The Department of Housing and Urban Development (HUD) has thrown out a rule it put in effect in 2008 for reverse mortgages that was causing grief for some homeowners and heirs.

The rule reversal came about in response to litigation by the AARP Foundation, which sued HUD on behalf of three surviving spouses of deceased reverse mortgage borrowers, who were put in danger of foreclosure because of the rule.

Reverse mortgages are loans available to seniors aged 62 or older who have equity in their homes. The loan typically makes cash or a line of credit available to the homeowner based on the equity in the property and homeowner's age. Seniors have been warming to reverse mortgages because their obligation to repay the loan is deferred until they die, sell the home, or move out. Prior to the 2008 rule change, the general practice stipulated that surviving spouses, who may have been removed from the title in order for the elder partner to qualify for the reverse mortgage, could purchase the home for 95 percent of the property's true market value.

But at the close of 2008 -- which Jean Constantine-Davis, a senior attorney with the AARP Foundation, characterizes as "uniquely bad timing because the real estate market had plummeted and was continuing to plummet" -- HUD issued a letter that changed the game. In it, policy was amended to require that an heir pay the full mortgage balance to remain in the home, even if it exceeded the value of the property.

As Constantine-Davis notes, "It put most of the (reverse) mortgages underwater immediately."

In March, the AARP Foundation filed a formal challenge to the rule. Of the many reasons behind the suit, Constantine-Davis highlights the lack of due process behind HUD's sudden reversal in policy. "They changed a rule via letter instead of following proper administrative procedures and allowing interested parties to comment," she says.

Last week, HUD, perhaps realizing that the increased attention garnered by reports of widespread foreclosures on seniors was bad public relations, proactively rescinded the 2008 letter, heading off foreclosure proceedings against the plaintiffs, and by extension, thousands of others.

Constantine-Davis asserts that the AARP will do its part to help HUD spread the word. "These foreclosures should be stopped," she says. "HUD issued a letter to the servicers, and the onus is on them to communicate with the homeowners. We're still working with HUD to ensure the word gets out. There's no question that people who are being foreclosed on now, and about to be evicted, will be helped by this."

The reversal of the 2008 rule only addresses part of the original lawsuit, but the AARP Foundation's legal team has reason for optimism. The other half of the equation is a Home Equity Conversion Mortgage (HECM) program statute that specifies that if the borrower (or estate) does not pay the balance when due, the mortgagee's remedy is limited to foreclosure.

However, in light of last week's capitulation, Constantine-Davis believes momentum is on the people's side. "I don't know what steps HUD is going to take from here," she says. "They have filed a motion to dismiss the case. HUD may issue a new rule altogether. We would then have to look at that rule to see if it offers enough protection for people. This could be good news for heirs."

HUD has indicated that prior rule changes were intended to make certain that all sales of properties were legitimate, market-driven sales and based on the each property's real value, and new guidance would be issued in the future on this issue.

 

 

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Real Estate - HUD Drops Harsh Rule on Reverse Mortgages

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