The AARP Foundation has filed suit against the U.S. Department of Housing and Urban Development on behalf of seniors who took out reverse mortgages guaranteed by the FHA (a division of HUD) and then, according to the complaint, lost their homes to wrongful foreclosures. The case represents a new turn in the crisis known as “Foreclosure-Gate,” because the advocacy group says HUD stripped away key protections that had been included in the program when the reverse mortgages were originally taken out.
“HUD changed the rules in the middle of the game without following federal law and told people they had to pay far more than they were promised,” Jean Constantine-Davis, a senior attorney at the AARP Foundation, told reporters.
How FHA reverse mortgages were supposed to protect seniors
A reverse mortgage allows seniors to collect monthly payments against their home equity, as opposed to making mortgage payments to build equity. A reverse mortgage is a loan, but the balance of the loan is not due until one of three things happens: the home is sold, the homeowners move out, or the last living homeowner dies. Ideally, a reverse mortgage can provide monthly income for seniors without threatening their homes.
Not all reverse mortgages are equal, however, and some homeowners reach the limit on these loans too early, which can cause problems. If the homeowner is allowed to continue receiving the payments, his or her heirs can be left with an unsellable home with an underwater mortgage. If the payments stop when the homeowner’s equity is exhausted, he or she can be put in the position of having no income unless mortgage payments are resumed.
Reverse mortgages guaranteed by the FHA were supposed to be different. With an FHA-guaranteed Home Equity Conversion Mortgage, the loan was supposed to be set up so that homeowners could never borrow more than the value of their homes. If the value of the home dropped and the homeowner was left with a mortgage that was underwater, the FHA guarantee would pay the overage when the borrower died.
According to the lawsuit, HUD changed those rules in 2008 under the Bush Administration. After the change, a surviving spouse who was not listed on the mortgage was required to pay off the full loan balance, even if it was more than the value of the home.
Perversely, if a stranger bought the home before the homeowner’s death and the house was worth less than the reverse mortgage balance, the FHA guarantee would kick in and pay the difference.
“HUD has basically ignored the protections guaranteed for spouses of borrowers as well as the borrowers themselves,” says Constantine-Davis.
The AARP Foundation is filing on behalf of three homeowners who fell victim to the rule and are facing foreclosure and eviction. Neither a HUD spokesperson nor former FHA commissioner Brian Montgomery, who made the rule change, responded to requests for comment.
Source: Westlaw News & Insight, “Seniors group sues HUD over reverse mortgages,” Corbett B. Daly and Terry Baynes, March 9, 2011