The AARP Foundation has issued the following press release:

Three surviving spouses of reverse mortgage borrowers filed a lawsuit against the Department of Housing and Urban Development (HUD), alleging that the agency had abandoned long-established federal rules and violated protections for surviving spouses, with the result that the three individuals are now facing imminent foreclosure and eviction from their homes.

The plaintiffs, from Indiana, New York, and Maryland, are represented by AARP Foundation Litigation and the Washington, DC law firm of Mehri & Skalet, PLLC.  The lawsuit, filed in US District Court for the District of Columbia, seeks an injunction prohibiting HUD from abandoning long-standing rules and from illegally foreclosing on surviving spouses.  These arbitrary changes allow lenders to initiate foreclosure and eviction actions against the plaintiffs.

The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are now "underwater" as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against.

HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir — including a surviving spouse who was not named on the mortgage — must pay the full mortgage balance to keep the home, even it if exceeds the value of the property.  This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums.

"HUD has inexplicably turned existing reverse mortgage policies upside down," said Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation, in discussing HUD’s actions.  "These are older individuals with limited means who have been blindsided by arbitrary, retroactive decision making."

Steven A. Skalet, of Mehri & Skalet PLLC, stated, "Rather than protecting borrowers, HUD retroactively changed the terms of the loans to make these elderly borrowers’ spouses and heirs pay more to keep their home than an unrelated purchaser would have to pay to purchase the property."  He added:  "This is shameful and we intend to make HUD honor the representations and promises they made to borrowers when they signed up for these government-insured loans."

A reverse mortgage is a loan that allows older homeowners to convert the equity in their homes into cash.  It is the "reverse" of a traditional mortgage, in which the borrower repays the borrowed sum on a monthly basis.  Reverse mortgage borrowers receive money in exchange for their home equity.

Reverse mortgage borrowers are not required to make monthly or other periodic payments to repay the loan.  Instead, the loan balance increases over time and the loan does not become due and payable until one of several specific events occur, for example, the last homeowner dies, moves permanently, or sells the home.

The loans are insured under the Home Equity Conversion Mortgage (HECM) program, and because of the complexity of the program and because it is specifically tailored to meet the needs of those 62 and older, Congress included special protections for HECM borrowers.

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