New AARP Reverse Mortgage Lawsuit Targets Wells Fargo, Fannie Mae

AARP filed a class action lawsuit Wednesday in the U.S. District Court for the Northern District of California in San Francisco, against Wells Fargo Bank and Fannie Mae on behalf of reverse mortgage borrowers and their survivors who have faced foreclosure and eviction.

The lawsuit is the second suit filed by AARP this year concerning reverse mortgage borrowers and their heirs. The original suit was dismissed by the court in July.

The new suit alleges that Wells Fargo has illegally foreclosed upon reverse mortgage borrowers who were not notified and were not given the opportunity to purchase the property for 95% of its appraised value after the loan becomes due and payable.

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The plaintiff in the case, Robert Chandler of Elk Grove, Calif., inherited the home of his mother, who had a reverse mortgage and passed away in 2010. The suit alleges that Chandler was never given notice of his right to purchase the property for its current value.

According to the allegations and AARP, Wells Fargo told him that he would have to pay off the full mortgage balance, then acting on Fannie Mae, the owner of the mortgage, proceeded to foreclose on the home. Finding no one willing to buy it for the same market price that Mr. Chandler was Fannie Mae began efforts to evict him from the property.

The Department of Housing and Urban Development rescinded its non-recourse guidance on April 6, during the initial lawsuit, which was filed in March.

HUD then issued new servicer FAQs on July 21 to clarify its guidance. “When a HECM loan becomes due and payable as a result of the mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs, that party may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property,” as stated in the FAQ.

“The new suit alleges that, despite HUD’s correction of its rules, the defendants are still failing to give notice to surviving spouses and heirs of their rights to purchase the property for the lower value, and are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home,” AARP said in a statement.

The AARP complaint claims there are thousands of potential defendants in a similar situation.

“In the wake of HUD’s reversal of its rule on the rights of surviving spouses and heirs earlier this year, we have been contacted by many, many others facing the same problem. It is difficult to understand why reverse mortgage lenders continue to deny them their contractual and legal rights,” said Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation.

Written by Elizabeth Ecker

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  • Rescission did not go far enough.  Servicing FAQs are a poor substitute for a new mortgagee letter.

    It is hard to tell what the ultimate damages will be on a suit of this nature.  Could the suit be over the 5% difference between market value and the argued purchase price?  What would the damages be on losing the home?  What a subjective valutation!!  Imagine a class action suit of this nature!!! 

  • Rescission did not go far enough.  Servicing FAQs are a poor substitute for a new mortgagee letter.

    It is hard to tell what the ultimate damages will be on a suit of this nature.  Could the suit be over the 5% difference between market value and the argued purchase price?  What would the damages be on losing the home?  What a subjective valutation!!  Imagine a class action suit of this nature!!! 

  • This may provide a new and interesting twist to the Reverse Mortgage market place- has anyone considered the previously underage spouse that is now 62 that is referred to here? Could they now do a Reverse for purchase using the lessor of the 95% of the current appraised value or loan amount due?

    Defintely a plus for someone that has life insurance proceeds to work with at their spouse’s demise.

    • Greg,

      “…has anyone considered the previously underage spouse that is now 62 that is referred to here?”  There is no spouse suing in this case. 

      The blog states:  “The plaintiff in the case, Robert Chandler of Elk Grove, Calif., inherited the home of his mother, who had a reverse mortgage and passed away in 2010.”  Are you saying the grandson is also a non-borrowing spouse who is now over 62?  How wierd (just trying to be polite)!!!

      Your comment about using a reverse mortgage to acquire the home by a non-borrowing spouse if that spouse qualifies is a little over two decades old.  The idea of using life insurance with sufficient proceeds to at least pay down the current HECM so that the non-borrowing spouse was thought of within 5 minutes (or less) of the idea of using the HECM for the non-borrowing spouse.  Within 30 seconds right after that the same ideas were applied to inheriting children and other heirs.

  • Since when are mortgagORs (or their successors) a party in the insurance between lenders and FHA?  MortgagEE Letter 2008-38 was addressed as follows:  “TO:  ALL APPROVED MORTGAGEES.”  FHA insurance is not between FHA and mortgagORs.  No notice is ever written to mortgagORs by FHA.  It is written to mortgagEEs because they are the policy owners not mortgagORs.
     
    If one does not catch on to the meaning of the prior paragraph, then all kinds of nonsensical conclusions result.  For example, the biggest myth in our industry is that somehow FHA insurance makes HECMs nonrecourse.  Really, since when?  It is the note and loan agreement which do that.  The insurance is between the lender and FHA with some great benefits for mortgagORs.
     
    Like lender title insurance, borrowers pay the costs for the lender FHA insurance coverage.  Could it be because of this phony idea that the insurance creates nonrecourse that Wells Fargo (“WF”) seems to have done what it did.  WF was wrong.  It is the note and the loan agreement which defines terms in a mortgage unless those documents state that some other party can willy nilly change the definition of those terms as they want whenever they want but in most states that would make the mortgage invalid.
     
    Even if FHA changed their nonrecourse reimbursement policy with mortgagEEs, where in the note or loan agreement does WF have the right to do the same with the mortgagOR?  WF was out of line and should have honored its agreement, period.
     
    WF should have never done what they did to this mortgagOR; it was not justified.  Just because ML 2008-38 changes the terms of reimbursement does not give WF the right to change its terms with the mortgagOR (or successors).  Changes in FHA insurance policy have nothing to do with the basic mortgage agreement unless the agreement permits such change.

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