Atare Agbamu's Think Reverse! Blog

Foreclosure and displacement are lapping at the doors of more than 12,000 older Americans (a National Reverse Mortgage Lenders Association  estimate in court filings) at a most vulnerable time of their lives.

And Obama’s HUD is directing reluctant HECM lenders to carry out these illegal and unconscionable foreclosures and displacements.

Even the federal district court judge, who has been presiding over the AARP-led litigation since 2011, knew that most surviving HECM non-borrowing spouses would not survive the PLF condition. In part, this is how the judge sees the PLF condition:

“…the … condition [PLF] is difficult, if not impossible, for the named plaintiffs and other surviving spouses to meet ….” August 28, 2014 Decision in the Plunkett case

Besides the obvious prompts to foreclosure (the word foreclosure appeared more than 12 times in the “relief” policy letter), the PLF condition and the many costly compliance hoops HECM lenders must jump through mean lenders would see foreclosure and displacement as the way to get HUD to pay their insurance claims. But it would not be that easy.

The foreclosure-and-displacement process could tie up lenders (and HUD) in endless multiple litigation for years. HUD’s recent regulatory maneuvers to redefine its “foreclosure time-frames” notwithstanding, the law is clear: foreclosures triggered by the death of a borrowing HECM spouse are illegal under federal law.

Families of surviving HECM non-borrowing spouses, advocates for older Americans, and public-interest lawyers are going to contest these illegal foreclosures in courts across the country.

Litigation in multiple jurisdictions across the country could impose profit-crushing costs on thinly-capitalized lenders. Most reverse-mortgage lenders today are small businesses which fund loans with precarious lines of credit from the big banks. They lack the deep pockets or the access to Fed window of a Wells Fargo or a Bank of America. So foreclosure litigation costs could damage their balance sheets and run many of them out of business.

By bullying lenders into cleaning up its own policy and business mess, HUD is unfairly imposing unacceptable costs on small businesses. The human and community costs could be even higher.

HUD can (and should) solve this foreclosure-and-displacement crisis without displacing more than 12,000 non-borrowing HECM spouses  or hurting the HECM lenders it is required to protect.

Our next post suggests a solution.

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Fourteen words

It all came down to the meaning of fourteen words.

The merits hearing in the non-borrowing spouses’ case against HUD – the hearing HUD tried and failed to kill from the start by challenging the spouses’ standing – boiled down to the meaning of a fourteen-word sentence Congress dropped into a ninety-nine-word subsection of HECM law.

There was no doubt Congress wanted HECM homeowners protected from displacement; the heading of the subsection made that clear. That Congress also wanted homeowners’ spouses shielded from the streets came through from the fourteen-word sentence. What was in dispute was which spouses Congress meant: Were they spouses who signed the loan papers as co-borrowers or  spouses who did not sign and were removed from title thus becoming non-borrowing spouses?

From the fourteen words, the spouses claimed HUD failed to protect them by issuing regulations which covered only spouses who signed the reverse-mortgage contract. From the fourteen words, HUD argued it “properly applied” the subsection in its regulations. From the fourteen words, armies of lawyers on both sides of the case concocted opposing arguments and meanings and, in the process, produced thousands of words in legal briefs, motions, and memoranda.

Fourteen words. Fourteen ordinary English words which assumed extraordinary importance in a court battle destined to change HECM and strengthen protections for older consumers who use the government-insured retirement mortgage across the U S.

Let’s review Subsection J of HECM law with special attention to the fourteen-word sentence at the heart of the merits-hearing:

(j) Safeguard to prevent displacement of homeowner

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term ”homeowner” includes the spouse of a homeowner. … .

The spouses argued that those fourteen words covered them whether or not they signed the mortgage contracts as borrowers. HUD countered that the fourteen words include only spouses who signed the loan papers. It claimed that to accept the spouses’ generous interpretation of the fourteen words would bring financial trouble to the HECM insurance program.

