The Department of Housing and Urban Development has rescinded a controversial mortgagee letter for its Home Equity Conversion Mortgage program addressing some consumer and industry concerns, but a consumer watchdog group involved in a case contesting the letter said it is still keeping an eye on the agency regarding its policy on loan payoff amounts.
AARP Foundation Litigation is still suing HUD over the now-rescinded mortgage letter, 2008-38. It represents three seniors whose spouses have died, but only the deceased family members were listed as borrowers on the HECM loans. These surviving spouses wanted to stay in the property; all three loans are in foreclosure.
In March, AARP Foundation filed its suit in the U.S. District Court for the District of Columbia contesting the 2008 letter. Among the claims was that not only did it violate HUD rules, it violated existing contracts between reverse mortgage borrowers and lenders.
Jean Constantine-Davis, a senior attorney for AARP Foundation said, “HUD’s action takes an important step toward resolving some of the issues raised in the case. We need to understand more about how HUD intends to implement the new mortgagee letter and what steps it is prepared to take to ensure that surviving spouses and heirs are not foreclosed on, based on the now withdrawn rules.”
A HUD spokesman said the agency does not comment on pending litigation.
Even though the letter has been withdrawn, the lawsuit is continuing, said Constantine-Davis.
“There is still at least one important issue that remains in the case—i.e., whether HUD illegally ignored statutory protections for the spouses of HECM borrowers. This issue will continue to be litigated.”
The mortgagee letter indicated the homeowner or heirs would have to repay the HECM in full if they wished to keep the property.
This was a different interpretation of the HECM loan’s nonrecourse provision than what some in the lending community had previously understood. Some lenders, in marketing the product to seniors, had said that when the time came to repay the loan, 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 arm’s-length transactions where the lender agreed to accept less than the full balance due.
Some in the industry said HUD’s move will help their clients.
Alex Farber, a senior vice president for Residential Home Funding, said he had a client who would benefit from the change. The surviving family members wanted to stay in the house, but its value had shrunk to $300,000. There was $470,000 outstanding on the mortgage.
The timing of the withdrawal, he said, was “fortuitous” for the family.
Mario Martirano, also a senior vice president for Residential Home Funding, added that without the change, the surviving family members were not able to refinance back into a traditional mortgage to pay the amount due if it was more than the home was worth.
The letter created a “gray area” when it came to arm’s-length transactions to sell the property, Farber said. Martirano added that he believed HUD would return to the policy that had been in place from the time the program started through the issuance of the mortgagee letter.
Although Residential Home recently entered the reverse mortgage business, the pair are long-term veterans with the product, going back 18 years.
(Neither the company nor its clients are involved in the AARP Foundation suit.)
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.
