AARP Blames HUD for Reverse Mortgage Foreclosure Problem

AARP has a new blog post warning would-be reverse mortgage borrowers to proceed with caution following a New York Times article published Monday about how the Home Equity Conversion Mortgage (HECM) program is “fraught with problems.” 

Both the NY Times article and AARP focus on the subject of foreclosure among elderly borrowers, which can happen if a spouse is left off the title of the home, and an AARP attorney blames the Department of Housing and Urban Development (HUD) for the foreclosures described in the article. 

Reverse mortgages are growing in popularity as older adults tap their home equity to help them maintain their standard of living in retirement. But these loans come with potentially serious risks and AARP has been working for years to educate older homeowners on reverse mortgages, so they don’t get into trouble.

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The New York Times reported Monday about some of the more extreme problems that people can face after taking on a reverse mortgage, including foreclosure. The cases involved seniors whose older spouses were listed as the sole borrowers on the loan. When those older borrowers died, the surviving spouses were left at risk of losing their homes. They often faced the choice of paying back the loan or facing foreclosure, the newspaper reported.

AARP welcomed the Times story. Moreover, Jean Constantine-Davis, a senior attorney with AARP Foundation, says the U.S. Department of Housing and Urban Development is responsible for the foreclosures that the newspaper described. She says HUD has failed to recognize that surviving spouses not listed on reverse mortgages, or on property deeds as homeowners, are protected by law from being displaced from their homes.

“This problem will only worsen as the program grows, unless HUD recognizes its first obligation is to protect homeowners and changes its rules,” Constantine-Davis said.

The non-profit organization, whose purpose is to promote the interest of the 50-and-older crowd, has filed a lawsuit accusing HUD of “ignoring the law” in such cases.

And in the meantime, says AARP, homeowners considering a reverse mortgage would do well to understand how the loan works and “proceed with caution.”

Read more at AARP.

Written by Alyssa Gerace

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  • Not every widowed non-borrowing spouse wishes to remain in the home.  The key is adequate counseling regarding the repayment requirements of the loan and a loan officer who can keep the best interests of the borrowers above those of him or herself. Does the spouse have a “plan b”, to vacate and move in with her daughter for example or downsize with other resources? Maybe.
    Prohibiting removal of a spouse does not meet needs or desires of every senior and I hope the courts keep this in mind in rendering a decision. AARP and the Retirement Research Center should be ashamed of themselves for taking such a narrow and once sided viewpoint.
     

    • hecmvet,

      In principle you are correct.  The problem is what was true at funding normally changes with time.  

      For example (fictional), a 59 year old woman (or man) who is married to a 69 year old may see the wisdom from an extremely healthy husband advocating coming off of title so that the couple can get more money to enjoy a more comfortable life together and see the grandchildren more often.  But at 65 as a widow, the situation may have changed very, very radically.

      With house values down and the inability to qualify for a thirty year mortgage in today’s environment, that same widow has now decided she does not want to leave her home based on the current value of the home.  The HECM is greatly underwater and the excess money they got from their fixed rate HECM is now half of what it once was.  In computing the shortage to close, she realizes she has no cash source to make the deal work.

      So with few resources other than what was left of the money they took at HECM funding, the widow is now forced to look for housing.  Her arthritis does not do well in Montana and New Hampshire where her children now live.  She is still receiving Social Security but the retirement payouts they enjoyed while married are not there in retirement because the husband “mistakenly” chose single life coverage rather than joint and survivor and the widow signed the forms without going over them in detail.

      The widow loved her husband and does not want to blame him for the mess she finds herself in.  Guess who she blames???  Perhaps some or all of that blame is warranted, especially if the originator engaged in “financial advising” by taking their word for everything (not validating) and showing them why his/her plan worked.  Of course six years ago who in our industry was talking about possible foreclosure at loan termination other than some servicers and James Veale?

