AARPs legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.
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The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due typically after the borrowers death.
AARPs litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.
At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.
AARPs litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the homes value had dropped.
HUD also changed a rule stating that a borrower could sell a secured property for 95% to 100 percent of its appraised value. The new rule stated that only arms-length transactions would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95% of appraised market value.
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The first AARP lawsuit alleged that, as a result of the rule, 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. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.
Although HUD reversed itself, AARP attorneys have continued to receive calls from distressed families facing foreclosure by Wells Fargo and other lenders. Its difficult to know how widespread the problem is, says Jean Constantine-Davis, a senior attorney at AARP. We only know about the people who have called us, and there are dozens.
The plaintiff in the new class action suit is Robert Chandler of Elk Grove, California, whose mother died in 2010, five years after obtaining a reverse mortgage. The suit contends that Chandler was not notified of his right to purchase the property for its current value, and that he was told by Wells Fargo that he would have to pay off the full mortgage balance.
Thats contrary to the standard HECM contract language, which specifically states that the property can be purchased at market value. Wells Fargo subsequently foreclosed on the home, acting on behalf of Fannie Mae, which owned the mortgage. The home had been in the Chandler family since the 1940s.
Wells Fargo announced plans to exit the reverse mortgage market in June, although it continues to service existing loans. The bank is one of three major lenders that has stopped writing loans this year.
The lawsuit comes as Wells Fargo and other major banks continue to deal with foreclosure-related problems in the traditional forward loan market.
A Wells Fargo spokesman noted the rule change issued by HUD in April: When the HUD rules changed, we adopted them including providing notice to the heirs. We intend to defend our company in this case.
Fannie Mae declined to comment.