When Reverse Mortgages Fail to Protect Homeowners From Foreclosure
The sharp downturn in the real estate market has impacted millions of Americans, and seniors are one of the groups most affected.
This is particularly true of seniors who have so-called “reverse mortgages.” This type of mortgage can potentially be a good way for people over the age of 62 to get money out of their homes. But in a market in which so many mortgages are underwater, it can also raise the risk of foreclosure.
Reverse mortgages are not new. But older homeowners are increasingly turning to them to improve their situations later in life, especially during a down economy. These types of mortgages, also called Home Equity Conversion Mortgages (HECMs), allow people to withdraw some of their home’s equity and receive it as a lump sum, in monthly payments, as a line of credit or a combination of these options. According to AARP, HUD insured over 78,000 reverse mortgages just last year and more than 660,000 between 1990 and 2010.
Homeowners eligible for reverse mortgages must be at least 62 years old and have to own the property or have a minimal outstanding mortgage. The property should be their principal residence and homeowners must be free of any defaults on federal debts. Homeowners must also attend an informational session about reverse mortgages before filing any HECM loan applications. Once a lender approves a reverse mortgage, the loan repayment is deferred until the owner dies, the home is sold or the owner moves out.
Because of a rash of lender foreclosures on mainly elderly homeowners holding reverse mortgages, the AARP Foundation sued the Department of Housing and Urban Development (HUD), challenging a rule that had the effect of contributing to foreclosures. The rule required an heir to pay the full mortgage balance to stay in the home after the borrower’s death, even if the amount was more than the market value of the property.
This article will examine the AARP litigation and HUD’s response.
Reverse mortgages can be expensive and confusing for elderly homeowners, as they are distinct from traditional mortgages. Also, a reverse mortgage can sometimes deplete all of the equity in the homes if the homeowners extend the reverse mortgage over too long of a period. This often arises where the homeowner takes a reverse mortgage on an assumption of life expectancy, but survives well past the expected mortality date.
While reverse mortgages can provide positive results, such as allowing older homeowners to remain in their homes longer, they can also backfire and result in foreclosures. This has been especially true for newly widowed homeowners, and some heirs of borrowers, because of lender compliance with an obscure HUD rule that was instituted in 2008.
Prior to the rule change in 2008, HUD had followed a policy that borrowers and their heirs would not owe more than a home’s value at the time of repayment. In fact, the practice was to allow surviving spouses whose names had been removed from the title (for purposes of the reverse mortgage transaction) to buy the property for 95 percent of its market value.
The 2008 rule stated that surviving spouses, in order to keep their homes, had to pay off the reverse mortgage balance shortly after the deaths of their spouses. This was the case regardless of whether or not the surviving spouse’s name was on the loan, and regardless of the home’s then-current value. When a widowed spouse could not repay the reverse mortgage within the time constraints, because of equity loss or other reasons, lenders were choosing to foreclose. That scenario, and the associated HUD rule, is what prompted AARP to sue HUD.
AARP v. HUD
AARP formally challenged HUD’s action in changing this rule, arguing that it was done arbitrarily by letter, rather than through the required administrative procedure. The suit further alleged that HUD’s rule change violated protections previously allowed for widowed spouses to prevent foreclosure.
AARP sought an injunction to stop HUD from enforcing the 2008 rule change against surviving spouses. AARP hoped this would prevent further illegal foreclosures from reverse mortgages due at the time of a borrower’s death.
In April 2011, HUD rescinded the 2008 rule that required surviving spouses not named on the property’s title to pay the full loan amount to keep their homes. The implications of this change are not yet fully clear.
The recent action by HUD in response to the AARP challenge could help some struggling homeowners. But it is important to talk with an experienced real estate attorney to know where you stand. Reverse mortgages should give older homeowners more financial freedom, but when they fail this purpose, they can unfortunately leave elderly people both homeless and helpless.
Elderly Twin Cities homeowners considering entering into a reverse mortgage agreement should consult experienced Minnesota real estate attorneys like Burns & Hansen, P.A. before signing any legally binding documents.
In addition, if you already have a reverse mortgage on your home, you should discuss your situation with a lawyer experienced in these types of mortgages to make sure you and your spouse are protected if one you dies or if your home loses equity because of the downturn of the real estate market.