AARP’s HECM Solution Would Produce an “Obviously Absurd Result”

In the Department of Housing and Urban Development’s most recent reply in support of HUD’s motion to dismiss a lawsuit filed by AARP against HUD, the department says it will not assume losses on an unknown number of loans for indefinite periods of time. Among other arguments, it says it does not have authority to alter contracts between lenders and borrowers, and that AARP’s suggestion to open the repayment obligation to any HECM successors would lead to an “absurd” result.

The reply document does not address the issue in the lawsuit regarding HUD’s non-recourse policy, over which it rescinded guidance earlier this year, but has yet to issue new guidance.

The response follows a decision from AARP to proceed in the lawsuit against HUD, in which three plaintiffs allege they face unjust foreclosures as a result of HUD policy regarding reverse mortgages. AARP has urged HUD to allow spouses of reverse mortgage borrowers, even those who are not on the home title and are not named in the reverse mortgage, to assume the loans once a borrower has passed away or has moved out of the home. In a footnote to HUD’s memorandum in support of its motion to dismiss the suit, HUD says while lenders are generally willing to accede to HUD’s requests to halt foreclosures because HUD, as in insurer of the loans, pays currently accruing interest on the loan in default, the department is not willing to assume all losses on loans similar to the ones taken by the plaintiffs.

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“It is one thing for HUD to voluntarily assume losses associated with delaying foreclosures for three Plaintiffs for a short period so that the Parties have an opportunity to fully explain the issues before the Court needs to rule,” HUD writes in the document. “It is quite another for HUD to assume losses on an unknown number of loans for indefinite periods of time (that could be decades).”

Further, HUD writes, “Plaintiffs can only seek to remedy their own injuries; they cannot raise the rights of third parties, particularly unidentified, and unidentifiable, future borrowersand/or their spouses.”

In response to the suggestion by AARP that successors of borrowers be entitled to assume reverse mortgage loans even when they are not on the title and not on the mortgage, HUD presents a hypothetical to demonstrate what it calls an absurd result.

“Plaintiffs’ suggestion that the repayment obligation should be deferred for the lifetime of any successors and assigns of the borrower would produce an obviously absurd result,” HUD writes. “What if a homeowner’s successor was his five-year-old granddaughter? What if his assign was a charitable organization? Under Plaintiffs’ theory HECM mortgages might never become payable.”

Written by Elizabeth Ecker

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  • If the principal issue in this case had been the non-recourse nature of a HECM, it would have included heirs other than just non-borrowing spouses.  The principal issue in this case is not nor has it ever been the non-recourse nature of a HECM.  The non-recourse issue simply emphasized the punitive treatment of surviving, non-borrowing spouses. 
     
    Despite what HUD states, the spousal displacement provision in question [12 USC 1715z-20(j)] has nothing to do with multiple loans from the same HECM, HECMs extending for decades, non-spousal heirs, or charities.  That is all a sideshow and nothing more than distractions from the real issue of displacing surviving non-borrowing spouses. 
     
    HUD chose to use its own interpretation of how the provision should read over the plain language of the statute, excusing it by declaring that the provision was poorly drafted (and similar excuses).  It could have solved the situation by having Congress amend the provision to read exactly the way HUD believed it should.  But after two decades HUD failed to take that action. 
     
    While the provision is nice and well meaning it has the potential to harm the program; however, HUD should have taken action to get the provision amended and still has not.  While I agree with HUD that the plain language of the statute would potentially make the program unworkable, HUD failed to act appropriately. 

  • I’ve been working in the RM business 10 years, and none of my/our borrowers (or their spouses in the case of a very rare non-borrowing spouse) has a misunderstanding about when the loan becomes due.  This has always been a central topic during counseling too.  But HUD needs to ensure that the loan documents accurately reflect the intended terms of the loan – this is basic stuff – especially for the benefit of the heirs.  Anything short of that provides an opportunity for a lawsuit such as this (I’m stating the obvious).

