Mortgagee Letter 2015-03 is a grave policy misguidance. It should be revoked before it exposes surviving spouses, lenders, the Home Equity Conversion Mortgage program, the Department of Housing and Urban Development, and the reverse mortgage industry to more unnecessary pain.
Issued on Jan. 29 as guidance to lenders to relieve the foreclosure-displacement crisis, the letter affects 12,000 older Americans (by National Reverse Mortgage Lenders Association estimates) who are the surviving non-borrowing spouses of HECM reverse mortgage borrowers who took HECMs before Aug. 4, 2014. While it is billed as relief for these consumers, that relief is questionable.
A new federal lawsuit filed on April 16, Snyder v. Castro, is an early warning that the policy letter is a cruel, bureaucratic farce designed to shift HUD's responsibility for the crisis to vulnerable victims of its own policy failures.
Three plaintiffs — Janet Snyder of Las Vegas, Karen Hunziker of Pollock Pines, Calif., and Howard Gill Jr. of Burnsville, N.C. — are facing foreclosure and displacement because their lenders have determined that they cannot surmount the hurdles HUD built into the Mortgagee Optional Election Assignment in Mortgagee Letter 2015-03.
Rather than relief, the MOE assignment is bringing foreclosure and displacement and anguish to consumers. According to the lawsuit, Snyder is slated for foreclosure as early as April 27, May 15 is Hunziker's foreclosure date, and Gill's is July 1st. For example, for Mrs. Snyder to qualify for HUD's MOE assignment, she must come up with $63,000 for a loan originated in 2006, according to the complaint. Since she does not have that sum, she will be evicted from her home on April 27 in violation of federal law.
These foreclosures are illegal under federal law because they are triggered by the death of the borrowing spouses. Yet they will proceed because HUD wants the lenders to foreclose as a condition for paying their insurance claims.
The same HUD that created the problems by issuing illegal regulations and by directing lenders through an earlier policy letter, Mortgagee Letter 2006-25, to remove non-borrowing spouses from title to their homes through questionable quitclaiming practice. Rogue actors in the industry followed HUD's "guidance" in ML 2006-25, and HUD is punishing the victims.
It is plain blackmail. As an agency of the U.S. federal government, HUD should be ashamed for trampling on the law it is charged with administering and for using its awesome bureaucratic might to intimidate and bully lenders into committing illegal acts that will embroil them in litigation for years unless ML 2015-03 is rescinded.
In private conversations, lenders have repeatedly indicated that they do not want to foreclose on surviving spouses because they know the spouses are victims of HUD's policies and because it hurts the reputation of the product and the industry. But as thinly-capitalized small businesses with their investments and survival at stake, they are being forced by HUD to foreclose.
Protection from displacement for homeowners is a core purpose of HECM law and the HECM program, and so is protection against crossover-investment loss for lenders' insured loans. Borrowers' equity pays the insurance premiums that HUD uses to pay claims. And as HUD Secretary Julian Castro told Congress on Feb. 11, HUD's Mutual Mortgage Insurance Fund is flush with more than $46 billion in cash to pay claims.
In addition, Castro said the MMIF expects to take in more than $7 billion a year in the next several years.
According to HUD's own questionable estimate in court papers a few days before Castro's testimony to Congress, the non-borrowing spouses' fiasco could cost a mere $1.8 billion at most if HUD accepts unfettered assignment of the disputed loans. It claimed the $1.8 billion dubious estimate would cause irreparable damage to the MMI Fund, and it is the reason for the cost-shifting "guidance" called ML 2015-03.
Since 2008, major private banks and other financial institutions have paid more than $120 billion for their mortgage-related business mistakes. Why should HUD go scot-free by forcibly shifting the costs of its unlawful conduct to the victims of the conduct? What kind of country allows a government agency to kick widowed spouses it is charged with protecting from displacement out of their homes with impunity?
What kind of lessons is HUD teaching the private companies it regulates? Who is going to hold HUD accountable for these blatant breaches of law and ethical conduct? Where is Sen. Elizabeth Warren? Where is Consumer Financial Protection Bureau Director Richard Cordray? Where is President Obama? Where is America's outrage at injustice to more than 12,000 surviving spouses and some lenders? Where is justice for powerless older Americans?
Mortgagee Letter 2015-03 is a heavy-handed and shameless attempt by HUD to forcibly shift responsibility to the victims of its policy and business failures. It should be quashed before more than 12,000 vulnerable older Americans are illegally kicked out of their homes.
Atare Agbamu is the president and CEO of ThinkReverse.