Federal Judge Rules HUD/FHA Violated Reverse Mortgage Statute by Improperly Directing Lenders to Foreclose on Elderly Widows!!!
“I couldn’t resist that title, but it’s absolutely true. And isn’t it more than a little hypocritical that in recent times, some parts of the government are blaming and penalizing mortgage lenders, contending that they aren’t doing enough to prevent foreclosures, while other parts of the government (HUD/FHA) are telling mortgage lenders that they must foreclose on elderly widows that can’t afford to pay off their deceased spouse’s reverse mortgage? Okay, aside from that hypocrisy, what really are the facts? HUD sought to enforce what they and their lawyers believed were their contractual rights regarding their FHA reverse mortgage program, in order to avoid potential losses to the FHA insurance fund that could easily be tens if not hundreds of millions of dollars or more (and at a time when the FHA insurance fund is insolvent and for the first time in its history just drew $1.7 billion from the U.S. Treasury). The Federal judge in this case ruled that HUD’s interpretation of the reverse mortgage statute was incorrect and that the statute did in fact protect surviving spouses (who were not borrowers) from foreclosure. I am not sure about the law in this matter, and while I know HUD and the government have taken pains to unfairly and inappropriately blame private mortgage lenders for just about everything, I don’t see how HUD could have done more and certainly I don’t think they acted inappropriately here? I am sure FHA’s reverse mortgage loan program and borrower loan documents were developed and reviewed by HUD’s lawyers to ensure they complied with the statute and thoroughly disclosed that when all borrowing spouse’s passed, the mortgage was required to be paid in full (generally through sale of the home) or FHA would take possession of the property, through foreclosure if necessary. Some married seniors chose to put only the eldest spouse as the borrower on the reverse mortgage, so that they would receive a greater financial benefit (either upfront, lump-sum cash or in a bigger monthly annuity). I don’t know for sure if it was made clear to non-borrowing spouse (generally the younger one) that they would have to pay off the mortgage, sell the home, or face foreclosure if their borrowing spouse pre-deceased them? I am betting it was made clear in most cases, but it sure as heck was made clear, in writing, to the borrowing spouse in loan documents they signed (and the non-borrowing spouse, if they were on title, probably had to sign something acknowledging that a lien was placed on the home and I am sure most benefited from the cash they received from the loan). Also, spouses are generally legally liable for each other’s financial decisions and actions and importantly, I believe the borrowing spouse was morally obligated to communicate with and explain the key terms of this reverse mortgage to his/her non-borrowing spouse (and in fact I bet did so, in most cases). With that said, assume for a moment, that instead of the government being ‘in the wrong here’, it was a private mortgage lender who after having been advised by counsel, wrongfully asserted what they thought were their contractual rights and foreclosed on these elderly widows (to avoid losses and protect their shareholders’ interests). And after-the-fact, they had received this ruling; that they were wrong and had violated a statute. What would have happened? “Page One” story, I bet. “Evil Mortgage Lender”, I bet. And likely there would be class-action lawsuits and calls for major government fines/sanctions and even criminal investigations. That’s the double standard we have today; government mistakes are overlooked, while private sector mistakes are distorted into major events.” Mike Perry, former Chairman and CEO , IndyMac Bank
Here is what I wrote about this double standard back on January 29, 2013:
“I believe that we (all of us) have allowed a double standard to develop in America, where citizens in the private sector are held to a higher standard of conduct and accountability than citizens in the public sector. And I believe it is getting worse over time (as the government expands) and it is eroding our individual rights and liberties and hurting the private sector’s ability and desire to take risks and innovate (succeeding sometimes, but more often failing and then trying again); the keys to a dynamic and vibrant economy. It is my view that Americans operating in the government sector (especially those in power, but even those who are not), must be held to a higher standard of duty and care than American’s operating in the private sector. Yet clearly today it is the opposite. Nearly all of our civil laws and regulations and the entire civil enforcement apparatus of the government is aligned against the private sector and private individuals. Nothing, other than our mostly disinterested and uninformed electorate, holds the government and its key officials to account for their conduct and mistakes. Why is it that because you seek to make your career in the “for- profit” sector (and help create jobs and taxpayers), some people think it is not possible to “do good” at the same time? And if something does go wrong (in an unprecedented financial crisis, say), it’s even worse. Your conduct and motives are immediately called into question and your reputation is unfairly besmirched. And years of your professional life are taken away being investigated by the government and sued (there are even calls in the press and among certain politicians for criminal prosecutions, without any knowledge of specific wrongdoing). However, if you are a government official and you are mistaken or fail, nothing happens.” Michael Perry, Excerpt from Statement #38, January 29, 2013