      We try to get around the problem at termination by saying things like the current situation just did not seem likely back then and other such irrational explanations.  The trouble is we are salespeople not financial advisors even though most insurance and securities salespeople honesty believe they understand the issues but generally are biased and have an unrelenting conflict of interest as big as the moon but deny it by declaring they are ethical.  Yet one can be as ethical as can be and at the same time have a monstrous conflict of interest standing in front of his/her face without recognizing it for what it is.

  • It’s very strange to me that AARP would sue HUD over this issue.  We clearly discuss and disclose and now have Non Borrowing spouses or residents sign documents making sure they understand the consequences if the borrower must permanently leave the residence.  It appears that AARP is woefully behind in its understanding of this product and would do well to learn more before blogging this kind of nonsense.
     

  • It only takes one greedy and dishonest loan officer, or one greedy and dishonest homeowner, to create the headline in the NYT.  Even with all the disclosures, counseling, and education, the RM industry continues to fight a reputation battle with the media.  After 11 years working to serve homeowners’ best interests, I find this amazing.  I thought the battle would be long over by now. 

  • It will be interesting to see how this lawsuit shapes out.  AARP clearly indicates on its website that under current HUD guidelines a non-borrowing spouse is required to payback the full loan balance upon the death of their spouse.  It also indicates that they filed a suit against HUD on March 8, 2011 on behalf of three surviving spouses as a result of what they call a “change of policy” made by HUD in December 2008 that reversed a special protection for a borrower or heir.  AARP argues that HUD rules clearly stated prior to this change that at the time of repayment a borrower or heir would never owe more than the home was worth.  HUD came back stating that the rule was never meant to imply that heirs or a surviving spouse who was not a cosigner on the loan could simply fulfill the loan obligation by paying the current market value of the home.

    If there is any substance to the suit, then it sounds like the argument is for loans made prior to 2009 and for situations in which the surviving spouse would have had the means to repay the home market value.   It would be interesting to know if these three cases had the ability to repay.  Perhaps, there could have been situations where this would have been possible, however, if not, foreclosure still would have been imminent. 

    Either way, my issue is that the media has spun this into a negative attribute of the program (i.e. also lumping in the tax & insurance default issue to this) as opposed to a rare unfortunate consequence.  It must be made clearer that HUD and the reverse mortgage community as a whole is transparent in its delivery of information to the public about the requirements of the program and the ramifications if a couple decides to obtain a reverse mortgage and leaves one spouse off the loan.

  • Comments like this from AARP infuriate me. They are “warning would-be reverse mortgage borrowers to proceed with caution.”
    Let’s go back a few months to when AARP announced it was going into the reverse mortgage business with a major insurance company. Look at the news cycle of articles they were putting out to the public then…no warnings there, just great things to say.
    Now that that venture appears to be no more they are “warning people.”
    As soon as AARP figures out how to make money on reverse mortgages they will be our best friend.
    They are the most profitable “non-profit” organization in the Country and their opinions follow their wallet. It’s a shame because at one point in time they were truly were senior advocates.  But that time has well past…

    • Michael,

      It is clear you were very infuriated.  While rumors circulated about NYLI and AARP for awhile, who did what is not so clear.

      AARP has always had some drawbacks on reverse mortgages, many of which WERE well founded.  The non-borrowing spouse issue could ruin the HECM program without adequate financial support from Congress and the Administration both now and in the future.  Here the interpretation AARP gives 12 USC 1715z-20(j) seems correct. If HUD knew about how this provision could be read and negatively impact the HECM program when it became part of the HECM program (which they did since many of their own staff agree with the AARP interpretation at a legal level), HUD should have gone immediately to Congress to get that provision amended retroactively to read the way they believe it should or simply have it retroactively rescinded.

      AARP has no legal standing to take HUD to task on this issue but some non-borrowing spouses may have the right to challenge not only lenders but also directly or indirectly (through lender suits) HUD.  For example, the suit would center on reimbursing lenders for their payment of HECM insurance but the HECM they received did not provide this provision which is required for HUD to insure any mortgage which the mortgagee wants insured as a HECM.  If those non-borrowing spouses win, imagine the ripples through our industry and the secondary markets.

