The Department of Housing and Urban Development this week rescinded a controversial mortgagee letter that held homeowners or their heirs responsible for repaying, in full, a Home Equity Conversion Mortgage if they wished to keep the property.
By nature, HECM loans are non-recourse mortgages. That letter, 2008-38, gave a different interpretation of the HECM loan's non-recourse provision than what had been previously understood. With the non-recourse provision in place, the borrower would never owe more than the value of the property.
But the letter said if the borrower wanted to retain the property and pay off the loan early, or if the borrower or any heirs wanted to keep the property when the loan became due, they needed to repay the full amount given. The letter also had a provision regarding arms-length transactions where the lender agreed to accept less than the full balance due.
A spokesman for HUD said "This guidance was intended to make certain that the sale of the property is a legitimate market driven sales transaction and based on the property's real value. Since there has been some uncertainty in interpreting the guidance in that mortgagee letter, new guidance will be issued in the future." Meanwhile, lenders should rely on "the regulations at 24 CFR Part 206 and the provision in Handbook 4235.1 for guidance," the spokesman said.
In March, AARP filed a suit in the U.S. District Court for the District of Columbia seeking an injunction stopping enforcement of the 2008 mortgagee letter. AARP says not only did that mortgagee letter violate HUD rules, it violated existing contracts between reverse mortgage borrowers and lenders.
The HUD spokesman said the agency does not comment on pending litigation. A call to AARP was not returned by press time.
