Reverse mortgages are once again under fire after the AARP filed a lawsuit against the Department of Housing and Urban Development (HUD) over the loans.
The group, along with the law office of Mehri & Skalet, PLLC, which is representing three elderly homeowners facing foreclosure, are seeking an injunction prohibiting HUD from reversing a long-standing rule and from illegally foreclosing on surviving spouses.
What’s the Issue Here?
- AARP wants to ensure surviving spouses aren’t harmed by reverse mortgages
- HUD quietly revised a rule pertaining to its HECM loan program in 2008
- That made it easier to call the loan due when the main borrower passed away
- Making life extremely difficult if the home happens to be underwater
Essentially, a HUD rule that goes back to 1989 clearly stated that a borrower or their heirs would never owe more than a property was worth at the time of repayment.
The HUD website still has the following text regarding Home Equity Conversion Mortgages (HECM): “The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home.”
Repayment is due when the death of the mortgagor takes place, or if the home is sold.
But in 2008, they reversed the rule without notice, requiring heirs (including those not named on the mortgage) to repay the full mortgage balance if they wanted to keep the home, even it if exceeded the value of the property.
This has made it impossible for surviving spouses or heirs to stay in their homes, as underwater mortgage financing isn’t exactly easy to obtain.
At the same time, a non-relative would be able to purchase the property for its current appraised value.
Additionally, the HUD’s reverse mortgage program notes that “HECM homeowners cannot be displaced from their homes until the HECM terminates,” and includes the spouse of a homeowner under the term “homeowner.”
As a result, these surviving spouses, who are technically homeowners, cannot be foreclosed on just because their spouse passes, per the lawsuit.
However, foreclosure can be initiated for a number of other reasons, including failure to pay homeowner’s insurance and property taxes, moving to a new principal residence, or even letting the property deteriorate without making necessary repairs.
Last month, Bank of America halted reverse mortgage lending, and late last year Consumer Reports called the loans a “last resort.”