HUD Sued Over Reverse Mortgage Foreclosures on Spouses

Author: AARP
Published: 2011/03/08 - Updated: 2026/05/18
Publication Type: Announcement

Contents: Synopsis - Definition - Introduction - Main - Insights, Updates - Related Publications

Synopsis: This report covers a federal lawsuit filed in U.S. District Court for the District of Columbia by three surviving spouses of reverse mortgage borrowers, represented by AARP Foundation Litigation and the firm Mehri and Skalet, PLLC, against the Department of Housing and Urban Development. It explains that the suit challenges a December 2008 policy shift in which HUD departed from its long-standing Home Equity Conversion Mortgage rules - in place since 1989 and reflected in the agency's 1994 Handbook - that limited a borrower's or heir's repayment obligation to the value of the home, and instead began requiring surviving spouses and heirs to pay the full mortgage balance to keep the property even when it exceeded current market value. The article also describes the HECM statute's "Safeguard to Prevent Displacement of Homeowner" provision, profiles the three plaintiffs facing foreclosure in Indiana and New York, and outlines the broader work of AARP Foundation Litigation. The information is useful for older homeowners, surviving spouses, adult children acting as heirs, and disability advocates who want a clear account of how HECM protections are meant to operate and where they have been contested in court.

Topic Definition: Illegal Reverse Mortgage Foreclosure Actions

Illegal reverse mortgage foreclosure actions, in the context of this litigation, refers to foreclosure and eviction proceedings initiated against surviving spouses and heirs of Home Equity Conversion Mortgage borrowers in ways that allegedly violate the program's long-standing federal protections. Those protections, codified in HUD rules dating to 1989 and the HECM statute's "Safeguard to Prevent Displacement of Homeowner" provision, generally limit a borrower's or heir's repayment obligation to the appraised value of the home and bar arbitrary displacement of a homeowner's spouse, even one not named on the mortgage, until the HECM itself terminates - protections the lawsuit contends were undermined by a December 2008 HUD policy change requiring full balance repayment as a condition of retaining the property.

Introduction

Three surviving spouses of reverse mortgage borrowers filed a lawsuit today 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 are represented by AARP Foundation Litigation and the Washington, DC law firm of Mehri & Skalet, PLLC. The lawsuit, filed in U.S. 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.

Main Content

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.

As noted above, one protection is that no borrower or his heirs can be liable for more than the value of the property. The lawsuit notes that HUD's Handbook, in effect since 1994, as well as other information published by HUD on its website and elsewhere, affirmed this policy. Then, in December, 2008, HUD abandoned that interpretation and stated for the first time that spouses or heirs who wanted to retain the home were required to repay the full balance, even if it exceeded the property's current value. Strangely, HUD's current rule is that a stranger can purchase the property for its current appraised value, but a surviving spouse cannot.

The lawsuit alleges that, as a result, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property.

A second important protection in the HECM statute - titled "Safeguard to Prevent Displacement of Homeowner" - provides that HECM homeowners cannot be displaced from their homes until the HECM terminates. It then states that "...for purposes of this subsection, the term 'homeowner' includes the spouse of a homeowner." Therefore, the spouse - even one who is not named on the mortgage - cannot be arbitrarily displaced from the home upon the death of the borrower.

Despite the clear language, HUD has never recognized the protection this non-displacement provision affords the spouse of a homeowner, according to the lawsuit.

The three plaintiffs, all of modest means, were adversely affected by HUD's illegal actions. Under HUD's rules, they do not qualify as "homeowners" because they were not listed on the original reverse mortgage documents with their spouses. And they will suffer "substantial hardship" if forced to repay the original higher mortgage cost in order to retain their home, the lawsuit states.

Plaintiff Delores J. Moore of Covington, Indiana, age 79, married Mr. Moore late in life and was never added to the deed to the home or the HECM mortgage. She is defending against a foreclosure action in Fountain County, Indiana Circuit Court.

Plaintiff Leila Joseph of Brooklyn, New York, age 77, was removed from the deed to the property when her husband, suffering from dementia at the time, entered into the reverse mortgage. Mrs. Joseph is defending a foreclosure action in the Supreme Court of Kings County, New York.

Plaintiff Robert Bennett age 69, had jointly owned the home with his wife since 1981. Unbeknown to him, he was removed from the deed when the HECM was executed. His wife, who was seriously ill at the time, died the following month. Mr. Bennett faces a foreclosure action.

HUD Secretary Shaun Donovan is the defendant in the lawsuit filed on behalf of the three plaintiffs by AARP Foundation Litigation and Mehri & Skalet, PLLC.

AARP Foundation Litigation (AFL) is an advocate in courts nationwide for the rights of people 50 and older, addressing diverse legal issues that affect their daily lives and assuring that they have a voice in the judicial system.

AFL expertise spans many specific areas of federal and state law, including:

• Age Discrimination in Employment
• Consumer, financial fraud and utilities
• Employee benefits, including pensions
• Investor protection
• Health and long-term care, including Medicaid, Medicare and prescription drug affordability
• Housing, including predatory mortgage lending, and livable communities
• Low-income benefits, such as the Supplemental Nutrition Assistance Program (SNAP)

Insights, Analysis, and Developments

Attribution/Source(s): This quality-reviewed publication was selected for publishing by the editors of Disabled World (DW) due to its relevance to the disability community. Originally authored by AARP and published on 2011/03/08, this content may have been edited for style, clarity, or brevity.