Represented by AARP Foundation Litigation attorneys, surviving spouses of reverse mortgage holders won a round in court.
Reverse mortgages — in which a homeowner receives money for a home’s equity, each month incurring a slightly greater debt to be repaid when the home is sold — can sometimes help older people on fixed incomes. Available to those over age 62, the loans are regulated by the U.S. Department of Housing and Urban Development (HUD).
The amount of equity that can be drawn from a reverse mortgage is a function of the value of the property and the age of the youngest borrower: the older the borrower, the higher the loan. Evidence has been mounting that couples considering reverse mortgages are often persuaded into taking the younger spouse off the deed. They report that mortgage brokers (whose fees are based on loan amount) assured them that this would be financially beneficial and could later be undone. What the couples do not understand is that the lender can call the mortgage due and foreclose after the death of the borrower. As a result, surviving spouses of reverse mortgage borrowers are faced with foreclosure once the borrowing spouse dies.
The federal reverse mortgage statute should provide protection: It states that the mortgages may not be called due and payable until both spouses have died or the home is sold. In addition, HUD regulations provide that, after the death of the borrower, the property can be sold for the lesser of the mortgage balance or 95 percent of its current value.
But in 2008, without public notice or input and against statutory language, HUD issued a rule that deprived a surviving spouse not named on the reverse mortgage of the ability to purchase the property for anything less than full loan balance — particularly problematic as the housing market collapsed and people found themselves “underwater.” HUD’s new rule meant that a stranger could buy a family home for 95 percent of its current value but the surviving spouse could not.
Represented by AARP Foundation Litigation attorneys along with attorneys at Mehri & Skalet, PLLC, three surviving spouses sued HUD.
Within weeks, HUD withdrew its rule prohibiting surviving spouses from purchasing at 95 percent of the property’s current value and halted the three foreclosure proceedings against plaintiffs. HUD did not, however, relent on plaintiffs’ claim that federal law protects them from displacement after their borrowing spouses die and successfully persuaded a district court to dismiss plaintiffs’ remaining claim. The court held that, even if plaintiffs ultimately succeeded in persuading it that HUD’s regulations violated federal law, this would not relieve plaintiffs’ injury — the foreclosures on their homes — because the decision to foreclose was not up to HUD but the lenders holding the mortgages.
Plaintiffs appealed successfully. The appeals court found plaintiffs’ claims were redressable and, in commenting on the merits, observed, “We admit to being somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.” The court’s decision will allow the case to move to trial.
What's at Stake
Nearly one quarter of all mortgaged homes are underwater today, a particular blow to people with limited resources and fixed incomes. Older people who thought they were planning ahead and signed up for reverse mortgages based on assurances in the law, who then lost a spouse, are being hit with a third blow as they find the homes they had carefully planned to protect are in jeopardy.
Bennett v. Donovan was decided by the U.S. Court of Appeals for the District of Columbia Circuit and remanded to the district court after determining that the plaintiffs have standing to bring their claim against HUD.