowers, HUD retroactively changed the terms of the loans to make these elderly borrowers' spouses and heirs pay more to keep their home than an unrelated purchaser would have to pay to purchase the property," said Steven A. Skalet, of Mehri & Skalet PLLC, in the release.

 

"This is shameful and we intend to make HUD honor the representations and promises they made to borrowers when they signed up for these government-insured loans," he said.

 

The plaintiffs -- Delores J. Moore, 79, Leila Joseph, 77, and Robert Bennett, 69 -- are from Indiana, New York and Maryland, respectively. The lawsuit was filed in U.S. District Court for the District of Columbia.

 

Read more from MarketWatch and MSN Money:

VIDEO ON MSN MONEY

14Comments
Mar 10, 2011 1:13AM
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From the get go the reverse mortgage struck me as a scam, it sounded to good to be true.  Now the piper is demanding payment.  I feel sorry for the people who were boondoggled, especially by the very government who is supposed to protect us from such ponzie schemes.  The solution is something we have collectively forgotten, Live with in your means.  Plan for the future.  And like the line opening song to the show "Good Times", "Easy credit, Rip Off"!  It especially upsets me that the HUD clandestinely changed the rules in the middle of the game.  If the borrower wanted to change things he would have to refinance into a new contract which both parties agree to the terms.  This unilateral change smacks of loan sharking. 

 

Even on the conventional mortgage that myself and my ex entered into when we bought our property, we both signed as coborrowers.  We were both income earners so it made since, and would also avoid litigation to settle an estate should one of us have passed.  I suspect that the three survivors were likely single income families or at least the primary earner was the deceased spouse and would have had a lifetime of family finances managed by that spouse.  It breaks my heart to see our government attempting to turn them out on the street in such a backhanded way.  Is our government that hard up for money.

Mar 10, 2011 1:20AM
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Does this mean that Fred Thomson, Henry Winkler, and Robert Wager's carefully chosen words selling the product could be mis-leading? Wonder how much they were paid? 
Mar 9, 2011 9:01PM
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I would certainly like to get in on that lawsuit. I was forced out of my home by HUD. They said I didn't get my paperwork to them on time. I was given 10 days of the date of the letter to get my paperwork in. Okay that was suppose to be 2 weeks and 3 days+3 days for mail to get to my home. Maybe, HUD doesn't know that it is business days and that excludes Saturday and Sunday and Federal Holidays. I had my paper work in their office in plenty of time. Well they failed to send me an eviction notice too. Then I had about $1800.00 taken from the property that was not legal theirs to take.
Mar 10, 2011 7:14AM
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I have thought from the very first that these reverse mortgages were nothing more, or less th****agalized scam! all of them should be erased, they are very dangerous, and shoul'nt be allowed.
Mar 10, 2011 2:18AM
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In this world nothing is free and if it sounds to good to be true it's not, greedy people have no morals that's what I've learned in my life, what was everyone thinking? that houses was some how immune to losing it's value, gee for educated people I'm not impressed, I don't like people taking advantage of our old folk and hope that justice can be obtained for these folks.
Mar 10, 2011 2:01AM
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I'm an FHA appraiser who appraises these houses that qualify for FHA Reverse mortgages. In the past 2 years, I've had 6 go into foreclosure for whatever reason. 2 went into foreclosure within 6 months.  In a declining market, which is about everywhere, except for a few pockets of prosperity here or there,  the equity of that house continues to shrink each month as the overall value continues to go down. Contributing to that decline is the aging owner. They take these things out when they're in the mid-to late 60's. As of the date of mortgage, the house is well maintained, usually. However, as they experience extreme  old age, ,in just a few years, the maintenance on the house starts to cease to exist  and the house falls into disrepair. Then, it ends up 20-40% upside down on the mortgage. They can't sell it and can't refinance it. So, it goes into Foreclosure. These owners say, "Why should they keep the house up, the Governments just going to take it". Let them fix it up.

Mar 10, 2011 1:57AM
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I could never see any up side to the reverse mortgage.  My guess is that the inevitable chickens are finally coming home to roost.  It was a scam from day one and the government should have never been involved.  I hope the plaintiffs win their suit, except of course that this will just be another case of financiers making a bundle and leaving the mess to be cleaned up at taxpayer expense.  
Mar 9, 2011 11:52PM
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Another fine example of Change here.

Take notice young Americans you'll be old and subject to such trials one day.

Mar 10, 2011 8:01AM
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It is simple for our government, if they do not like the rules or they do not suit them, change them, it is much more profitable to receive than to give.
Mar 10, 2011 8:42AM
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Didn't anyone catch the statement that the only one listed on the reverse mortgage was the one family member (and not the spouse) that passed away. Once the mortgage holder dies in this situation, game over. Helpful hint - make sure both spouses are named on the reverse mortgage.  
Mar 5, 2012 11:56AM
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I took out a reverse mortgage after my spouse died. Now if I remarry what happens to my spouse upon my death? Does she get booted or have to buy the house? What about placing her on the deed (house has been paid off since 1999) with me or will reverse mortgage prevent that action?

Mar 10, 2011 12:23AM
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As soon as they figure out it can't be blamed on Bush the story will die.  Bet you don't hear about it during the 2012 elections either.  Well, you got what you voted for now live with it.
Mar 10, 2011 9:28AM
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This is why people need to read the small print.
Mar 10, 2011 3:36AM
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The adjustable rate mortgage that I had before had me nearly to the brink of bankruptcy because of the never-ending payment increases. Now I have 3.18% fixed rate. I would absolutely recommend "123 Mortgage Refinance" I worked with to anyone I know planning to refinance mortgage.

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