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.”


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

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  • Some in the industry have been indicating this suit was coming for over two years.

    Since the case involves surviving spouses only, it would seem to have limited application to other persons unless the court broadened its ruling. What is not presented is if the case will be presented before a judge alone or if there will be a jury. No doubt that could have an impact on the outcome of the case.

    The mortgagee letter states in part:

    “Specifically, HUD Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, provides in Paragraph 1-3C, that:

    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.

    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. (For additional guidance please reference 24 CFR 206.27(b) (8)).”

    Despite the reference by HUD, all 24 CFR 206.27(b)(8) states is: “The mortgagor shall have no personal liability for payment of the mortgage balance. The mortgagee shall enforce the debt only through sale of the property. The mortgagee shall not be permitted to obtain a deficiency judgment against the mortgagor if the mortgage is foreclosed.”

    However, 12 USC 1715z-20(j) does in fact state:

    “Safeguard to prevent displacement of homeowner

    The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term “homeowner” includes the spouse of a homeowner. Section 1647(b) of title 15) and any implementing regulations issued by the Board of Governors of the Federal Reserve System shall not apply to a mortgage insured under this section.”

    Who will win????

  • On March 25, 2009, RMD published a column referring to an article by Atare Agbamu calling for the revocation of Mortgagee Letter (“ML”) 2008-38. Atare had been furious about this issue long before the issuance of ML 2008-38 in December 2008. He strongly advocated the position that HUD had condoned the use of the term nonrecourse to mean a senior never had to pay more than the value of the home, period.

    HUD tried to explain their position in the Mortgagee Letter by referencing the regulations but the regulations did not say what HUD wanted them to say. It stands as one of the strangest Mortgagee Letters issued to date. To most of us it seemed to be a change in policy yet there was nothing in any of the official documents stating the nonrecourse policy of HUD the way it was portrayed by the industry. What was odd, in over 19 years, HUD had never spoken out about our misunderstanding if that is what it was.

    If you would like to understand the basic issues, I highly recommend reading the blogs Atare has written on the subject. You will can find another RMD story on May 20, 2009 or simply go to Google and search for Agbamu 2008-38.

    The only surprise Atare expresses about this lawsuit is that it did not come sooner.

  • As a HECM counselor I clearly explain to the non-borrowing spouse that they may, in fact, need to move out of the house if the borrower dies; That if they want to keep the house after the borrower dies they will need to pay the full loan balance and the non-recourse limit does not apply.
    The fact of the matter is that the reverse mortgage loan is not in the non-borrowing spouse’s name and they are perfectly aware of this fact after the counseling session is complete.
    Wether or not is is ‘right’ to make the non-borrowing spouse move out of the home they’ve lived in for years, is another question, but they are the ones who are making the decision to obtain the reverse mortgage in the first place.

    • Justin,

      The issue is not about doing what HUD dictates but rather how this suit will impact the way you counsel? This is perhaps the most significant challenge to how HUD is running the program yet.

      While the suit should not change counseling basics, it probably should create an addendum to advise borrowers that there is a challenge on two fronts, the POSSIBLE revocation of the recourse portion of Mortgagee Letter 2008-38 pertaining to retaining ownership of the home at loan termination and a POSSIBLE different twist and interpretation of the spousal displacement issue (found in the law as noted above) as presented by the attorneys for the plaintiffs in the case reported in the AARP press release.

      In the Moore case, the wife probably was not even married to the borrower at the time the HECM was originated. So when was Mrs. Moore counseled? Not all spouses of HECM borrowers have had counseling. Remember life still goes on beyond counseling. A decision could benefit spouses who were not even married to HECM borrowers at the time of origination. This case could result in all borrowers whether married having to be counseled about spousal issues in case of future marriage.

      This is a very fascinating case with far reaching implications.

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