HUD sued over reverse-mortgage rules
AARP says change to federal rule is forcing surviving spouses out of homes.
This post comes from Amy Hoak at partner site MarketWatch.
Facing 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.
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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.
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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.
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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.
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.
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