Rescinded HUD Guidance Following AARP Lawsuit “Could be Good News For Heirs”

The Chicago Tribune reported Thursday on the lawsuit against the Department of Housing and Urban Development by AARP regarding several reverse mortgage foreclosures, and the recently rescinded guidance from HUD that does away with a rule “that was causing grief for some homeowners and heirs.”

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

HUD’s most recent guidance rescinded Mortgagee Letter 2008-38, in essence reversing on of its former reverse mortgage policies. “HUD, perhaps realizing that the increased attention garnered by reports of widespread foreclosures on seniors was bad public relations,” the Tribune writes, “proactively rescinded the 2008 letter, heading off foreclosure proceedings against the plaintiffs, and by extension, thousands of others.” AARP has said it is moving forward with the lawsuit.

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“The reversal of the 2008 rule only addresses part of the original lawsuit,” the article states, “but the AARP Foundation’s legal team has reason for optimism. 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 mortgagee’s remedy is limited to foreclosure.”

The Tribune sought a comment from AARP legal counsel Jean Constantine-Davis, who said she believes the recent action from HUD is a good sign. “I don’t know what steps HUD is going to take from here,” she told the Tribune. “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.”

Read the Chicago Tribune article.

Written by Elizabeth Ecker

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  • Some have concluded that as to HECMs, by issuing Mortgagee Letter 2011-16 HUD is defining non-recourse to mean that the most heirs must pay to retain the inherited home which is also collateral for a HECM is the lower of 1) the value of the home or 2) the balance due on the HECM. BUT is that true?

    First, ML 2011-16 not only potentially impacts heirs but borrowers as well. Second, ML 2011-16 never states what the current position of HUD is as to non-recourse on HECMs. All the ML states is that HUD will provide its guidance later. In fact ML 2011-16 instructs us to use the same documents it used in creating ML 2008-38 to determine what non-recourse means — that is until HUD tells us later what it means by non-recourse when specifically applied to HECMs. That is less clear than Los Angeles skies on its smoggiest days of the year or the Gulf waters around the Deepwater Horizon oil rig just days after the first explosion which helped to create and expand the BP oil spill disaster in the Gulf of Mexico.

    While ML 2011-16 is a good first step, it is also only a first step. Until HUD renders the guidance they promise in ML 2011-16 we are in little more than a thick fog with no clarity. It is quite unnerving to read how many in the industry see this as a stupendous victory. Even if HUD renders the guidance the vast majority of us hope they will, the victory is de minimis at best and more of a small morale boost than a true moral victory.

    First, how many borrowers pay off their HECM while living in their home? Most must sell the home due to failing to meet the one year of continuous residency requirement. How many of those who might want to keep the home have a way to pay off the HECM and keep the home? If the home is underwater, even if all they have to pay is the appraised value of the home (or even just 95% of that value), most HECM borrowers could never qualify for a forward loan of that magnitude with such a low LTV.

    Second, the vast majority of heirs do not want the home. They want its remaining cash equity, if any.

    While we all rejoice for the few ML 2011-16 may ultimately help, even in the very best scenario, it is only a very small minority of borrowers and heirs who will ultimately benefit; first to benefit, the balance due must exceed the value of the home and second, they must want to keep the home. The AARP lawsuit without ML 2008-38 impacts every single borrower who has or might want to have a surviving spouse who is not a borrower. Of course that also means, we need to know who is considered a spouse and many other interesting factors as Mr. Veale points out in his recent article.

    • The proof is in the pudding…

      HECM lenders are being faced TODAY with decisions re what to collect as repayment from heirs who have inherited a home that is ‘underwater’ to a reverse mortgage. Anecdotal evidence from a select few indicates they are seeking collection of the lesser of mortgage balance or current market value. All we need is evidence that HUD is honoring any resulting claims on the HECM insurance fund and we’ll have out answer.

      Does anyone know?

      • REVGUYJIM,

        It seems you are not aware of how the process works. Are lenders ever involved in that process? While the servicers of some lenders might be on some very rare occasions, historically if termination took place when the balance due was greater than the value of the home, HUD normally owned the loan through assignment and its contracted servicer actually dealt with the issue.

        Why is it that you think lenders are involved in this process? Is it that you know of lenders who stockpile HECMs in their portfolios and do not assign such loans to HUD at 98% of their maximum claim amounts? If that is the case, very few of us know about it.

        To know what is happening, HUD would have to disclose that information. The only thing wrong with your comment is that the proof is in the HUD pudding not the lender’s.

  • The forgiveness (cancellation or discharge) of indebtedness for heirs can be quite costly from an income tax standpoint. In fact heirs may want to disclaim their interests in the home. HECM borrowers should plan their estates so that heirs have this right.

    The plan can be achieved through trusts and other means but it may require having more than one trust. Borrowers should seek the advice of tax professionals who have experience in separating estates so that “tax toxic” assets can be structured in a manner that they can be disclaimed without any impact to the rest of the estate assets. Not only is federal law involved but there can be laws of more than one state involved as well.

    Reverse mortgages are non-recourse debts and unless there is no taxable disposition related to the underlying collateral (the home) such as any sale of the interests previously held by the decedent, foreclosure, trustee sale, etc. the provisions of Internal Revenue Code (“IRC”) Sections 61(a)(12) and 108 will not apply but IRC Regulation 1.1001-2 will.

    So while not everything is rosy, income tax from the amount of any debt forgiven is still cheaper than paying off the amount forgiven. But the tax law is structured so that with proper planning, any tax from the amount forgiven can be avoided entirely.

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