Pullback of HUD reverse mortgage rule to benefit spouses

April 29, 2011

The Department of Housing and Urban Development has thrown out a rule it put in effect in 2008 for reverse mortgages, which was causing grief for some homeowners and their heirs.

The rule reversal came about in response to litigation by the AARP Foundation, which sued HUD on behalf of three spouses of deceased reverse-mortgage borrowers. The spouses were put in danger of foreclosure because of the rule.

Reverse mortgages are loans available to seniors age 62 or older who have equity in their homes. The loan typically makes cash or a line of credit available to the homeowner based on the equity in their property and their age. Seniors have been warming to reverse mortgages because the obligation to repay the loan is deferred until they die, sell the home or move out. Before the 2008 rule change, the practice stipulated that spouses, who may have been removed from the title so the elder partner could qualify for the reverse mortgage, could purchase the home for 95 percent of the property’s true market value.

But at the close of 2008, which Jean Constantine-Davis, a senior attorney with the AARP Foundation, characterized as “uniquely bad timing because the real estate market had plummeted and was continuing to plummet,” HUD issued a letter that changed the game. In it, policy was amended to require that an heir pay the full mortgage balance to remain in the home, even if the balance exceeded the value of the property.

As Constantine-Davis noted, “It put most of the [reverse] mortgages underwater immediately.”

Last month, the AARP Foundation filed a formal challenge to the rule. Of the many reasons behind the suit, Constantine-Davis highlights the lack of due process behind HUD’s sudden reversal in policy. “They changed a rule via letter instead of following proper administrative procedures and allowing interested parties to comment,” she said.

This month, HUD, perhaps realizing that the increased attention garnered by reports of widespread foreclosures on seniors was bad public relations, rescinded the 2008 letter, heading off foreclosure proceedings against the plaintiffs, and by extension, thousands of others.

Constantine-Davis asserted that the AARP will do its part to help HUD spread the word. “These foreclosures should be stopped,” she said. “HUD issued a letter to the servicers, and the onus is on them to communicate with the homeowners. We’re still working with HUD to ensure the word gets out. There’s no question that people who are being foreclosed on now, and about to be evicted, will be helped by this.”

The reversal of the 2008 rule addresses only part of the original lawsuit, but the AARP Foundation’s legal team is optimistic. The other half of the equation is a Home Equity Conversion Mortgage program statute that specifies that if the borrower (or estate) does not pay the balance when due, the lender’s remedy is limited to foreclosure.

However, in light of HUD’s capitulation, Constantine-Davis said momentum is on the borrowers’ side. “I don’t know what steps HUD is going to take from here,” she said. “They have filed a motion to dismiss the case. HUD may issue a new rule altogether. We would then have to look at that rule to see if it offers enough protection for people. This could be good news for heirs.”

HUD has indicated that previous rule changes were intended to make certain that all sales of properties were legitimate, market-driven sales and based on the each property’s real value and that new guidance would be issued on this issue.

Ilyce Glink is an author and nationally syndicated columnist. If you have questions, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or visit thinkglink.com.

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