A U.S. District Court for the District of Columbia issued a Memorandum Opinion last week, ruling whether some initiatives undertaken by the Department of Housing and Urban Development (HUD) in response to the Bennett and Plunkett non-borrowing spouse cases could be considered arbitrary.
Specifically, the court touched on HUD’s Mortgagee Optional Election (MOE) program, its ability to analyze the possibility of delaying a foreclosure until a Home Equity Conversion Mortgage (HECM) reaches 98% of its maximum value and whether it can be compelled to take assignment of the four loans represented in the lawsuit, according to a weekly report front he National Reverse Mortgage Lenders Association (NMRLA).
In each of the lawsuits—the first of which originated in 2011—the plaintiffs, all of whom were surviving non-borrowing spouses, claimed HUD violated the Administrative Procedure Act (APA) by failing to protect the rights of non-borrowing spouses.
Specifically, plaintiffs based their case on language included in a subsection of the APA, which stated “the term ‘homeowner’ includes the spouse of the homeowner,” when referring to the loan obligation being deferred until the homeowner’s death.
The Court agreed, holding that the only plausible construction of the subsection was that the loan obligation should be deferred until the homeowner’s and the spouse’s death.
In June, former HUD Commissioner Carol Galante concluded that the agency was not required to provide any relief as a result of Bennett II to any non-borrower surviving spouse, including the four named plaintiffs in the Plunkett case.
The former commissioner, however, did introduce the MOE as an alternative remedy, expressly stating that the MOE applied “only with respect to the four Plaintiffs as well as the two Plaintiffs in the Bennett case.”
To be eligible for the MOE, five criteria must be met among the surviving non-borrowing spouse plaintiffs, including having been married to the borrower at the time of loan origination and until the borrower’s death; the plaintiff must have title to property or a legal right to remain on the property at the date of the election; the loan cannot be in default for any reason other than the death of the borrower at the date of election.
Additionally, there can be no allegations or claims that would invalidate the loan or any such claims must be resolved in favor of the mortgagee; and the non-borrowing spouse must have had a principal limit factor (PLF) greater than or equal to the PLF of the HECM borrower spouse at the date of origination, or the non-borrowing spouses current PLF is greater than the current unpaid principal balance.
Given all the criteria, HUD determined none of the six named plaintiffs was eligible for the MOE.
In the Memorandum Opinion, the Court ruled that HUD’s MOE is not arbitrary and capricious, as the agency had planned to apply the initiative to all non-borrowing spouses via FHA Info #14-34.
“While it is possible that HUD could have accounted for these needed cost savings in other ways, plaintiffs have failed to meet their burden of showing that HUD’s decision to do so was arbitrary and capricious and not merely a policy decision with which they disagree,” the Memorandum states.
The Court also agreed that although the PLF condition of the MOE is difficult to meet, it does not render the MOE program arbitrary and capricious.
To meet the condition of a non-borrowing spouse’s PLF being greater than the current unpaid principal balance, the surviving spouse would need only to pay back some of the loan amount, HUD points out.
“Just because the PLF condition may require surviving spouses to take additional action—and pay additional money to their lenders—in order to be eligible for the MOE, does not cause its inclusion as a condition of the program to be arbitrary and capricious,” the Court stated.
Ultimately, HUD’s use of this hypothetical principal limit puts each plaintiff in the position he or she would have been in “had the private contractual agreement entered into contained terms consistent with Mortgagee Letter 2014-07, rather than the terms the plaintiffs’ respective spouses actually bargained for,” as noted in the Memorandum.
“Doing so protects the viability of the reverse mortgage program, which is a reasonable consideration for HUD,” stated the Court.
View the Memorandum Opinion.
Written by Jason Oliva