AARP Legal Foundation (ALF) has announced that they will be representing three borrowers against the U.S. Department of Housing & Urban Development (HUD). AARP alleges that HUD changed their reverse mortgage policies do the detriment of surviving spouses and heirs of reverse mortgage borrowers at the end of 2008. Specifically the two issues involved in the suit revolve around the price at which HUD will sell a reverse mortgage home to a surviving spouse as opposed to a "bona-fide third-party transaction" which is a sale to a completely non-related third party and also the displacement of the spouse of a reverse mortgage borrower.
HUD has always stated that the borrower and the borrowers' heirs will never owe more than the property is worth. In other words, the loan is known as a "non-recourse" loan and that the lender and HUD can only look to the property to retire the debt. If the property has decreased in value while the balance of the reverse mortgage has increased to a point where the balance owed on the mortgage is higher than the property's value, then the lender and HUD cannot look to the borrower or the borrowers' heirs to pay additional funds to make up any deficiencies when the property is sold. However, in 2008, HUD added a caveat to this explanation in their Mortgagee Letter 2008-38 and stated that this is true on a bona fide sale to a third party. This meant that a surviving spouse who was not on the original mortgage or family members who wished to keep the property could only purchase the home for the amount owed on the reverse mortgage, even if it was well above the current value, even if a stranger could come along and purchase from HUD at current market value.
HUD issued Mortgagee Letter 2008-38 which is a clarification that completely outlines the terms of the nature of the non-recourse debt, how some people have misconstrued the meaning to be that borrowers can keep their homes for less than they owe on a reverse mortgage and how bone-fide third party sales should be transacted. It refers readers back to 24 CFR 206.27(b) (8) to sum it all up by saying " 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 and is not the intended meaning of the quoted provision. 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 be personally liable for any deficiency resulting from the foreclosure. " AARP attorneys believe this is a change from the promise HUD has made borrowers in the past, not a clarification of their policy.
The second issue against which AARP attorney's will seek relief for their clients against HUD is with regard to the displacement of non-borrowing spouses when a borrower with a reverse mortgage dies or is otherwise forced to permanently leave the home, thus creating a repayment event on the loan. AARP believes that HUD has never afforded spouses of homeowners protection under a non-displacement clause which they believe also protects non-borrowing spouses of homeowners.
These cases are of utmost importance to see how they are litigated and their ultimate outcomes. They could have far-reaching effects on thousands upon thousands of existing reverse mortgages, potential changes in the way HUD treats new applications for homeowners with younger, non-borrowing spouses and the entire reverse mortgage program. One could argue on the first point that families cannot now retain the reverse mortgage properties for more than their current values and so most if not all of these "underwater" properties are going to foreclosure sale anyway. That allowing families to purchase at fair market value may have no fiscal impact on HUD at all. However, many borrowers remove a younger spouse either because they have not reached the minimum age for a reverse mortgage or they do not qualify for the benefits they require at the younger borrower's age. The spouse coming off title must also attend the counseling. If the AARP attorneys are successful in their attempt, HUD would surely have to eliminate all loans done with non-borrowing spouses and all spouses would have to qualify in the future and all benefits would be determined on the younger spouses age, regardless of whether or not the spouse ever even owned any piece of the property.
Cliff Auerswald of All Reverse Mortgage Company may be reached by phone at (888) 801-2762 or e-mail [email protected]
Cliff's family-owned team has more than 100 years of combined experience in mortgage banking, and has been instrumental in educating some of the largest banks on the nuances of the reverse mortgage products, and their benefits to senior homeowners. Because the reverse mortgage is all we do our goal is exceed your expectations in finding you the very best terms, as well as providing a truly no hassle experience and timely close.