Earlier at the DC Circuit during the standing appeal, the judges had expressed surprise at HUD’s take on those fourteen words: “The issue on appeal is limited to appellants’ standing. But we admit to being somewhat puzzled as to how HUD can justify a regulation that seems contrary to the governing statute.”

Now at the merits-hearing, U S District Judge Ellen Segal Huvelle, the same judge who had dismissed the case for “lack of standing” in July and in September 2011, took HUD’s argument apart one by one and came to a decision: HUD’s regulation violated Subsection J of HECM law. The judge ordered HUD to come up with a solution (or relief) for the spouses.

On the merits of their case, the non-borrowing spouses, Robert Bennett of Maryland and Leila Joseph of New York, won. It was a victory that seemed improbable only two years before when they were denied standing to sue HUD by the same court and by the same judge. Because of their struggle, HECM now protects non-borrowing spouses for the first time in twenty-five years.

Our next post looks at solutions HUD has come up with since the merits decision.

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved.

Why widowed spouses won standing fight

Throwing out the decision of a lower federal court (or any lower court) is a serious matter in our judicial system and, if it must be done at all, a reason or reasons must be given by the higher court.

In July 2011, the DC federal district court dismissed the failure-to-protect lawsuit three widowed spouses of HECM borrowers brought against HUD. In September that year when the spouses begged the court to reexamine their case, the court refused.

The court’s refusal came from its thinking that the spouses’ problems (foreclosure and displacement) resulted from the terms of reverse-mortgage contracts their dead spouses signed with third-party lenders. Even if they were to win their case against HUD, the court said, the lenders would still have the right to foreclose and displace them, and they would have no solution or redress to their problems.

As we saw in part seven, redressability (or the likelihood that a favorable decision will solve the spouses’ problems) is one of three tests anyone suing a federal agency such as HUD must meet to have standing under the Administrative Procedure Act (APA). Although the spouses insisted that they met all three tests, the district court disagreed on redressability. So redressability was the specific standing issue the DC Circuit had to address in its decision.

The DC Circuit agreed with the district court that if redressability depended on the actions of lenders, the spouses would have no standing to sue HUD; they would be toast. Nevertheless, it threw out the district court’s decision, gave the spouses standing, and sent the case back to be heard on its merits at the district court.

Why did the DC Circuit overrule the district court in this case? It found a part of HECM law which empowered HUD to solve the foreclosure-displacement problems of the spouses and the investment-low headaches of the lenders.

In Subsection (i) of HECM law, Congress says HUD can take “any action necessary” to further the purposes of the HECM mortgage insurance program. Needless to say, protecting homeowners (including their non-borrowing spouses) from displacement and lenders from losses are stated purposes of the HECM program.

But the DC Circuit did something else besides granting standing to the spouses, it suggested how HUD could solve the problems.

The how is called assignment. Under HECM rules, lenders can assign a loan to HUD when the loan balance reaches 98 percent of a limit set by HUD called the Maximum Claim Amount. When this happens, HUD holds the loan until the loan’s life ends.

In a Solomonic fashion, the court suggested that HUD could take assignment of the troubled mortgages, pay off the lenders, and decide whether to foreclose on the spouses.

I outlined the court’s assignment suggestion and other ideas for resolution of the non-borrowing spouses’ problem in an article in National Mortgage News on January 15, 2013. While we will return to those resolution ideas in other posts, our next post looks  at a direct result of the DC Circuit decision on standing: the merits-hearing and decision at the federal district court.

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved.

A Lifeline from the D C Circuit

The stakes were nothing if not high for the non-borrowing spouses (NBS) and for HUD as the parties awaited the decision of the second most important federal court in the United States in the winter of 2012.

At the federal district court for D C a year before, HUD had argued successfully that a widower and two widows lacked “standing” to drag it to court. The victory had affirmed the brilliance of its contain-and-dismiss NBS litigation strategy. A ruling granting standing to plaintiffs would wreck that hasty plan. It would mean that plaintiffs’ allegations would have to be heard on their merits.

