Update: HUD Prevails in AARP Lawsuit—But Issues Remain

Last Friday, HUD won the dismissal, without prejudice, of the case AARP filed against it on behalf of non-borrower HECM loan widowed spouses facing foreclosure. A description of the Court’s decision, and an initial analysis, was prepared by NRMLA’s counsel, Weiner Brodsky Sidman Kider PC:

This past Friday, July 15, HUD won an important victory in the lawsuit the AARP had filed against it, on behalf of several individual HECM loan borrowers, in the United States District Court for the District of Columbia (Bennett v Donovan, Civil Action No. 11-0498 (ESH)). In its Memorandum Opinion, the Court dismissed the one remaining part of the lawsuit not previously withdrawn as “moot” because the Court agreed with HUD that the individual HECM loan borrowers who filed the complaint against HUD lacked “standing” to bring it.

However, as explained more fully, the Court did not rule, one way or the other, as to whether HUD’s interpretation of the HECM statute was permissible or correct, as, indeed, it could not, since it determined that it did not have jurisdiction to hear this complaint. Second, and in part as of the result of this first point, the victory for HUD (and for lenders) may be temporary, as HUD’s interpretation of the statute has yet to be addressed by the courts.

Original Article:

AARP Legal foundation announced that they will be representing three borrowers against the Department of Housing and Urban Development (HUD). AARP alleges that HUD changed their reverse mortgage policies to 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 reverse mortgage 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 2008-38 Mortgagee Letter 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 the 2008-38 Mortgagee Letter 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 spouse’s age, regardless of whether or not the spouse ever even owned any piece of the property.

Also See: Reverse Mortgages: What Happens After Death

Message from NMRLA: AARP Files Suit Against HUD Over Non-Recourse

AARP filed suit against the U.S. Department of Housing and Development last week over a policy clarification published in 2008 that pertains to the treatment of “non-recourse” when a reverse mortgage is paid off. For many years, the reverse mortgage industry, even officials at the Federal Housing Administration, stressed that one of the vital consumer protections contained in the HECM program is that borrowers or heirs will never be responsible for owing more than the value of the home when the reverse mortgage is paid back.

In Mortgagee Letter 2008-38, HUD essentially said that non-recourse only applies when the property is sold. If a surviving spouse who was not named on the reverse mortgage wanted to keep the home, he or she would have to pay the full balance, even if the loan amount exceeded the appraised value of the home. “Often the surviving spouse or other heir cannot pay off the balance in full, especially where the property is “underwater,” the suit says. “In such cases, elderly widows and widowers are being forced from their homes or required to pay amounts that are greater than was promised when the loan was taken out.”

According to AARP, HUD went a step further by changing its rule that allowed borrowers or heirs to sell the property to anyone for 95% to 100% of the appraised value to satisfy the loan. With the publication of ML 2008-38, HUD said the property sale must be an “arm’s length transaction” to qualify for the lower payoff amount. “The effect of this is to allow a stranger (indeed anyone in the world) to purchase the property for 95% of its fair market value but to require spouses or heirs to repay the full mortgage balance,” the suit adds. “By this change, HUD abrogated existing mortgage contracts between borrowers and lenders, which allow the property to be sold to anyone for the lesser of the balance or 95% of the appraised value.

AARP is suing on behalf of three spouses who are experiencing these issues. To read the suit in its entirety, please click HERE

04/05/2011 – HUD Reimposes Original Non-Recourse Policy

Yesterday, the U.S. Department of Housing and Urban Development published Mortgagee Letter 2011-16: Rescission of Mortgagee Letter 2008-38, Borrower’s Recourse for Repayment of HECM Debt.

In essence, HUD is reimposing its original non-recourse policy, which states that borrowers or heirs will never be responsible for owing more than the value of the home when the reverse mortgage is paid back.

To view a copy of the mortgagee letter, please click HERE

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By Michael G. Branson – Add me to your circles

Tags: AARP Reverse Mortgage Lawsuit, HUD Reverse Mortgage Lawsuit, Non-Borrowing Spouse, Non-Recourse