The U.S. Department of Housing and Urban Development (HUD) is facing a lawsuit from three surviving spouses of reverse mortgage borrowers. The case, filed in the U.S. District Court in the District of Columbia has charged the organization with retroactively changing the rules of the agreement and putting the plaintiffs at risk for losing their homes to foreclosure.
About Reverse Mortgages
While many consumers need to secure mortgages and make monthly payments in order to finance their pursuit of the American Dream of home ownership, reverse mortgages are a unique type of loan that allow home owners to tap into their equity while staying put in their homes. This loan varietal also goes by the name of Home Equity Conversion Mortgage (HECM).
While many consumers are just starting to hear about the unusual loan agreement, the device has been around for over five decades. Deering Savings and Loan of Maine issued the very first reverse mortgage to Nellie Young in 1961, but the niche only started to gain legs once the Federal Housing Authority Insurance Program was passed into law in 1988.
During that time, the American Association of Retired Persons (AARP) worked in conjunction with the Feds to develop the loan product. Reverse mortgages were first tested in a trial with 50 participating national lenders. Under the guidance of the AARP, the program was deemed a success and the United States government officially started backing the loans in 1989.
Over the next decade reverse mortgages became increasingly popular. In 1998 private financial sectors took notice and started to offer reverse mortgages to their clientele. Estimates from HUD in 2009 predicted that the reverse mortgage niche would expand to include $30 billion worth of activity in 2010.
Reverse Mortgage Rules
Baby boomers have been the main contributors to the reverse mortgage industry as the loan varietal allows them to stay in their home and age in place. The rules surrounding reverse mortgages include:
- Reverse mortgages will only be issued to consumers aged 62 or older.
- The mortgage on the property must either be paid in full or near full amortization.
- Only primary residence of homeowners can be used for the secured loan opportunity.
- Only single family detached home, townhouse or condominiums can qualify for the loan.
- Reverse mortgage loan amounts are based on a combination of current interest rates, the age of a borrower and homes fair market value.
About the Lawsuit
The lawsuit has been served based on a 2008 revision in the original policy rules set in 1989 as HUD made a point "clarification" its previously established terms. According to Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation, since the change implemented by HUD was considered minor, it did not go through the conventional process of getting approval and public feedback.
According to a statement released by the AARP, the original loan language from 1989 stated that both "...reverse mortgage borrowers and their heirs would never owe more than the home was worth at the time of repayment," (MSN.com). The recent “clarification” now states that "an heir or surviving spouse must pay the mortgage balance to keep the home -- even if that loan balance is higher than the property's value," (MSN.com). Three spouses who did not sign off on the original reverse mortgage agreement are behind the lawsuit as the policy changes are putting them on the brink of ruin.
There are several points made by the AARP disclaiming the credibility of HUD's actions including:- Breaches the existing contracts between the borrower and lender.
- Annuls why borrowers had been paying mortgage insurance premiums.
- Allows a stranger to buy the homes at the current market value, but prevents spouses from purchasing the property at a fair price.