And who knew how the merit-hearing would turn out given the uncertainties of litigation? Would HUD’s soiled HECM-rulemaking laundry be once again exposed to the sunshine of judicial scrutiny? With the HECM portion of the Mutual Mortgage Insurance (MMI) Fund still bleeding red ink then from the HECM fixed-rate fiasco, who knew what financial pain a ruling for non-borrowing spouses would bring to HUD?

For plaintiffs, a ruling upholding HUD’s no-standing victory would have probably meant the end of litigation road as a path to saving their marital homes from foreclosures and themselves from displacements.

For HECM origination, it would have meant business as usual where the prospect of large loan amounts (and fat commission-income checks) encouraged some originators (and some borrowers) to continue the deadly practice of removing non-borrowing spouses from title and exposing them to foreclosures and displacements when their borrowing spouses die.

And for the HECM reverse mortgage program itself, it would have meant the continuing negative association of HECMs with spousal displacement in the mind of an aging market, hardly a recipe for promoting an otherwise beneficial product. Such were the stakes in the decision that would come down from the D C Circuit Court.

Before the three-judge panel was a simple question: Did HECM non-borrowing spouses have standing to sue HUD under the Administrative Procedure Act (APA)?

To haul HUD to court under the APA, plaintiffs must show that they meet three requirements for standing:

1) Injury-in-fact — Was there a breach of a legally protected interest or right? Plaintiffs claimed their impending foreclosures (temporarily suspended during the lawsuit) and displacement met the first test;

2) Causality — Was there a connection between the action of defendant and plaintiffs’ injuries? Plaintiffs alleged HUD’s flawed regulations and non-recourse policy missteps did them in;

3) Redressability — Was it “likely” that a favorable decision will redress the injury?  Plaintiffs said it was.

Relying on HUD’s argument more than a year earlier at the D C federal district court, plaintiffs had been denied standing on the ground that they failed test three (redressability). The D C Circuit must now decide whether that decision was correct.

In what amounts to a lifeline to (and a present for) plaintiffs four days into the new year in 2013, it did. In a unanimous 13-page decision, the D C Circuit reversed the lower federal court, granted standing to the non-borrowing spouses, and sent the case back to be heard on its merits.

Our next post looks deeper into the D C Circuit decision on standing and the ideas for resolution of the NBS problem it spawned.

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved.

The Bennett 1.0 Appeal

HUD’s contain-and-dismiss counterattack plan in the first non-borrowing spouses’ (NBS) lawsuit (we’ll call it Bennett 1.0) worked like a charm, for a while.

The D C Federal District Court bought HUD’s argument that plaintiffs lacked “standing” to sue HUD. In its ruling against a widower and two widows, the court agreed that the plaintiffs had been hurt (they were in the jaws of foreclosures and displacements from their marital homes in state courts); however, it said their problems or injuries (foreclosures and displacements) were caused not by HUD but by the terms of mortgage contracts their dead spouses signed with third-party lenders.

Even when the plaintiffs asked the court to reconsider their case, pointing out that HUD is a party to every HECM loan and that it is the 900-pound gorilla in the HECM business, the court said, “no.”

The court’s decision was a low moment for the plaintiffs. It could have ended the NBS litigation saga. One of the three plaintiffs dropped out to take the hurriedly restored original HECM non-recourse option (see part four); a second one looked into that option.  As we saw in part four, original non-recourse allowed heirs and estates of dead HECM borrowers to buy the mortgaged property for 95 percent of appraised market value. The no-standing ruling seemed like the end of the road for the non-borrowing spouses’ lawsuit but for the skill and doggedness of the litigators behind the remaining plaintiffs.