  • I’ve been working in the RM business 10 years, and none of my/our borrowers (or their spouses in the case of a very rare non-borrowing spouse) has a misunderstanding about when the loan becomes due.  This has always been a central topic during counseling too.  But HUD needs to ensure that the loan documents accurately reflect the intended terms of the loan – this is basic stuff – especially for the benefit of the heirs.  Anything short of that provides an opportunity for a lawsuit such as this (I’m stating the obvious).

  • 2545,
     
    Don’t jump off the bridge quite yet.  A few days ago, we were told the world was ending also.  Don’t be like that preacher who now finds yet another date when the world will end.
     
    Why would the loss end the program?  Without admitting any wrong, HUD could have Congress change the provision just as it did under HERA with the LTC provision.  Then it would be up to the courts to look at the intent of Congress and look at the expectation of borrowers.
     
    As to the size of any loss one must determine how many terminations ended up displacing a spouse.  Of course if the loan was, otherwise, in default at the time of termination, there is no displacement as a result of the termination; displacement was a result of default, not the death of the borrowing spouse.  A HECM can be in default for many reasons including poor maintenance.  So how many HECM terminations are we dealing with 20%, 10%, or 5%?
     
    Then the question becomes a matter of individual compensation.  How would it be measured?  Was the home underwater so that the issue is a matter of rent?  Could the award be offset by a loss in value because of poor maintenance or total amounts due as a result of defaults in taxes and insurance?
     
    Finally would be punitive damages be permitted?  If so, how would they be measured?
     
    While the HECM program is at the mercy of Congress, there is no law which states that the HECM program must end as a result of any loss which HUD is responsible for.  Any loss which will result is not a problem with the program it is due to the conduct of the legal staff at HUD, period.
     

    • A few days ago (in my opinion) there was not valid proof or information to support “the rapture”.  I am not jumping off the bridge yet.  Although, when I look off the edge it gives me a queasy feeling in my stomach. Just as it would if AARP continues and happens to win this law suit.  I do not believe that this is a matter of loss but rather future loss.  Why would HUD/lenders/investors continue the program if they don’t know when they will be paid.  If HUD has not yet made this change why would they if they lose the law suit.  Just a close down of the program.  In the end, our program would not be a huge loss to HUD.  We are and will always be a small niche program to HUD.

      • 2545,
         
         
        It seems you have concluded that the loss is a cost of the program.  Why?  It is a loss due to the legal position of the HUD legal staff not an operational program loss.  Of course that is a legal question which only someone like Mr. James Brodsky, NRMLA’s lead legal counsel and a former HUD legal executive, should be answering.  But as a CPA, it seems to be a cost classifiable as that of administrative costs of HUD not allocable to the program.
         
        But let us say it is a program cost.  Then one would have to split the losses between the GI and MMI Funds with most of it falling within the GI Fund, meaning it would have NO meaningful impact to the current program.  To minimize the impact to the current program, HUD needs to act now to get the law amended before it has a potential for huge losses which must be absorbed within the MMI Fund.  Congress needs to decide if it wants to keep the spousal displacement rule and FUND IT or amend it to read as HUD believes appropriate.

        I have a simple suggestion: Stop looking over the cliff. That is exactly what that preacher with an extremely distorted view of Biblical prophecy did for too long and now he is falling off that cliff. His current and very personal view of prophecy probably resulted from becoming excessively queasy and disoriented from looking down that cliff for too long. Don’t allow yourself to get into that position.
        Go out and originate HECMs except this time explain to your prospects and applicants what impact the AARP case could have at termination.  You may want to talk to your list of borrowers as well.  It is good PR no matter what.

      • Mr. Veale,
        You seem to have a positive outlook and know the outcome if AARP wins this suit.  I will step away from the edge because I don’t like the feeling it gives me in my stomach.  I just hope if this does play out and runs its course your conclusions are correct.  I certainly do not want to lose my livelihood and career to this unfortunate suit.

