Beyond ML 2008-38: The 800-Pound Can of Worms



After more than two years of single-handedly urging HUD to revoke Mortgagee Letter (“ML”) 2008-38, it finally listened, under legal and political pressure.

HUD issued Mortgagee Letter 2011-16 on Tuesday, April 5, 2011, rescinding the odious Mortgagee Letter 2008-38 (December 5, 2008), the cause of ongoing litigation brought by a widower and two widows (the “AARP case” March 8, 2011), among hundreds of seniors across the America who have been recklessly hurt by the application of ML 2008-38 as alleged in the federal lawsuit.

Besides being two years late, ML 2011-16 is a clumsy legal maneuver as well as an admission that ML 2008-38 was (and is ) a colossal mistake that has injured seniors and exposed lenders, servicers, and HUD (taxpayers) to potentially huge legal, financial, and reputational risks.

I say “clumsy legal maneuver” because while it may have been issued to blunt the AARP lawsuit, it actually buttresses the case against HUD. More troubling, in rescinding ML 2008-38, HUD leaves HECM non-recourse policy in doubt, putting seniors, counselors, and lenders in regulatory limbo on a crucial issue in the nation’s reverse mortgage industry.

The 800-pound can of worms in the “AARP case” – HUD’s almost 22-year scandalous failure to protect non-borrowing spouses in HECM transactions by willfully and arrogantly refusing to implement the anti-displacement provision of the HECM Statute  — is not going away. It has the potential to become the grandmother of all legal and financial exposure for HUD
and lenders, thanks to the superior legal minds at HUD who substituted their bureaucratic judgment for a clear Federal law.

I believe the non-implementation of the anti-displacement law, Mortgagee Letters 2008-38, 2006-25, 2011-16, and other HECM policy letters call into question the judgment and competence of some of the legal counsel at HUD. The best risk-management decision Secretary Donovan and Acting FHA Commissioner Ryan can make today is to clean house at the highest level of HUD’s servicing and legal departments.

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