AARP Foundation Litigation and the DC law firm of Mehri & Skalet lawyers (who argued the plaintiffs’ case) proved a match for HUD’s army of Justice Department lawyers. Believing in the strength of their case, they moved the fight up the next level in the federal judicial food chain: the U.S. Court of Appeals for the District of Columbia Circuit, informally called the D C Circuit.

Established by Congress in 1893, the D C Circuit is generally considered the second most important federal court after the U.S. Supreme Court. It is often a prep court for the big court itself. Chief Justice John Roberts and Associate Justices Clarence Thomas, Antonin Scalia, and Ruth Bader Ginsburg are former members of the DC Circuit.

According to Wikipedia, the DC Circuit is “… given the responsibility of directly reviewing the decisions and rulemaking of many federal independent agencies of the United States government based in the national capital, often without prior hearing by a district court.” It also hears appeals involving the Administrative Procedure Act, a section of which plaintiffs claimed HUD violated.

The litigation strategists at HUD and the Justice Department who crafted contain and dismiss probably never calculated that HUD’s disputed HECM rulemaking would be exposed to the judges of the DC Circuit. They figured their brilliant plan would so undercut plaintiffs’ case that it would die at the federal district court level, and it almost did. As events would turn out, it was a wrong calculation.

The DC Circuit Court decision in Bennett 1.0 is the subject of our next post.

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved

Contain and Dismiss

If there was a plan behind HUD’s initial response to the non-borrowing spouses’ (NBS) lawsuit in March 2011, it could be described as contain and dismiss. In other words, contain aspects of the case that can be contained and move to dismiss uncontainable parts.

The non-recourse part, which exposed the subsection-j problem, was containable so HUD moved to revoke Mortgagee Letter 2008-38 within a month of the lawsuit (see part 4). For the volatile subsection-j (or failure-to-protect) part, HUD pushed for dismissal.

Revocation of ML-08-38 neutralized the first three counts of a four-count plaintiffs’ complaint, making them “moot” as lawyers would say.

Among other points in court papers, HUD said plaintiffs were not in danger of foreclosure because it had asked for (and had received) assurances from lenders (or mortgagees) that they would not foreclose on plaintiffs during the life of the lawsuit. So there was no immediate risk of harm to plaintiffs as they had claimed.

Although the recall of the mortgagee letter was an admission by HUD that its non-recourse policy “clarification” was a disaster for borrowers and lenders, it did not address count four, the failure-to-protect aspect of the case.

To dispatch count four, HUD argued that plaintiffs lacked “standing” (or the right to bring a lawsuit against HUD) and asked the court to dismiss the case. It said its interpretation of subsection-j was proper and necessary to save the HECM program from actuarial (and financial) damage. It conjured the prospect of what we would call Hugh-Hefner scenario: a 75-year-old marrying a 25-year-old spouse. A very young spouse in a reverse mortgage means the loan will have a very long loan life and the loan balance could exceed the home’s value at loan payoff, leading to financial losses for lenders and for HUD.

Contain and dismiss was a clever litigation plan, and it worked. The court bought HUD’s story, and dismissed the lawsuit for “lack of standing.” Even when the non-borrowing spouses went to the court again and asked the judge to reconsider their case, insisting that they had standing, the court said “no.”

HUD won the first round of the court fight. Next, we look at the non-borrowing spouses’ fight on appeal to the US Circuit Court.

Copyright (c) 2014, ThinkReverse LLC. All Rights Reserved

The HECM Non-recourse Connection

It was one of the puzzles of the non-borrowing spouses’ (NBS) litigation saga which began in March 2011.

Within a month of Bennett v. Donovan, in which non-borrowing spouses sued HUD alleging failure to protect them from displacement when their borrowing spouses died (as required by HECM law), HUD took a seemingly unrelated action.

It revoked the infamous Mortgagee Letter 2008-38 (ML-08-38), a supposed “clarification” of HECM non-recourse policy. So what is the connection between the NBS problem and HECM non-recourse policy? More importantly, how did HECM non-recourse policy both masked and exposed the NBS trouble?

