Three surviving spouses sued the federal Department of Housing and Urban Development (HUD) over changes in reverse mortgage policies adopted without any public notice or input. After the plaintiffs filed a motion seeking a preliminary injunction to block the foreclosures of their homes, HUD announced it had rescinded its December 2008 policy. HUD also halted the three foreclosure proceedings against the named plaintiffs in Indiana, Maryland and New York.
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 — may in some circumstances be helpful to older people who are on fixed incomes and who often don't qualify for other foreclosure prevention programs. Available to those 62 and older, these mortgages are regulated by HUD.
In 2008, HUD reversed its policies so that surviving spouses of reverse mortgage borrowers who were not named on the mortgage thereafter had to pay the full loan balance to keep a home, even if the home has fallen in value. This became particularly problematic as the housing market collapsed and people found themselves "underwater" — owing more on a home mortgage than the home was worth.
"After 17 years of explaining and promoting the … reverse mortgage as a so-called 'non-recourse' loan on which a borrower or his or her heirs would never owe more than the home was worth, HUD changed course," a lawsuit filed by AARP Foundation Litigation attorneys alleges. The lawsuit claims that HUD's rule change led to hundreds of foreclosures on the homes of older widows and widowers.
One of the named plaintiffs is Delores Jean Moore, a 79-year-old widow of limited means. Moore alleges that her name was not on the deed of her home, which her husband had bought before their marriage; therefore, she was not listed on the reverse mortgage. During the housing counseling session, which is required before undertaking a reverse mortgage, her husband specifically asked what would happen if he died before his wife, and he was assured that his wife would never owe more than the fair market value of the property. After her husband died in 2008, Moore was notified by the lender that she had to repay the full mortgage balance, even though the house value had dropped below the amount owed.
Plaintiffs assert that, according to HUD regulations, the surviving spouses or heirs of reverse mortgage borrowers should be permitted to buy the property for 95 percent of its fair market value. They also assert that according to the statutory language and intent of the legislation that created the reverse mortgage program, they should be protected from foreclosure after the death of their spouses named on the mortgages. The lawsuit argues that HUD's failure to protect surviving spouses runs directly counter to the legislation, exceeds HUD's statutory authority and runs afoul of federal procedure.
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 from HUD, 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.
Status of the Case
Bennett v. Donovan is before the U.S. District Court for the District of Columbia. AARP Foundation Litigation attorneys represent the plaintiffs in conjunction with attorneys in private practice at Mehri & Skalet, PLLC. Some of the problematic rules have been rescinded, and HUD has halted foreclosure on the three named plaintiffs pending the resolution of the remaining issues in the case.
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