      • 2545,

        Believe me I am just as concerned about things the way you are.  I have no idea how certain politicians will use this case for their own purposes.  All we can do is point to facts as we know them.  In the right hands any outcome could have a terrrible ending for the program or help us find more ways to help senior homeowners.

        Then there is the CFPB.  None of us know how we will fare with this new Bureau. 

        I ran the income tax department at the nation’s ninth largest steel company when it was in the Fortune 250 and was a senior administrator in the tax department of a Forbes 100 and the second largest engineering firm in the world.  Both surprised me when they went up and when they came down.

        All we can do is look at and hold onto the facts.  How things turn out is anyone’s guess.  I do not believe it is the intention of AARP to harm the HECM program.  They just want to see it work as designed.  Sometimes that can have an unpleasant outcome; as we say all too frequently: “There are always unintended consequences even with the best of intentions.”  It is far too early to tell where this will end up.

        At the edge of a cliff there are many ways to look.  However, it is still the edge of a cliff.  The best policy is to get your look and move back just as quickly as possible.

  • While there may be creative ways internally within HUD to allocate losses that they could have by extending the timeline that the loan is outstanding, I think that is only part of the concern.

    With having unpredictable prepayment speeds and behavior, the secondary market for GNMA securities would all but dry up, in my opinion.  Institutions that are investing in GNMA securities are basing their investment on an anticipated rate of return and prepayment speed.  If you are introducing outside forces (such as an unknown length of time before prepayment due to a spouse – who could be significantly younger – living in the home for years beyond the borrower’s death), it will absolutely cause these investors to look for alternative investments.

    • ReverseGuy and Mr. Jackson,
       
      Your opinions are very disappointing.  Our job is to understand HECMs, their accounting, and how the product relates to the secondary market.  It is to speak from that knowledge so as not to spread unwarranted fear into colleagues or the public.  So let us go back to very, very basic HECM rules and relate those rules to the ownership of HECMs and secondary markets.
       
      First, let us look at fixed rate HECMs.  They are closed end mortgages which means all available proceeds must be taken at closing.  Few if any borrowers make payments on these HECMs.  When the balance due reaches 98% of the original maximum claim amount, the note must be assigned (sold) to HUD.  If anything, the spousal displacement rule means a small percentage more of fixed rate HECMs will reach assignment.  It does not mean fewer fixed rate HECMs will reach assignment.  Where is the unpredictability with that?  It is with HUD on how many years it will be required to carry fixed rate HECMs, period.   
       
      As to adjustable rate HECMs, first we go back to assignment.  The percentage which reach assignment will not go down due to the spousal displacement rule.  The expected average length of a HECM in the secondary market per Jeff Lewis is five years.  Do either of you really expect that to shrink?  If it could, that would be true unpredictability.
       
      HUD can provide information about the percentage of adjustable rate HECMs which terminate where the house is inherited by a non-borrowing spouse who would be displaced by termination if it were not for the spousal displacement rule.  Such statistics do not add unpredictability especially from a fairly large number of terminations which is growing every month.  One thing that the spouse displacement rule does not permit is any further borrowing or payments to the non-borrowing spouse.  It only provides that the non-borrowing spouse cannot be displaced.  That is one of the clearest indicators that this provision applies to the non‑borrowing spouse.  That also means the balance due as of the date of the death of the borrower cannot grow due to further principal payouts.
       
      What creative accounting rules are either of you referencing?  This is not Enron.  These are standard HUD accounting rules.  If the loss relates to a particular HECM, it belongs in the Fund related to the year of its endorsement.  All HECMs endorsed before October 1, 2008 belong in the GI Fund.  Those endorsed on or after that date, the MMI Fund.  The only issue is, does a bad decision of the legal staff relate to operations or the administrative costs which are not allocated to specific programs.  I am not an expert on HUD accounting rules and do not know the standards by which this is measured.  Mr. James Brodsky might.  How is any of that creative?
       
      I have only been in this industry six years.  From what both of you have said, you have both been in the industry far longer.  According to you two, there is something very, very significant both in HUD accounting and the impact of this rule as to its impact on the predictably of HECMs in the eyes of the secondary market which I am missing so please point it out.  
       
