The AARP, the powerful senior citizens organization, sued the federal government Tuesday, alleging that illegal changes to rules regarding reverse mortgages could result in seniors getting evicted from their homes.
The suit was filed against the U.S. Department of Housing and Urban Development (HUD) by the AARP Foundation in U.S. District Court in Washington, D.C. The plaintiffs are two widows in Indiana and New York and a widower in Maryland, all of whom face immediate foreclosure and eviction as a result of HUD’s decision to change rules regarding reverse mortgages.
“HUD has inexplicably turned existing reverse mortgage policies upside down,” Jean Constantine-Davis, a lawyer with the AARP, said in a press release. “These are older individuals with limited means who have been blindsided by arbitrary, retroactive decision making.”
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HUD does not comment on pending lawsuits, according to a spokeswoman.
Reverse mortgages were created more than a quarter-century ago so that seniors with significant equity invested in their homes could tap into that equity to cover living expenses. A reverse mortgage is different from a regular mortgage in which the homeowner pays down the principal each month. Instead, with a reverse mortgage, the principal grows over time as the homeowner receives a monthly payment. The loan is paid off at the very end, often when the last homeowner dies, moves into assisted living or sells the home.
Since 1989, HUD rules stated that borrowers or their heirs would never owe more than the house was worth at the time of repayment, according to the AARP. But HUD changed that rule in December 2008, so that now borrowers and heirs must pay the full mortgage to keep the home, even if the value has fallen since the mortgage was written.
During the housing boom, that was rarely a problem. But now that 23% of American homes are worth less than their mortgages, some seniors find that reverse mortgages they received to balance their finances are actually sinking them. Unable to find a lender willing to give a loan for more than their house is worth, they are forced to sell the home, pay the difference between purchase and selling price themselves, and give up all of the remaining equity they had invested.
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AARP points out that after seniors lose their home, anyone off the street could buy it at the new, lower value.
“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,” attorney Steven A. Skalet, who is working with AARP on the case, said in a press release. “This is shameful.”
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