Attorneys with AARP Foundation Litigation and the private law firms of Mehri & Skalet, PLLC and Kerr & Wagstaffe, represented the heir of a reverse mortgage borrower in a lawsuit challenging both Wells Fargo Bank and the Federal National Mortgage Association (“Fannie Mae”) for failing to abide by the terms of reverse mortgage contracts and regulations of the federal Department of Housing and Urban Development. In a disappointing ruling for surviving heirs, the U.S. Court of Appeals for the Ninth Circuit upheld a federal district court ruling that lenders are not required to honor foreclosure protections in federal regulations when those regulations are not specifically incorporated into the mortgage agreement.
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 on fixed incomes, who often don’t qualify for other foreclosure prevention programs that could otherwise assist them. Fannie Mae owns and Wells Fargo sold and services reverse mortgages.
At issue in some cases is what happens to the reverse mortgage when the homeowner passes away. Certain protections are in the law for spouses of those homeowners, but it is less clear what protections the heirs of the homeowners have, if any.
The heir of a reverse mortgage borrower filed a lawsuit challenging the amount required to satisfy the mortgage after the death of the borrower, who was his mother. The suit alleges that under the standardized terms of the reverse mortgage, once the loan becomes due, the borrower’s estate or heirs should be able to satisfy the mortgage and keep the property either by repaying the full mortgage balance or selling or transferring the property for 95 percent of the appraised value — whichever is less.
This 95 percent rule in the contracts was meant to prevent families and survivors from losing their homes in the event of a downturn in the real estate market. Lenders were protected because participants are required to purchase loan insurance.
However, survivors and families of deceased borrowers allege that Fannie Mae and Wells Fargo refuse to abide by the 95 percent rule and instead demand repayment of the full mortgage balance. When they do not receive it, survivors argue, the lenders foreclose on the properties and evict the survivors.
Named plaintiff Robert Chandler is the heir of his mother, Rosemary Chandler, who obtained a reverse mortgage in 2005 on a home the family owned and lived in since the 1940s. Soon after she passed away in 2010, he argues, Wells Fargo initiated foreclosure proceedings never having informed him of the 95 percent rule and insisting he pay off the full mortgage balance if he wanted to keep the house.
The U.S. Court of Appeals for the Ninth Circuit upheld the district court dismissal of Chandler’s challenge, ruling that the plain language of the mortgage did not support his position and that while the federal rules may have required otherwise, in order to prevail on a breach of contract claim, those rules would have to have been in the mortgage documents.
What’s at Stake
At the time this case was filed, nearly one quarter of all mortgaged homes were underwater, a particular blow to people with limited resources and fixed incomes. Older people who signed up for reverse mortgages were told that their heirs would never owe more than the lesser of the mortgage balance or the value of the property. But, after their deaths, their families are facing a different set of rules that jeopardize the homes the older homeowners sought to protect.
The class action lawsuit Chandler v. Wells Fargo was decided by the U.S. Court of Appeals for the Ninth Circuit. A more favorable ruling on behalf of survivng spouses was issued by the District of Columbia Circuit Court in Bennett v. Donovan.