      Today it was announced that Mark Haines of CNBC passed away.  His strongest trait was he did not suffer fools gladly.  He frowned on those who rendered a less than informed opinion when the interviewee obviously should have known better.  He particularly disdained those who unnecessarily spread fear.  In that vein, this comment was not written gladly. 

  • James,

    I take back my usage of the term “creative” in regards to the HUD accounting.  I did not mean to insinuate that HUD was not properly utilizing accepted accounting methods.

    However, I think you may have missed my point.  In your response, you mention that the the loan must be assigned to HUD, so it may just result in a few more loans being assigned to HUD than before – rather than paying off prior to that point due to the death or move out by a borrower.

    From my understanding, loans are not required to be assigned to HUD when they reach 98% of the maximum claim amount – it is an investor option.  On top of that, if the loan is in any sort of default  for taxes, insurance, repairs, etc HUD does not accept those. 

    Where does that leave a GNMA issuer when they can’t assign a loan to HUD and there is a non-borrowing spouse in the picture?  Their obligation to service that loan could go on for years.  Jeff Lewis’s information regarding average life of loan being five years is based upon the senior population mortality and mobility rates (and probably historical industry performance).  What happens to that five year average life of loan if a senior borrower marries a 30 year old, and that 30 year old remained in the home for another 35-40 years after the senior borrower’s death or move out from the home to an assisted living facility?  I understand that it is an extreme example – but one that bears consideration in the context of this issue.

    • ReverseGuy,
       
      I am glad to hear that the inane discussion about creative accounting at HUD has ceased.  To be clear it is not entirely impossible that HUD employs some type of creative accounting; before government take over Fannie Mae did for the sake of bonuses.  HOWEVER, it is extremely unlikely one would find such accounting nonsense at HUD.  Call me a naïve CPA but knowing several HUD employees, I only have the greatest respect for their ethical standards.
       
      Now we will move on to a primer on HMBSs.  First, a HMBS is owned by a group of buyers.  No one buyer decides what will be done with any one HECM.  Such decisions are usually made by the manager of the HMBS.  There is no question that such managers will assign each HECM to HUD at the time each one becomes eligible.  In fact it is Ginnie Mae that handles this.  So I do not get the point about a HMBS holding a HECM past assignment. 
       
      Now we come to losses due to defaults, etc.  Defaults are not the responsibility of the HMBS or its owners.  This is part of the contingent liabilities of the HMBS issuer.
       
      As to your statements regarding the comments of Mr. Jeff Lewis, it seems you know more about them than me; however, I was in the room when he stated them in Newport Beach a few months back at the NRMLA Conference.  I listened intently as Mr. Peter Bell helped Mr. Lewis clarify to the audience what Mr. Lewis was saying.  Maybe you were there?  But then how would I know?  I have yet to see a name tag with the name ReverseGuy at a NRMLA meeting.  Who knows maybe….
       
      Again originators have a responsibility to continuously increase their knowledge about HECMs.  They should not be generating unnecessary fear or concern among peers or the public as has been done in this thread.  Now I will stop before more of the strongest trait of Mark Haines continues coming out.  I wish you the best but I have spent far too much time on basic issues all of us should know.

      • James,

        I too will make this my last post on this subject. 

        However, I think that you failed to read my last post thoroughly.  At no point did I mention anything about a HMBS buyer/investor.  I was discussing the risk for the issuer (originator/lender) of a HMBS.

        If a loan is not eligible to be assigned to HUD at 98% of the maximum claim amount, the HMBS investor does not care – as the loan must be bought out of the pool at that time, no questions asked. 

        However, the HMBS issuer (originator/lender) could be left holding the bag in the situation of a non-borrowing spouse.  Say that they cannot assign the loan to HUD (let’s say because of some sort of tax default at that time) and they – the issuer/lender – must buy the loan out of the HMBS and then keep that loan on their balance sheet until (in my example above), the HECM borrower’s 30 year old wife passes away 35 years later.

