AARP challenges HUD on reverse mortgages

The shadow of a house key falls over a mortgage application form.


Tess Vigeland: A couple of weeks ago we aired a story explaining reverse mortgages. They let senior home owners borrow against the equity in their houses, and the bill doesn't come due until the home owner dies or otherwise leaves the property. Well this week the AARP filed suit against the U.S. Department of Housing and Urban Development. HUD regulates reverse mortgages. AARP claims a change in government policy is pushing the spouses of some deceased owners out of their homes.

Jean Constantine-Davis is a senior lawyer at the AARP Foundation. Thanks for being here.

Jean Constantine-Davis: Thank you.

Vigeland: Tell us what has now happened with some of these reverse mortgages.

Constantine-Davis: Well, over the past year or a little more, we've been hearing about a lot of folks who are surviving spouses of a person who took the reverse mortgage. I think the most typical scenario is where two people have been married and living in a home for many years and at some point they decide they need to access the equity in their home. And a mortgage broker of some type will convince them that it's better to put the reverse mortgage in one of their names or they don't even know that it's only getting put in one of their names, but in fact, that's what happens.

Vigeland: Instead of both of them signing it.

Constantine-Davis: Yes. And the problem with that is that it's not just that the mortgage is only in one of their names, it's that in order for that to happen, the other person's name is taken off the deed to the property. So essentially, one spouse is being divested of all of his or her interest in the property and usually the older spouse is left on the deed and on the reverse mortgage. And the reason that the broker's like that is because you can take a higher amount if you're older. The amount that you can take out in a reverse mortgage is a function of the value of your property and your age.

Vigeland: Alright, so what has happened now is that there was a change in the rules at the Department of Housing and Urban Development. Tell us what that did.

Constantine-Davis: The rule has always been with reverse mortgages, neither you nor your heirs will ever owe more than the value of your property. So, in 2008, HUD said that's only true if you sell the property. If you want to keep the property, if your heirs want to keep the property, they have to pay off the full mortgage balance. HUD also said that if you want to buy the property from the estate, you have to pay the full mortgage balance rather than the appraised value of the property. This rule came, as you imagine, at a uniquely bad period of time, when values in housing market had already plummeted and they have dropped even further since that time.

Vigeland: So now, spouses with homes that are underwater are still having to pay back more than what the home is now worth.

Constantine-Davis: Right, and of course they can't get financing to do that.

Vigeland: How many reverse mortgage holders do you think might be in this position?

Constantine-Davis: That's kind of the $15 million question here. There are statistics on how many reverse mortgages are out there, which I believe is something like 500,000. And a certain number of those are being held in the name of a single individual, so there's no way of knowing if those people who are individually named on the mortgage are in fact single people or if they're married people whose spouse is not named on the mortgage.

Vigeland: Alright, well, I'm sure this will take some time winding its way through the legal system, but mean time, thank you for joining us. Jean Constantine-Davis is a senior lawyer at the AARP Foundation. Thanks again.

Constantine-Davis: Thanks Tess.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.
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Interesting article - we are currently on a mission to help seniors save on their reverse mortgages - many in the media have given the reverse mortgage program a bad rep but in reality it is a great program for some - we are working hard to allow seniors to comparison shop HECM lenders -

I agree that the surviving spouse or other heirs should be able to refinance a reverse mortgage for the FHA appraised value, it's just common sense.

Not changing this rule will likely result in "straw buyer" transactions in the future.

I also believe that this suit will ultimately result in most lenders prohibiting the removal of anyone on title when a reverse mortgage is done.

As Mr. Veale points out, this would eliminate some legitimate reasons for doing this, and that is not a good thing.

The problem we originators have is that the HUD rules change and those changes are not clear. ..and they keep changing. The rules seem to change retroactively. My experience of loan originators is reverses are so time consuming that few get rich people bother. Most are concerned about seniors and try to do a good job. These kind of discussions are good to bring facts to light.

The HUD rule change isn't the problem. It's the lender and HUD allowing one spouse to quit claim or divest themselves of their interest in their property. The lender and HUD knew what the outcome would be when the titled borrower passed away - foreclosure! Thousand (not a handful) of seniors have been left in default, foreclosure and homeless from reverse mortgages sold to seniors for profit without a care for the consequences to the seniors. Reverse mortgages should not be sold unless the borrower completely understands the consequences. NO ONE does that. See my website; elderfinancialterrorism.com

While I agree with Ms. Jolley on several points, I do NOT agree removing spouses off of title is a common practice. Out of the loans I have originated, I have done only one where a spouse came off of title and that was where the existing loan was in default. The reverse mortgage was only intended to last 18 months at which time a court awarded annuity would begin. At the end of the 18 months, the borrowers wanted to get a traditional 30 year mortgage, which they did. That was a very positive experience for everyone and financially would have worked out even if the spouse on title had passed away. It was a win-win move for everyone from day one.

I have also advised couples to stay on title. In one case, each spouse was previously married to another person but the four had been great friends for years. In a period of less than three years, each had their respective spouse pass away. After a few years they ran into each other and neither had remarried. Both realized they would be much happier if they were married to each other. They did but after combining households, they failed to put both on title. We suggested they discuss their estate concerns with their respective attorneys and see if there was not some way both could be on title. They did and the attorneys and I worked out the details. It is working well for both of them.

Sad to say, there are too many situations (even one would be one too much) where spouses have been removed from title under very risky circumstances. Most of the time there has been an eager "financial advisor" who was originating the loan to sell something with it or the borrower desperately needed all of the money they could get in order to avoid foreclosure. I am sure that if counseling knew about the eager "financial advisor" situation, the counselor would have tried to talk the senior out of going off of title.

A reverse mortgage cannot work miracles. It is a financial product with pluses and minuses. It should only be used as a pure leveraging device to carry new or existing financial or insurance assets IF the borrower has the financial wherewithal to absorb a possible financial loss. HOWEVER, leveraging in later life rarely makes sense to this old-time CPA. The adage is true that the older one is, the more risk adverse one should be unless the risk taker is filthy rich.

Seniors need to be careful with their future and realize these are not equity something or others. Reverse mortgages, even HECMs, are first and foremost mortgages with some very unusual and helpful features in the right circumstances. Do not start looking into them when you are in financial need. As I am fond of saying, everyone over 50 should know as much as possible about them but they are not for everyone.

Good interview. Let's take it a little further though because the lender is responsible as well. The lender knows when they tell someone to quit claim or take their name off their property what the consequnces will be to the elderly borrower who is no longer on title. Many, many people have been left homeless from this practice while the lender has recovered 100% of their loan. This is just one of the many negative consequences of reverse mortgages that seniors are not aware of. Please see my webstie for more information Sandy Jolley elderfinancialterrorism.com

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