Tulsa Detour : The Road to Hell
It began with good intentions at HUD.
But the results of good intentions can sometimes be anything but good: ” …hundreds of foreclosures on the homes of elderly widows and widowers …”(1), severe reputational blows to HUD and the HECM program, the resignation of an FHA chief, large legal and other costs to taxpayers, and it may not be over. What caused the “AARP Lawsuit” against HUD?
The immediate causes of the lawsuit were the foreclosures, evictions, and the raw human anguish the plaintiffs (and other elderly widows and widowers around the country) faced. But the origin of the litigation requires a little history.
From the beginning of the HECM program in 1989 until about 2006, HUD defined HECMs as non-recourse loans, meaning borrowers or their heirs can never owe more than the value of the home when the loan must be repaid. That was the commonly-accepted definition and rule in the industry. It helped HUD and lenders reassure nervous seniors that HECM reverse mortgages will not hurt their heirs and relatives when the borrower dies. It was a bed-rock policy. And it was not free: seniors paid (and continue to pay) a handsome insurance premium for that assurance.
By 2006, unknown to the public and the industry, high officials at HUD’s servicing unit in Tulsa, Oklahoma unilaterally forced dead borrowers’ heirs to repay the full loan balance if they want to keep the home, even if the loan balance exceed the home’s value. This practice, which radically changed long-held HECM non-recourse policy, was mentioned to HECM counselors during a February 2006 training session by an official of HUD’s servicing. Let’s call it the Tulsa Detour.
Stunned HECM counselors who attended the Tulsa training sought clarification from HUD. In July 2007, a lawyer at HUD said the long-held definition of non-recourse was “not quite accurate.”(2) Essentially, HUD lawyers blessed the odd practice of their servicing colleagues in Tulsa. Except for some HECM counselors, the public and the industry was largely unaware of this massive shift in non-recourse policy. Lenders and their loan officers were still telling seniors, their relatives, and the public that they “can never owe more than the home’s value” when they take HECM loans.
Enter AARP. In a major national report on reverse mortgages released in December 2007 (3), AARP flagged the difference between HUD’s stated and long-held non-recourse policy and the Tulsa Detour. The seniors’ group asked HUD to match its practice with its policy. Instead of blending practice with policy, HUD worsen the problem.
On December 5, 2008, in the waning days of the Bush administration, HUD issued the controversial Mortgagee Letter (ML) 2008-38, which approved the Tulsa Detour as a “clarification” of existing policy. Besides changing HECM non-recourse policy, ML 2008-38 inexplicably barred heirs and relatives of HECM borrowers from bidding for their homes at loan termination, the so-called “Arms-length Rule.” Within a month of the AARP-led litigation, HUD hurriedly revoked ML 2008-38 in April, 2011.
Why the Tulsa Detour and ML 2008-38? The officials at HUD servicing (and the lawyers at HUD General Counsel’s office who provided legal cover) thought they were closing a legal loophole in the original non-recourse policy. How did I know that? An email to me from a high official at HUD (in response to my March 2009 Op-Ed in Origination News calling for the revocation of ML 2008-38) said as much (Click here) . It is the classic good intentions leading straight to hell: foreclosures, evictions, human anguish, lawsuits, lawyers, fees, resignations, bad press, and pure hell for all.
Good intentions! Thus a short-sighted attempt to close a potential “loophole” drove HUD and the HECM program into a human, legal, financial, and reputational gaping-hole that it must now dig itself out of. The dismissal of the lawsuit on technical grounds on July 15th offers HUD an opportunity to solve the core problem: Protection for the non-borrowing spouse in HECM transactions as decreed by Congress more than 22 years ago.
Notes:
(1) Robert Bennett et al v. Shaun Donovan, in his capacity as Secretary of The United States Department of Housing and Urban Development (Complaint, paragraph 7, page 3)
(2) Robert Bennett et al v. Shaun Donovan,, in his capacity as Secretary of The United States Department of Housing and Urban Development (Complaint, paragraph 44, page 9)
(3) Reverse Mortgages: Niche Product or Mainstream Solution? PP. 111-112
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