        How many issuers (originators/lenders) do you think are willing to take that risk to potentially have to hold a HECM on their balance sheet for 35 years?  I’m not saying that this will be the rule – it will certainly be the exception to that.  However, I feel that it is worthwhile to ponder that extreme type of scenario in light of the AARP lawsuit and it’s potential impact it could have on our industry. 

      • Reverseguy,
        Good explanation of the potential concern of this suit.  We all hope this does not play out but it is certainly something to be aware of.

      • ReverseGuy,
         
        You are right.  I did not answer your issuer question and here is why.

        What percentage of HECMs are we discussing?  First, all borrowers would have to die BEFORE assignment.  Second, a non-borrowing spouse (whatever the word spouse means in this context) would have to inherit some ownership in the home and beyond that qualify as being displaced from the principal residence of that spouse as a result of HECM termination related to that same home.  Third, the non-borrowing spouse would have to want to continue living in that home as the principal residence of the spouse.
         
        Is the percentage 90%?  42%? 12%? 0.25%?  0.0001%?  Then we would have to determine if the HECM was originally purchased by Fannie Mae.  If it was, how would a lender be involved with any contingent guarantee?  Then we would have to determine what additional default problems a non-borrowing spouse would produce.  If the situation was where home values were rising, holding a HECM could be for the best since prior, current, or future defaults might be cured over time.
         
        If there are any defaults still outstanding that the non-borrowing spouse cannot cure, that is what foreclosure is for.  Remember the spouse displacement rule REQUIRES that there are no other loan covenants which are in default.  Remember the only problems we are discussing are defaults between inheritance and assignment.
         
        So I do not get this great fear of loss.  It seems you are playing the devil’s advocate for its own sake.  Businesses make loss decisions everyday.  Why not just pay off the defaults, take the loss by assigning the HECM to HUD?  As one of my partners used to advise us and all of his clients, “You’re first loss is your best and least loss.”  He was a very wise man.
         
        The problem you present is the same contingent liability for all HECMs which go into default before assignment and for which a lender has a contingent issuer liability.  It hardly seems the spousal displacement rule will inordinately increase HMBS contingent liability exposure for lenders.  HMBS issuer contingent liability may tick up but not very substantially.
        As to small brokers who might go bust as a result of any contingent liability, they have much more to worry about than this spouse displacement rule. 
         
        That is my view as to the impact to lenders.  But remember very shortly lenders will not be the only HMBS issuers.  Maybe you can analyze the situation for that issuer.
         
        There is something constructive you can do.  If you are overly wrought over the matter, help get the spouse displacement rule amended to where you believe it should read.  It is my opinion that the lender/issuer exposure to additional contingent liabilities over this particular issue is de minimis at the very worst.  It is a far greater issue for HUD and perhaps even Fannie Mae.
         

  • Reading through the article and the thread of Comments several significant issues jump out.  First this issue is potentially of great significance to HUD.  Second, there are some issues for lenders but not many.  The third is the implications for the program itself.
     
    It is the last item which must addressed.  Unless the case has a quick resolution because of the courts pushing it through or concessions by the parties, this case could go on for years.  In a worst case scenario final resolution might not occur until the next decade.
     
    In between we must deal with attacks on the program.  Some will use this case to their ends.  It would seem the best resolution would be an amendment to clear up the “faulty drafting” with no admission of error by HUD and then let the parties duke it out in court.  Unless the law is amended ASAP, this provision as it stands will be applicable to all new HECMs.  Without admitting wrong, HUD should work on a correction now.

  • I agree with the Critic: “HUD should work on a statutory correction now.” I also agree with a comment I saw somewhere else that suggested the HUD lawyers were defending the case inappropriately and that the Department of Justice might disagree with their stance as they are arguing against the very clear intent of congress with respect to the rights of surviving spouses. Is it correct that HUD is defending the case and not the Department of Justice? If so are HUD lawyers violating any ethical guidelines or oaths of office that they took? Should they be reported to the Bar?

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