Posted on 09 Mar 2011
Reverse mortgages were designed to pay older homeowners a regular sum against the equity in their house and shield borrowers from economic upheaval. But these loans have also been caught up in the real estate collapse, and now AARP has filed a lawsuit against the Department of Housing and Urban Development, which regulates reverse mortgages. The suit asserts that policy changes by HUD are pushing older homeowners into foreclosure.
The case was filed in Federal District Court for the District of Columbia by the AARP Foundation, the organization’s charitable arm, and the law firm of Mehri & Skalet on behalf of the surviving spouses of three homeowners who had bought reverse mortgages. All three are facing eviction, the suit says.
“HUD has illegally and without notice changed the rules in the middle of the game at the expense of vulnerable older people,” said Jean Constantine-Davis, a senior lawyer at the AARP Foundation.
The lawsuit focuses on reverse mortgages where only one spouse signed the loan document. It argues that HUD shifted course in late 2008, making changes in its procedures so that surviving spouses who are not named on the mortgage must pay the full loan balance to keep the home, even if the property is worth less.
Owners of traditional mortgages often are liable for the difference between the value of their house after foreclosure and their original loan. Reverse mortgages were intended to be nonrecourse, which means that even if the value of the property shrinks, the most the borrower can lose is the house itself.
It is unclear how many elderly homeowners are facing foreclosure for reasons related to the lawsuit, but Ms. Constantine-Davis said that hundreds and perhaps thousands of elderly people were in positions similar to those of the three plaintiffs.
Nearly a quarter of all homes with mortgages in the United States are worth less the loan. These so-called underwater properties are difficult to sell and impossible to refinance.
The suit accuses HUD of making policy changes that allow underwater homes with reverse mortgages to be sold to strangers in arm’s-length transactions for less than the full mortgage balance, but that require spouses or heirs in some cases to pay the full amount. Finally, the suit says HUD is ignoring its own provisions against displacing a surviving spouse.
A HUD spokeswoman said the agency does not comment on pending litigation.
One plaintiff, Delores Jeanne Moore of Covington, Ind., was not on the reverse mortgage because her husband had owned the house before they married. He died in 2008. Under the new HUD rules, the suit says, if Mrs. Moore wants to keep the house, she must pay the balance of the loan, $91,000. But a third-party buyer could get the house for 95 percent of its appraised value, or about $81,000.
Mrs. Moore’s lender has been seeking to foreclose since August 2009. “When the housing market was constantly ticking upwards, these new provisions would not have mattered so much,” Ms. Constantine-Davis said. “Now it’s a much bigger problem.”
More than half a million people have received reverse mortgages since Congress authorized the program a quarter-century ago. Those who get the cash must be at least 62 and have substantial equity in their houses. Participants receive either a lump sum or monthly payments from lenders. After their death, the house is sold and the mortgage is paid off.
Robert Bennett, a 69-year-old retired cook at the United States Naval Academy, is also a plaintiff. Three years ago, he and his wife, Ophelia, replaced the traditional mortgage on their house in Annapolis, Md., with a reverse mortgage so they could make ends meet.
Lenders sometimes encourage only the elder member of a couple to put his or her name on the mortgage because then the payout is greater. Mr.
Bennett said he did not realize that his new mortgage had taken his name off the title of the home, which the couple had owned together since 1981.
Mrs. Bennett, who was a decade senior to her husband, died shortly after the new mortgage went into effect. The payments immediately stopped and the mortgage became due and payable.
The lender began foreclosure proceedings and scheduled a sale of the property last month.
The new mortgage, intended to secure this couple’s future, instead helped destroy it. They paid $20,000 in fees but received only $1,800 in cash.
Meanwhile, fees and interest continue to accumulate. The balance of the loan is now about $300,000, while the value of the property has fallen to about $200,000.
If HUD had not changed the rules, the suit says, Mr. Bennett would have been allowed to live in the house until his death.
“It’s a miserable thing to be thinking you’re going to get kicked out after you’re living all this time and you’re retired,” Mr. Bennett said in an interview.
“If I thought a reverse mortgage was going to set me up in a situation like this, I never would have participated.”