By Mark Miller
Tribune Media Services
The problems afflicting the reverse mortgage industry took a turn for the worse recently, when the AARP Foundation filed a lawsuit challenging federal rules said to be forcing borrowers into foreclosure.
AARP filed the suit against the U.S. Department of Housing and Urban Development (HUD), which regulates the reverse mortgage market. But the suit also strikes at a problem affecting lenders and borrowers, namely the sharp decline of home values in the wake of the housing crash - and lending rules affecting married couples where only one spouse signs the loan documents.
HUD administers the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM). For years, HUD and lender marketing materials have described HECMs as non-recourse loans, in which borrowers could never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure seniors that HECMs were safe.
But AARP charges 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 means that a surviving non-signing spouse would have to re-pay the full outstanding HECM balance, even if the home's value had dropped.
Second, HUD changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only "arm's 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 percent of appraised market value.
Lenders and some lawmakers are supporting AARP's position.
The National Reverse Mortgage Lenders Association is urging HUD to rewrite its rules to allow a sale to a family member on the same terms as a sale to a third party. And Rep. Barney Frank (D-Massachusetts) recently co-signed a letter to HUD urging that surviving spouses be permitted to assume the loans. Frank is the ranking member of the House Committee on Financial Services and co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The AARP suit comes on the heels of recent efforts by HUD and lenders to address loan defaults among strapped homeowners who fail to keep up on required tax and insurance payments. HUD launched a new initiative aimed at beefing up counseling services that reverse mortgage borrowers are required to undergo as part of the loan process.
AARP's plaintiffs are the surviving spouses of three homeowners who bought HECMs, but who didn't sign on as co-borrowers. As such, they represent a very large portion of all HECM borrowers; only 39 percent of outstanding HECM loans last year had multiple signers, HUD data shows.
HECM borrowers must be 62 years of age, so in some cases, one spouse is too young to qualify. In other cases, one spouse isn't listed on the title; one of AARP's plaintiffs wasn't listed because her husband owned the house prior to their marriage in 2001.
But there also can be financial motivation for just the older spouse to sign the loan. That's because the amount you can borrow is determined, in part, by an age-driven actuarial formula that includes the age of the youngest borrower, interest rate, home value and insurance costs; solo older borrowers will receive higher monthly payments since they aren't expected to collect payments as long as younger borrowers.
We're living in tough times, so reverse mortgages likely are here to stay, warts and all. But the AARP lawsuit underscores the need for would-be reverse mortgage borrowers to think carefully about the implications of taking a loan, and the possibility of losing a home under certain circumstances. By law, counseling is a pre-condition for borrowing, but take it seriously-and if you have any doubts, consult a trusted attorney or financial counselor before making a decision.
I've posted links to counseling resources with the online version of this column here: http://retirementrevised.com/rmcounseling.
Mark Miller is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and LIving" (John Wiley & Sons/Bloomberg Press, June 2010). He publishes RetirementRevised.com, featured recently in Money Magazine as one of the best retirement planning sites on the web. Contact him with questions and comments at firstname.lastname@example.org
This column was printed in the April 24, 2011 - May 7, 2011