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AARP sues U.S. housing department over reverse-mortgage policy

AARP, the largest advocacy group in the U.S. for retired persons, sued on Tuesday the Department of Housing and Urban Development for promoting policy changes that led to the foreclosure of seniors’ homes.

The lawsuit was filed on behalf of three surviving spouses of reverse-mortgage borrowers, who allege that HUD “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,” according to an AARP press statement. The elderly plaintiffs, from Indiana, New York and Maryland, are being represented by the AARP Foundation Litigation and the D.C.-based law firm Mehri & Skalet, PLLC.

At the center of the case is the principle of a reverse mortgage – a loan that allows homeowners over 62 to convert their home equity into cash, rather than making monthly mortgage payments. In the reverse mortgage, the loan only becomes due and payable if the homeowner dies, moves or decides to sell the home. The plaintiffs’ lawyers are claiming HUD had a policy in place that protected spouses but in 2008 the department changed its interpretation of that policy and began enforcing a rule that spouses who wanted to retain their homes were required to repay the full balance, even if the balance was more than what the home was worth.

From AARP:

The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are now “underwater” as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against.

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.

… One protection is that no borrower or his heirs can be liable for more than the value of the property. The lawsuit notes that HUD’s Handbook, in effect since 1994, as well as other information published by HUD on its website and elsewhere, affirmed this policy. Then, in December, 2008, HUD abandoned that interpretation and stated for the first time that spouses or heirs who wanted to retain the home were required to repay the full balance, even if it exceeded the property’s current value. Strangely, HUD’s current rule is that a stranger can purchase the property for its current appraised value, but a surviving spouse cannot.

The three plaintiffs, all of modest means, were adversely affected by HUD’s illegal 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. And they will suffer “substantial hardship” if forced to repay the original higher mortgage cost in order to retain their home, the lawsuit states.

About 23 percent of all mortgaged homes are underwater, according to housing data firm CoreLogic.

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