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A Win For Reverse Mortgage Borrowers

Surviving spouses can stay in their homes

Three older homeowners facing foreclosure have been granted a reprieve after the government rescinded a policy that effectively penalized surviving spouses not listed on reverse mortgages.

See also: Paying back reverse mortgages.

The action comes less than a month after AARP Foundation Litigation and the Washington law firm Mehri & Skalet filed suit against the Department of Housing and Urban Development for abandoning long-standing federal rules that applied to reverse mortgages insured by the Federal Housing Administration. The rules have been in place since 1994.

The suit accused HUD of violating the contracts between borrowers and lenders when it changed the rules in 2008, years after the contracts had been signed.

In a separate but related matter, Jean Constantine-Davis, a senior attorney with AARP Foundation, says HUD has failed to recognize surviving spouses not listed on reverse mortgages or on property deeds as homeowners and protected by law from being displaced from their homes until the loan terminates. The suit against HUD involving that issue will proceed, she says. [Editor's Note, Fall 2012: The case, Bennett v. Donovan, is currently with the Washington D.C. Circuit Court of Appeals.]

In a Mortgagee Letter published Wednesday, HUD said it has rescinded a policy that allowed homes with reverse mortgages that were worth less than the loan balance to be sold to strangers for less than the mortgage balance, while surviving spouses not named on the reverse mortgage, or their heirs, were required to pay the full loan amount if they wanted to retain the property.

The suit named three surviving spouses from Indiana, New York and Maryland who were not listed on the reverse mortgage. The three were facing foreclosure on the homes they lived in because they couldn't get financing to pay off the loan, which was higher than the home's value as a result of the housing market meltdown.

In a reverse mortgage, the balance becomes due when the homeowner dies or moves or sells the house.

But HUD said that under its policy, the three didn't qualify as homeowners because they weren't on the reverse mortgage with their spouses.

The case against HUD carries broad implications because it affects whether spouses would be able to stay in homes that are now under water.

"Rather than protecting borrowers, HUD retroactively changed the terms of the loans to make these elderly borrowers' spouses and heirs pay more to keep their home than an unrelated purchaser would have to pay to purchase the property," says attorney Steven A. Skalet.

He adds that HUD agreed not to proceed in the eviction and foreclosure of those three spouses named in the suit pending a final resolution of the case.

The HUD rules in 1994 stated that reverse mortgage borrowers or heirs would "never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt."

But at the end of 2008, HUD "turned existing reverse mortgage policies upside down" by deciding that an heir — including a surviving spouse who was not named on the mortgage — must pay off the mortgage balance to keep the home, even it if exceeded the property's value, says Constantine-Davis.

“Spouses not named on deeds are still defined as ‘homeowners,’ under the reverse mortgage law,” Constantine-Davis says. "Many people are in this situation, where one spouse is not listed on the reverse mortgage or deed. Many people are in jeopardy over this."

Carole Fleck is a senior editor at the AARP Bulletin.