Archive for September, 2014

HECM protects non-borrowing spouses VII

Monday, September 29th, 2014



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.


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HECM protects non-borrowing spouses VI

Monday, September 22nd, 2014



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.


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HECM protects non-borrowing spouses V

Monday, September 8th, 2014




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.


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