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If there was a plan behind HUD’s initial response to the non-borrowing spouses’ (NBS) lawsuit in March 2011, it could be described as contain and dismiss. In other words, contain aspects of the case that can be contained and move to dismiss uncontainable parts.
The non-recourse part, which exposed the subsection-j problem, was containable so HUD moved to revoke Mortgagee Letter 2008-38 within a month of the lawsuit (see part 4). For the volatile subsection-j (or failure-to-protect) part, HUD pushed for dismissal.
Revocation of ML-08-38 neutralized the first three counts of a four-count plaintiffs’ complaint, making them “moot” as lawyers would say.
Among other points in court papers, HUD said plaintiffs were not in danger of foreclosure because it had asked for (and had received) assurances from lenders (or mortgagees) that they would not foreclose on plaintiffs during the life of the lawsuit. So there was no immediate risk of harm to plaintiffs as they had claimed.
Although the recall of the mortgagee letter was an admission by HUD that its non-recourse policy “clarification” was a disaster for borrowers and lenders, it did not address count four, the failure-to-protect aspect of the case.
To dispatch count four, HUD argued that plaintiffs lacked “standing” (or the right to bring a lawsuit against HUD) and asked the court to dismiss the case. It said its interpretation of subsection-j was proper and necessary to save the HECM program from actuarial (and financial) damage. It conjured the prospect of what we would call Hugh-Hefner scenario: a 75-year-old marrying a 25-year-old spouse. A very young spouse in a reverse mortgage means the loan will have a very long loan life and the loan balance could exceed the home’s value at loan payoff, leading to financial losses for lenders and for HUD.
Contain and dismiss was a clever litigation plan, and it worked. The court bought HUD’s story, and dismissed the lawsuit for “lack of standing.” Even when the non-borrowing spouses went to the court again and asked the judge to reconsider their case, insisting that they had standing, the court said “no.”
HUD won the first round of the court fight. Next, we look at the non-borrowing spouses’ fight on appeal to the US Circuit Court.
Atare Agbamu is author of Think Reverse! With more than 200 articles on reverse mortgages in circulation since 2002, Agbamu wrote Forward on Reverse, the first regular monthly column on reverse mortgages in America’s financial media from 2002 to 2011. Through his advisory, ThinkReverse LLC, Agbamu advises financial professionals, institutions, and regulators across the country.