Three surviving spouses of reverse mortgage borrowers—Delores J. Moore of Covington, Ind.; Leila Joseph of Brooklyn, N.Y. and Robert Bennett of Annapolis, Md.—have filed a lawsuit against the U.S. Department of Housing & Urban Development (HUD), alleging that the agency had abandoned long-established federal rules and violated protections for surviving spouses, with the result that the three individuals are now facing imminent foreclosure and eviction from their homes. The plaintiffs are represented by AARP Foundation Litigation (AFL) and the Washington, D.C.-based law firm of Mehri & Skalet PLLC. HUD Secretary Shaun Donovan is listed as the defendant in the lawsuit.
The lawsuit, filed in U.S. District Court for the District of Columbia, seeks an injunction prohibiting HUD from abandoning long-standing rules and from illegally foreclosing on surviving spouses. These arbitrary changes allow lenders to initiate foreclosure and eviction actions against the plaintiffs. The lawsuit alleges that, as a result, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property.
The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are classified as “underwater” as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against. Reverse mortgages are insured under the Home Equity Conversion Mortgage (HECM) program, and because of the complexity of the program and because it is specifically tailored to meet the needs of those 62 and older, Congress included special protections for HECM borrowers.
"AARP has sued HUD over reverse mortgage foreclosures enabled by Mortgagee Letter 2008-38. In a series of articles beginning in February 2009: “Grandma Rita’s Heirs and the 20-year ‘Mistake’”(The Reverse Review), and “An Assault on Fairness: Quash Mortgagee Letter 2008-38, Part I and Part II, I challenged HUD’s revised HECM non-recourse policy in Mortgagee Letter 2008-38 and urged HUD to rescind it," said Atare E. Agbamu from Think Reverse! "HUD did not listen. The suit AARP filed vindicates my position."
HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir—including a surviving spouse who was not named on the mortgage—must pay the full mortgage balance to keep the home, even it if exceeds the value of the property. 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.
“HUD has inexplicably turned existing reverse mortgage policies upside down,” said Jean Constantine-Davis, a senior attorney with AFL, in discussing HUD’s actions. “These are older individuals with limited means who have been blindsided by arbitrary, retroactive decision making.”
"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 bona-fide third-party sales should be transacted," said Cliff Auerswald from All Reverse Mortgage Company. "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 three plaintiffs were adversely affected by HUD’s actions. Under HUD’s rules, they do not qualify as “homeowners” because they were not listed on the original reverse mortgage documents with their spouses. As the lawsuit states, they will suffer “substantial hardship” if forced to repay the original higher mortgage cost in order to retain their home.
"AARP attorney's will also seek relief for their clients against HUD 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," said Auerswald. "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."
Plaintiff Moore, age 79, married her husband late in life and was never added to the deed to the home or the HECM mortgage. She is defending against a foreclosure action in Fountain County, Indiana Circuit Court. Plaintiff Joseph, age 77, was removed from the deed to the property when her husband, suffering from dementia at the time, entered into the reverse mortgage. Mrs. Joseph is defending a foreclosure action in the Supreme Court of Kings County, New York. Plaintiff Bennett, age 69, had jointly owned the home with his wife since 1981. Unbeknownst to him, he was removed from the deed when the HECM was executed. His wife, who was seriously ill at the time, died the following month. Mr. Bennett faces a foreclosure action in Circuit Court in Anne Arundel County, Maryland.
"I applaud AARP for taking on HUD on behalf America’s voiceless seniors who are using HECM to supplement their retirement income," said Agbamu. "Let justice be done for America’s seniors!"