AARP Sues HUD Over Reverse Mortgage Program Changes

AARP filed a lawsuit against the Department of Housing and Urban Development (HUD) today for alleged illegal reverse mortgage foreclosure actions. The suit comes following rising complaints from HECM borrowers regarding the issue of non-borrowing spouses.

Three plaintiffs, represented by AARP Foundation Litigation and the Washington, D.C.-based law firm Mehri & Skalet PLLC, allege HUD’s abandonment of long-established federal rules and violation of protections for surviving spouses with reverse mortgages has led to foreclosure of their properties.

Rules made by HUD in 1989 established that a borrower or heirs would never owe more than the home was worth at the time of repayment. In 2008, in its Mortgagee Letter 2008-38, HUD clarified its “non-recourse policy,” stating, “The HECM is a ‘non-recourse loan.’ This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.” The letter further specified that “In any circumstance where a mortgagee agrees to the acceptance of less than the full mortgage balance, such sale of the property by the borrower (or the borrower’s estate) should be an arm’s length transaction.”

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At that time the rule changed to require 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 made it possible for a surviving heir to face a higher price in buying the home back than an unrelated buyer would face. The lawsuit alleges that 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.

“Rather than protecting borrowers, HUD retroactively changed the terms of the loans to make these elderly borrowers’ spouses and heirs pay more to keep their home than an unrelated purchaser would have to pay to purchase the property,” said Steven A. Skalet, of Mehri & Skalet PLLC. “This is shameful and we intend to make HUD honor the representations and promises they made to borrowers when they signed up for these government-insured loans.”

The three plaintiffs were not recognized as “homeowners” because they were not named on the original reverse mortgage documents with their spouses.

View AARP’s statement.

Written by Elizabeth Ecker