Confusing rules and unfair policies on reverse mortgages have forced many older Americans into foreclosure, states a lawsuit filed by AARP Foundation on Tuesday. The organization is suing the Department of Housing and Urban Development, which regulates the mortgage products.
At issue is a key change made in 2008: HUD reversed its policy so that surviving spouses (even if they are not on the loan) must pay the full loan balance to keep the home, regardless of the home's value. So if the home loses equity and the survivor cannot repay the full loan amount when their spouse dies, they face eviction from their home.
About 23 percent of all mortgaged homes are underwater, according to housing data firm CoreLogic.
"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, an AARP Foundation senior lawyer.
Offered to people 62 and older, a reverse mortgage provides relief to homeowners facing foreclosure. Many older people and retirees on fixed incomes don't qualify for loan modifications or other foreclosure prevention aid, so reverse mortgages are often the last hope to save their homes.
A reverse mortgage is a loan that's secured by the home's value. Instead of a regular mortgage, in which homeowners repay a lender with monthly payments, a reverse mortgage is repaid when the house is sold. The older the homeowner, the more money they can borrow.