The AARP Lawsuit and What It Means To You
On March 8, 2011, the AARP Foundation Litigation along with the Washington D.C. law firm of Mehri and Skalet, PLLC, filed suit against the Department of Housing and Urban Development (HUD) on behalf of 3 plaintiffs. These plaintiffs were surviving spouses of reverse mortgage borrowers, and were facing eviction from their homes.
Here's the background of the case. Ever since the bill authorizing the reverse mortgage was signed into law back in 1988, HUD has clearly stated that the borrower or heirs would never owe more than the home was worth at the time of repayment. Since the borrower does not make payments on a reverse mortgage and the principal balance increases over time with the accrual of both interest and annual insurance, borrowers are naturally concerned about being protected should the value of the home end up less than the amount owed. One of the reasons for the expensive FHA-backed mortgage insurance was to establish this protection.
However, in December 2008 HUD rather abruptly changed its stance and said that if the estate or a surviving spouse who was not on the loan wanted to retain the home, they had to pay off the full mortgage balance, even if it exceeded the value of the home. This decision was understood to apply retroactively to all prior loans, as well as future reverse mortgages, and effectively made it almost impossible for an estate or surviving spouse not on the loan to keep an upside down home, because there are no lenders who will lend in that situation. HUD's announcement came in the form of Mortgagee Letter 2008-38, which specified that "in any circumstances where a mortgagee agrees to the acceptance of less than the full mortgage balance, such sale of the property by the borrower (or the borrower's estate) should be an arm's length transaction."
Now in most cases, the reverse mortgage has both spouses on the loan, or only one person because the spouse has already passed away. So the situation the lawsuit focuses on only applies to a small minority of cases. When both spouses are on the loan, the surviving spouse can continue to remain in the home after the other spouse passes away. It's relatively rare for both spouses to be on the loan, and then after they are both gone, to have the estate want to retain the property.
Why would a spouse be left off a reverse mortgage? The most common scenario is that the younger spouse is not yet age 62 and doesn't qualify to be on the loan. Another scenario might be that the younger spouse qualifies, but is considerably younger, and because the amount of money given in a reverse mortgage is based on the age of the younger spouse, they would leave the younger spouse off to receive the additional money.
AARP said in the suit that it's unfair for HUD to change the rules to go against the intent of the legislation, and make the plaintiffs face "substanial hardship" by being unable to pay off the loan, now that it's due and payable as a result of the death of the borrower. Strangely, HUD's ruling kept in place the policy that an unrelated 3rd party can purchase the property without having to pay more than the home's current value. Thus, a stranger is protected but a surviving spouse is not.
While the suit was still in the courts, HUD issued Mortgagee Letter 2011-16, dated April 5, saying that it regretted the uncertainty generated by the 2008 Mortgagee Letter and hereby rescinded it. HUD stated that further guidance would be issued in the future.
On July 15, 2011, the U.S. District Court for the District of Columbia dismissed the lawsuit as "moot" because the individual plaintiffs lacked "standing" to bring it. This means that HUD won on a technicality, and we did not get the benefit of a court ruling on whether HUD's interpretation of the HECM statute was permissible or correct. However, because of the HUD letter of April 5, it was widely anticipated that HUD would issue some acceptable clarification of its own accord.
Indeed, on July 19, 2011, HUD issued a new set of FAQs directly addressing this issue. HUD now states clearly that when a "property is conveyed by will or operation of law to the mortgagor's estate or heirs (including a surviving spouse who is not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property." Further, HUD requests all lenders to stay any foreclosures or evictions in process where there may be a surviving spouse or other heir interested in retaining title to the property. Once such an heir has presented a new written statement of intent to retain the property, the lender should give them 90 days to satisfy the obligation, and if necessary, an additional 90 days beyond that.
Borrowers can now be assured that they will not have the same experience the three plaintiffs in the original suit had, and that the traditional understanding that neither the borrowers nor their heirs will ever have to repay more than the value of the home, will continue to apply. We may never know why HUD tried to change its policy back in 2008, but we are all indebted to the AARP for forcing HUD to confront this administrative blunder and rectify it.