      One slight correction is that it is not clear if AARP is technically a non-profit but many of its organizations and  revenues are tax-exempt.  Some believe this is one of the very worst examples of the abuse we find in the tax-exempt arena.  They (as well as you) have a whole lot of good points in that regard. 

      Of course some of the flak we get come from AARP is from some who were once our own such as Ken Scholen who fought during the HERA hearings for our origination fee to be lowered to 1% (first) of the Principal Limit, not the Maximum Claim Amount (second).  I will never forget the exasperation seen in the faces of those who were so surprised by his appearance in those hearings to fight for that two-pronged reduction.

      Enjoy the weekend.

  • I just heard a suggestion today that if AARP is concerned about younger spouses not being on title then why don’t they create an insurance product that will provide the younger spouse a policy to have funds to pay off the reverse mortgage when the borrower is no longer in the home.  After all AARP is in the insurance world also.

    Now whether they will find an investor to do this is another story. And could the younger spouse/borrower even afford the insurance?  Maybe AARP could cover the costs and risks with their membership fees.

    Why should mortgage investors and/or HUD take a hit and allow a younger spouse who is not on title (which means they are not an owner of the property) remain in a home for free for years without receiving any payment or way to be compensated for their investment and risk?  In some cases this could be the case for 20+ years.

  • ConcernedRMOriginator,

    Quite frankly, I do not care how the issue is resolved as long as Congress recognizes its responsibility to fund this provision.  This is not AARP suggesting a change, this is an interpretation of existing law.  Many at HUD agree with the AARP position but in implementing policy they are in the minority.

    From the very beginning of the program HUD realized this is not a 20 year issue but could potentially be a multi-generational issue with senior marrying senior and then one spouse passing away and the surviving spouse remarrying, and on and on for many many marriages. As long as the surviving spouse is a homeowner, then the HECM would stay in place.

    Looking at 12 USC 1715z-20(j), the AARP position is quite logical, reasonable, and accurate.  Some of us looked at this provision in 2005 and could not understand how the provision was reflected in the loan.  But we were certainly not the first to do so.

    While I agree that the program needs to preserved at all costs, it is hard to believe HUD did not go back to Congress to have the law changed retroactively to read the way they have consistently interpreted it.  If it is the way HUD interprets it, it is far less useful than an appendix.  While Congress writes a lot of unnecessary law, they rarely do it this way.

    Personally, even though I do not believe it will help the program unless Congress starts funding it, there is little doubt the AARP interpretation of the law is right.

  • If a prospective borrower indicates that they have a non-borrowing spouse for whatever reason (and some are good and sound reasons apart from just trying to squeeze the maximum principal limit higher), shift gears immediately. Discuss the complications this represents to the non-borrowing spouse’s legal ownership of the home and their financial responsibility for repaying the loan if the borrowing spouse dies or leaves first (and document it in your conversation log which you better have incorporated into your business practices long ago). Lots of questions about other assets come into play immediately, as well as preparing them for writing the letter of explanation that the underwriter may require but which you definitely should.

    It’s usually simple to protect a non-borrowing spouse’s legal rights of ownership to the home. The harder part is giving the non-borrowing spouse the financial means to write the big checks to either pay off the prior reverse mortgage entirely or the smaller but still significant one for the now-eligible former non-borrower to start their own reverse mortgage and use those funds to help make the payoff.

    Before the McCaskill amendment to HERA, if there were no other sufficient assets that could be converted into cash by the non-borrowing spouse, I’d be asking the prospect to to place a call to a life insurance pro. Using the amortization sheet from the reverse software, we could often see that a term policy could cover enough of the gap to financially protect the residence of the non-borrowing spouse. Today that reasonable suggestion could get me in hot water.

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