AARP Seeking Reverse Mortgage Reforms

Posted April 26, 2012 in Elder Law Foreclosure Real Estate by Richard Dahl

The American Association of Retired Persons (AARP) is awaiting word on its challenges to federal rules and industry practices that are placing widows and widowers at risk of foreclosure.

In March of 2011, the AARP Legal Foundation filed suit on behalf of the surviving spouses of three homeowners against the federal Department of Housing and Urban Development (HUD), alleging that policy changes enacted by that agency in late 2008 regarding reverse mortgages were pushing them into foreclosure.

Reverse mortgages are instruments that are available to homeowners over the age of 62, allowing them to borrow against their home equity; the mortgage need not be paid off until the homeowner dies or moves out of the property. But in late 2008, HUD issued a policy letter that seemed to state that widows and widowers not listed on a spouse’s reverse mortgage would have to repay the full amount of the mortgage lender when their spouse died.

Under the previous rules, the most that a surviving spouse could lose was the house itself. But with the economic downturn and collapse of the housing market, this rule meant disaster for many surviving spouses of reverse mortgage holders because their homes were worth less than the outstanding loan. In addition, the suit alleged that HUD was allowing these “underwater” homes with reverse mortgages to be sold to “arm’s length” buyers for less than the full mortgage balance at the same time that spouses or heirs had to pay back the full amount.

“We said this just doesn’t make any sense,” said Jean Constantine-Davis, a senior lawyer at the AARP Foundation. “It’s an arbitrary rule because why would you care who pays the mortgage back?”

A month after the suit was filed in the Federal District Court for the District of Columbia, HUD relented by issuing a letter that rescinded the 2008 policy letter.

In July, the court dismissed AARP’s lawsuit, stating that the plaintiffs had failed to establish redressability — meaning that they’d failed to show that HUD could do anything to change the situation because they’d entered into contracts with private lenders. In other words, they lacked standing.

United States Department of Housing and Urban ... AARP, however, has appealed that ruling—and, meanwhile, has launched a second legal challenge on reverse mortgages. In August, AARP filed suit in the U.S. District Court for the Northern District of California against Wells Fargo and Fannie Mae, stating that although HUD has corrected its rules, the defendants are “still failing to give notice to surviving spouses and heirs of their rights to purchase the property for the lower value and are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.”

While HUD has improved its rules for surviving spouses in reverse-mortgage homes, Constantine-Davis believes that HUD should be more proactive in protecting elderly homeowners and suggested that the agency might enact new rules to ensure surviving spouses’ rights to stay in the home if they weren’t a party to the mortgage or require that both spouses be listed on all reverse mortgages.

She said that going “off the deed” is too risky.

“It’s just not right,” she said. “It has too many hazards, and they’re giving up this huge property interest.”

She said that surviving spouses in these situations should actively pursue the financing to purchase the property and set up an estate.

“They need to set up an estate for the deceased person, because the right is that of the estate. And they shouldn’t let time go by. The lenders should be sending them notices that the estate has the right to do this, but as much as I can tell, those are spotty at this point. I don’t have a lot of confidence that lenders are getting the word out there as aggressively as they should.

“So if you don’t get a notice from the lender itself, you should write to the lender and say, ‘I have this right and I need an extension of time to line up financing,’ or whatever. It can be a spouse or an heir. Anybody can purchase the property.”

If you or a loved one is a surviving spouse not listed on a reverse mortgage you should contact an attorney immediately in order to protect yourself and your home. You can find more information about reverse mortgages and foreclosures on Lawyers.com.

Do you think lenders are taking advantage of seniors by foreclosing on reverse mortgages? Share your thoughts by leaving a comment below.

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