Updated October 1, 2013, 7:40 p.m. ET
Federal Reverse-Mortgage Program Takes a Hit in Ruling
Some Elderly Homeowners Improperly Faced Foreclosure After Their Spouses Died, Judge Says
A federal court rejected the Obama administration’s interpretation of a law governing a popular mortgage program for senior citizens that had led some homeowners to face foreclosure after a spouse died.The decision, handed down Monday, threatens to increase potential losses for the federally insured reverse-mortgage program, which allows homeowners 62 years or older to borrow money against the value of their homes. When the borrower moves or dies, the lender that originated the reverse mortgage takes possession of the home and sells it, and the proceeds are used to repay the loan.AARP filed suit two years ago to challenge the Department of Housing and Urban Development, which oversees the program. The seniors’ organization said HUD had violated federal law by requiring surviving spouses who weren’t on the mortgage to pay off the loan in full or face foreclosure.Nearly 600,000 borrowers have federally insured reverse mortgages through the Federal Housing Administration, which is part of HUD. Borrowers must have substantial equity in their houses and can receive either a lump sum or monthly payments from lenders. Lenders use actuarial tables to determine how much money borrowers are eligible to receive, with younger borrowers getting smaller monthly payments because they are expected to live longer.
Consumer advocates allege that brokers sometimes encourage only the older spouse to put his or her name on the mortgage in order to receive larger payments. HUD’s policy “encouraged more reverse mortgages to be made for larger amounts of money,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.
It isn’t clear how many homeowners have reverse mortgages where only one member of a couple has his or her name on a loan, though lawyers representing two homeowner plaintiffs in the case say there are hundreds of such borrowers. Peter Bell, president of the National Reverse Mortgage Lenders Association, said he wasn’t aware of evidence suggesting a widespread problem. “I’d rather not comment on it since I don’t know,” he said.
In the case decided Monday, Robert Bennett, a retired cook at the United States Naval Academy, had challenged his eviction from the Annapolis, Md., house that he and his wife bought in 1981. In December 2008, Mr. Bennett, then 66, and his wife, then 76, took out a reverse mortgage, according to court filings. Mrs. Bennett died the next month, and Mr. Bennett later learned that he wasn’t on the loan and that the mortgage needed to be repaid, although the $295,000 loan exceeded the value of his property, which was appraised for around $200,000 in 2011.
In the decision, U.S. District Judge Ellen Huvelle sided with Mr. Bennett and a Brooklyn, N.Y., widow who found herself in a similar position. The judge didn’t specify damages in her ruling and instead directed HUD to fashion “appropriate relief.”
“The message was loud and clear. This reverse-mortgage statue is supposed to protect spouses from foreclosure,” said Craig Briskin, a lawyer with Mehri & Skalet PLLC in Washington, who had represented the plaintiffs.
The FHA could face larger losses as a result of the decision, because younger spouses who weren’t on the loans will be able to live in the homes and receive any monthly payments that aredue.
In a 2011 motion to dismiss the lawsuit, HUD lawyers had argued that allowing surviving spouses to stay in homes when loans were based solely on the age of the elder spouse would “eviscerate” the “actuarial balance of the program.”
“The FHA fund will certainly take a hit from this,” said Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, who also represented the plaintiffs.
The FHA last week said that it would receive a $1.7 billion infusion this week from the Treasury because the agency has burned through its reserves. The bulk of those losses are in the reverse-mortgage program, officials have said.
A HUD official said Tuesday the agency wasn’t yet able to estimate the impact of the ruling or determine appropriate relief because of staff furloughs tied to the government shutdown on Tuesday. “We will be unable to respond until funding is restored and these staff return,” the official said.
The ruling could also prompt HUD to revise its rules to require that actuarial calculations be made based on the age of the youngest spouse, potentially reducing lending volumes. “Fewer people are going to do reverse mortgages,” said Mr. Rheingold.
Write to Nick Timiraos at firstname.lastname@example.org
A version of this article appeared October 2, 2013, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Reverse-Mortgage Program Takes a Hit.