To our first question, the connection is consumer protection: the section of HECM law the non-borrowing spouses claimed HUD failed to implement protects non-borrowing spouses against displacement while original  non-recourse (not ML-08-38) shields HECM borrowers, their heirs, and estates from unlimited financial loss at loan’s payoff.

As we saw in part three, the central risk in reverse-mortgage lending is that the loan balance can grow larger than the home’s value (crossover risk). Without non-recourse protection, lenders can go after borrowers’ other assets to satisfy the loan balance. Original non-recourse limits this risk to the loan’s balance or to 95 percent of the home’s market value at payoff, whichever is less. Original non-recourse further decrees that no other assets of the borrower but the home can be used to satisfy the reverse-mortgage loan.

It is a bedrock feature of the HECM reverse mortgage. It gives borrowers peace of mind, knowing that their other assets are safe from recourse risk and that their heirs and estates are protected from similar danger. Original non-recourse made it easier to market reverse mortgages to scam-weary elders and their families. It did something else.

Original non-recourse unintentionally masked the core NBS problem (HUD’s failure to extend displacement protection to non-borrowing spouses) because for years borrowers, their heirs, and their estates could satisfy the HECM loan by simply paying the loan balance or 95 percent of the home’s market value, whichever is less. That was before the travesty of ML -08-38.

Then came ML-08-38, which itself was an attempt to justify or “clarify” a needless breach of original non-recourse policy that began around 2006 at HUD’s servicing unit in Tulsa, Oklahoma.

For the first seventeen years in the US market, original HECM non-recourse was the governing rule. Customers, counselors, lenders, HUD, investors, regulators, and the public relied on it.

Around 2006, unknown to HECM customers, industry, and the public, officials at HUD’s Tulsa servicing unit began forcing dead HECM borrowers’ heirs to repay the full loan balance if they want to keep their homes, even if loan balances exceed homes’ values. This practice, which made original non-recourse policy conditional, was mentioned to HECM counselors during a February-2006 training session in Tulsa.

Stunned counselors who attended the Tulsa training sought clarification from HUD. In July 2007, a lawyer at HUD opined that original non-recourse was “not quite accurate,” giving legal blessing to a practice that was clearly at odd with HUD’s stated original non-recourse policy.

Equally alarmed by the abrupt policy change, senior-lobby colossus AARP asked HUD to harmonize its practice with its stated original non-recourse policy. ML-08-38  was HUD’s response.

And it exposed the NBS problem because spouses who wanted to pay 95 percent of their marital homes’ market values to keep their homes following their spouses’ deaths were, for the first time, rebuffed by perplexed lenders, citing ML-08-38 as the legal basis for their refusal to accept anything but the full loan balance. One of the original Bennett plaintiffs in Indiana sent payment (95 percent of her home’s then market value) to a lender and her payment was rejected and the lender began foreclosure proceedings.

Caught between HUD’s modified non-recourse policy and hapless lenders who had to use it to effect foreclosures and displacements, non-borrowing spouses turned to AARP Foundation Litigation (AFL) for help.

As AFL lawyers and their partners at the Washington DC Law Firm of Mehri & Skalet looked into HECM law to find help for their clients, they found a problem: regulations HUD issued to implement Section 255 (J) of HECM law denied displacement protection to non-borrowing spouses for more than two decades.

If HUD’s denial of displacement protection to non-borrowing spouses was a wound (it was and still is for existing non-borrowing spouses at this writing), original non-recourse was a band-aid which masked the injury until HUD’s ML-08-38 or “clarified” non-recourse exposed the festering sore that led to the lawsuits.

And that, among other reasons, was why HUD had to revoke it, but it was too late, the damage was done, the NBS genie was out of the bottle. HUD’s initial responses to the NBS lawsuit is the gist of our next post.

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