Three surviving spouses of reverse mortgage borrowers have sued HUD, alleging that what HUD characterized in 2008 as a clarification of its policy constituted a change from long-established federal rules that should have protected them from having to repay lost equity in order to stay in their homes.
“We don’t comment on pending litigation,” a spokesman for the Department of Housing and Urban Development told this publication, when asked about the suit.
According to AARP, AARP Foundation and the Washington law firm of Mehri & Skalet PLLC are representing plaintiffs from three states filing the lawsuit in U.S. District Court for the District of Columbia. The suit seeks an injunction prohibiting the alleged rule change and foreclosing on surviving spouses on what it said are illegal grounds.
At issue in the case is HUD’s “clarification” of its handbook policy on Home Equity Conversion Mortgages in which it has stated that the loans are “non-recourse,” defining this as meaning that “the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”
But in late 2008 HUD issued a mortgagee letter that said, “Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct.”
According to the mortgagee letter, “non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not personally be liable for any deficiency resulting from the foreclosure.”
The 2008 letter also notes that one of the “general categories” that situations regarding the termination of a HECM fall into is one in which, “if the mortgage is due and payable and the borrower (or estate) desires to retain ownership of the property, the mortgage debt must be repaid in full.”
Also alleged in the suit is the existence of what is identified as a “HECM statute” entitled “Safeguard to Prevent Displacement of Homeowner” that is said to provide that HECM homeowners cannot be displaced from their homes until the HECM terminates. The suit says it states that “…for purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.’”
The AARP said the suit alleges that all three plaintiffs are seeking foreclosure, are of “modest means” and will suffer “substantial hardship” if they are forced to repay the original, higher mortgage cost in order to retain their homes. It also alleges that all three were not listed as borrowers on the mortgage documents because of the following respective circumstances:
• One plaintiff was married “late in life” and never got added to the deed to the home or the loan.
• Another plaintiff had been on the deed to the home but was removed when her husband, “suffering from dementia at the time,” entered into the reverse mortgage.
• The third plaintiff said he did not know he was removed from the deed when the HECM was executed and his wife, who was seriously ill at the time, died the following month.
Reverse mortgage market participants have said they have rarely actually foreclosed on senior borrowers, but as financial concerns have mounted on the government and the private market in the wake of the downturn there has been more pressure to do so.
