On behalf of three surviving spouses of reverse mortgage borrowers, AARP Foundation filed a lawsuit Tuesday against the Department of Housing and Urban Development (HUD) alleging that unfair rules and confusing policies have forced many older Americans into foreclosure.
Pointing to a redefining of "non-recourse," specifically as it relates to non-borrowing spouses as detailed in Mortgagee Letter 2008-38, the suit claims that HUD rules in place since 1989 clearly stated that the borrower or their heirs could never owe more than the home is worth at the time of repayment. The clarification in 2008 stated that should the surviving spouse or heirs desire to retain the home, then they must pay the full balance of the reverse mortgage regardless of the loan balance. The suit further claims that this change in policy also violated existing contracts between reverse mortgage borrowers and lenders.
Filed in U.S. District Court for the District of Columbia, the lawsuit seeks an injunction prohibiting the use of the new definition and illegally foreclosing on surviving spouses.
The three plaintiffs represented in the suit are all non-borrowing spouses of reverse mortgage borrowers who have subsequently passed away. All three are currently facing foreclosure action because the current balance of the reverse mortgage exceeds the value of their homes and they do not have means to pay the full existing balance. One of the plaintiffs claims that he was unaware that he was removed from the deed at the time the HECM was executed.
Should this lawsuit prevail, it could set a precedent that has broad implications on the interpretation of "non-recourse" provisions not only of future reverse mortgage contracts, but also on those currently in force.
In the course of the litigation, however, the plaintiffs will have to demonstrate that the rule definition provided in HUD's mortgagee letter in December of 2008 resulted in a fundamental change in the application of the non-recourse rule, rather than serving as a clarification of the intention of the rule. To this point, the suit suggests that the new interpretation unfairly punishes surviving spouses in cases where the balance of the loan exceeds the value. In this scenario, a stranger could then purchase the home for at or below the current appraised value, whereas the spouse would be required to pay the full balance of the reverse mortgage to retain the home.
“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 working with AARP Foundation on the lawsuit. “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.”
The suit also points to a second protection in the HECM statute that relates to the "Safeguard to Prevent Displacement of Homeowner." According to the suit, this provision provides that HECM borrowers cannot be displaced from their homes until the HECM is terminated. The definition of borrower in this subsection includes the spouse of a homeowner. The challenge for plaintiffs in this claim will be to challenge what qualifies as termination event of the HECM, such as the death of a sole borrower on the loan contract.
The results of this lawsuit could widely impact the reverse mortgage market requiring changes by HUD, the FHA mortgage insurance fund (i.e. increased insurance payments), and lenders. The most obvious change could be a delineation of the definition of "heir" and "surviving spouse." Essentially, the program could be altered to no longer allow a spouse to be excluded from the HECM as a "non-borrowing spouse." Additionally, heirs could be provided similar opportunities to purchase the home according to the appraised value instead of the full loan balance.