A lawsuit filed by AARP against the Department of Housing and Urban Development for changes made to its reverse mortgage program is already having an impact.  On Wednesday, the agency published Mortgagee Letter 2011-16 to rescind guidance issued in 2008 to clarify its non-recourse policy on reverse mortgages insured by the Federal Housing Administration.

“Since there has been some uncertainty regarding the guidance in that ML, HUD is rescinding ML 2008-38, effective as of the date of this ML,” said Robert Ryan, Acting Assistant Secretary for the Federal Housing Administration. The Mortgagee Letter was dated April 5.

Mortgagee Letter 2008-38 stated 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.” The letter further specified that “In any circumstance where a mortgagee agrees to the acceptance of less than the full mortgage balance, such sale of the property by the borrower (or the borrower’s estate) should be an arm’s length transaction.”

In the lawsuit against HUD, AARP alleges that the agency abandoned long-established federal rules and violated protections for surviving spouses when it published the guidance.

“This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums,” said AARP in a statement.

According to HUD, new guidance on topics related to the regulations at 24 CFR Part 206 and Handbook 4235.1 will be issued in the future. “In the interim, mortgagees should refer to the regulations at 24 CFR Part 206 and the provisions in Handbook 4235.1 for guidance,” said Ryan.

AARP had not respond to RMD’s request for comment at press time.

View a copy of the Mortgagee Letter here.