Archive for July, 2011

Failure to Protect: The Case against HUD, part 2

Friday, July 22nd, 2011

A Pyrrhic Victory?


Last Friday (July 15), the Federal District Court for the District of Columbia bought HUD’s argument and dismissed a lawsuit brought by two widows and a widower, spouses of dead reverse mortgage borrowers who faced foreclosure and displacement from their homes.

The court’s decision, which was based on technical grounds (“lack of standing”), amounts to a tactical victory for HUD. Instead of celebrating, HUD should see the decision as an opportunity to solve the predicament of the non-borrowing spouse in reverse mortgage transactions.

What is this predicament? It is displacement from the marital home of the non-borrowing spouse when the borrowing spouse dies. In the HECM program’s governing laws, Congress foresaw the problem and specifically asked HUD, the program’s designer, insurer, administrator and police, to protect the non-borrowing spouse. However, according to the lawsuit, HUD has never implemented this provision of the governing federal law. Why? Your guess is as good as mine.

Among others, one lesson we can take from this AARP-led litigation is that some issues cannot be swept under the rug, as HUD has done for more than 22 years.  The core issue — the displacement of the non-borrowing spouse in HECM transactions — must be addressed now, not later. Otherwise, it will cast a pall on industry growth and negate reassuring marketing messages about product safety. It could further expose HUD and lenders to litigation and other risks. Who wants HECM, knowing it could result in the displacement of their spouse when they die?

The preventable disaster of now rescinded Mortgagee Letter 2008-38 (thanks to the lawsuit) and the resulting “AARP lawsuit” has brought this issue out. The consuming public now knows this ugly underbelly of the HECM program.

Getting this lawsuit dismissed on shaky technical grounds will turn out to be a pyrrhic victory unless HUD seizes the moment and moves fast to address the predicament of the non-borrowing spouse in reverse mortgage transactions. By any measure, 22 years of indecision on this issue is enough.

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