FHA retreats from reverse mortgage claims

by Peter G. Miller
April 12th, 2011

If you’re a federal department you likely do not want to incite the attention of a powerful lobby. For the future education of government bureaucrats he’s why: It took HUD less than a week to back down after facing a lawsuit from one of the most important groups in Washington, the American Association of Retired People.

The dispute began in the waning weeks of the Bush Administration. Until this point it had been plainly understood when an individual with a reverse mortgage — or a Home Equity Conversion Mortgage (HEMC) as HUD calls them — moved, sold or passed away that the loan could be entirely paid off by giving title to the lender. Neither the lender nor HUD had any right to go after the borrower’s estate, spouse, children or heirs to make up any loan losses.

Big Claims Against Spouses & Heirs

But in late 2008 HUD came out with a new ideas.

“The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Get it?

Under HUD Mortgagee Letter 8-38 a spouse or heir who wanted to keep the property had to pay all that was owed to the lender, not just property’s appraised value. In other words, HUD would not pay lender claims if the family wanted to keep the property. Since a reverse mortgage is a negatively amortizing loan, in time the size of the mortgage debt would likely pass the value of the home — especially during the past few years as home values have generally fallen.

According to AARP, “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.”

Caught, HUD retreated with a new mortgage letter published April 5th:

“On December 5, 2008,” said HUD, “the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML) 2008-38 to provide clarification to mortgagees regarding the requirements for repayment and termination of a Home Equity Conversion Mortgage loan. HUD’s intent in issuing ML 2008-38 was to supplement and explain provisions contained in the regulations at 24 CFR §206.125 and HUD Handbook 4235.1 (Home Equity Conversion Mortgages). Since there has been some uncertainty regarding the guidance in that ML, HUD is rescinding ML 2008-38, effective as of the date of this ML.”

In other words, let’s go back to the old understanding, a key reason to get a reverse mortgage.

And no, there was no uncertainty. No clarification was needed. HUD, under the Bush Administration, tried to gut the FHA reverse mortgage system through the back door and got caught. It tried to change the contracts HUD had with existing reverse mortgage borrowers even though borrowers had not agreed to any revisions.

Congratulations to AARP for protecting its members and their families.

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