AARP Class Action Lawsuit Could Include HECM Borrowers Past and Present

AARP’s recent class action lawsuit filed against Wells Fargo and Fannie Mae regarding reverse mortgage borrowers and heirs who have been allegedly foreclosed upon without the option to buy back the home for fair market value could include those who got reverse mortgages before HUD initially changed its non-recourse guidance, says AARP counsel.

When asked whether the class involved in the lawsuit includes those who were foreclosed on before the HUD guidance regarding its recourse policy for HECMs, AARP counsel said yes, it does.

“The lenders had contracts with the borrowers that required that, prior to the initiation of foreclosure, they would be offered the chance to sell the property for 95% of its appraised value prior to initiating foreclosure proceedings,” said Jeanne Constantine-Davis, AARP Foundation Senior Attorney in an email to RMD. “When HUD issued Mortgagee Letter 2008-38, the lenders all went along with it, despite their contracts with the borrowers.”

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Today, the HECM contract states clearly that the borrower has the option to sell the property for the lesser of the loan balance or 95% of the appraised value and apply the net proceeds of the sale toward the balance of the mortgage. But Mortgagee Letter 2008-38 set a different policy in December 2008 when it began to require that the 95% option was only available in an arms-length transaction, excluding the borrowers’ heirs.

A lawsuit filed earlier this year by AARP against the Department of Housing and Urban Development targeted the recourse policy set forth by that mortgagee letter. The case was dismissed in July after HUD changed its policy in April.

“One month after the [earlier] AARP suit was filed, HUD reversed itself, and reinstituted the HUD policy to the fairer practice of not requiring payment that exceeded the updated value of the home,” AARP said in a statement. “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,” said AARP in a statement.

Wells Fargo says it intends to defend itself, and notes that the plaintiff in the case had a positive reverse mortgage experience and remained in her home through the end of her life.

“Wells Fargo services reverse mortgages in accordance with the guidelines required by HUD, the Department of Housing and Urban Development. In April 2011, HUD changed the rules to allow the heirs of a reverse mortgage property to purchase the home at 95% of the appraised value. When the HUD rules changed, we adopted them including providing  notice to the heirs,” a Wells Fargo spokeswoman told RMD in an email. She said she could not comment further because the case is in litigation.

A summary of the case by the National Reverse Mortgage Lenders Association legal counsel, Weiner Brodsky Sidman Kider, notes that the class in the lawsuit includes those borrowers under HECM loans of Wells Fargo and Fannie Mae, their heirs and/or estates, who were not given the “95% right” and whose homes were sold at foreclosure without the right to purchase the homes for 95% of the then-appraised value.

“The suit asks for a declaratory relief that defendants not be permitted to foreclose on such class members unless and until the borrowers (or their heirs or estates) are given the ‘95% right,’ and it alleges breach of contract, and unfair and deceptive acts and practices claims under California law.  The suit also requests a jury trial,” the summary says.

While the suit is still very new, legal counsel writes, lenders and servicers should review their practices with counsel and ensure that they are in compliance with all HUD guidelines in this area, including but not limited to the most recent pronouncements by HUD.

Written by Elizabeth Ecker

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  • When Mortgagee Letter (“ML”) 2008-38 was first posted, there was a huge outcry from the industry that made little sense.  Many claimed that FHA was going to harm existing borrowers and their heirs.  It was as if FHA could change the terms of existing HECM mortgages by the mere release of this ML.  This lawsuit shows how very false that impression really was.
     
    An existing HECM is a contract between the mortgagor and mortgagee and unless the note or loan agreement states that subsequent MLs can impact the mortgage how can they?  A ML is the way this insurer, FHA, notifies its beneficiaries (mortgagees) of information and policies it wants to disclose.
     
    The impact of the ML was never on existing borrowers; it was on mortgagees.  FHA was saying that if the borrower or heir retained the home, FHA would provide absolutely no reimbursement for any loss incurred.  FHA used a lot of unnecessary words to get there but in the simplest of terms that is what was said.
     
    So now lenders or note holders were suddenly at risk for a loss based on the difference between the balance due and whatever they collected from the borrower as the payoff amount.  The defendants incorrectly concluded that they could willy nilly violate contract terms and follow the ML despite the terms in their own contracts.
     
    There is still the question of compensation.  How much compensation will the plaintiffs seek and how will it be determined?

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