NEW YORK (MainStreet) – AARP has sued the U.S. Department of Housing and Urban Development on behalf of three seniors who say their houses are now underwater –meaning they owe more than the properties are worth – as a result of a deceased spouse’s reverse mortgage.

The lawsuit, filed by the organization Tuesday in Federal District Court for the District of Columbia, alleges that abrupt policy changes by HUD in 2008 make it harder for a spouse or heir who did not sign reverse mortgage loan documents to keep an inherited property. 

“HUD has inexplicably turned existing reverse mortgage policies upside down,” Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation, said in a written statement.  “These are older individuals with limited means who have been blindsided by arbitrary, retroactive decision making.”

As we previously reported, a reverse mortgage allows cash-strapped homeowners 62 or over to borrow money from banks against the equity they have in their home. Because the loan hinges on the value of the home, repayments on reverse mortgages are not required until the house is no longer your principal residence.

According to AARP, HUD rules in place since 1989 clearly state that a borrower or a borrower’s heirs would never owe more than the home was worth at the time of repayment. At the end 2008, HUD changed its policy and said that an heir – including a surviving spouse who was not named on the mortgage – must pay the full mortgage balance to keep the home, even it if exceeds the current value of the property.

AARP argues that the policy is particularly unfair because many of the homes that enter foreclosure when heirs fail to repay the reverse mortgage end up being sold for less than market value.

“This is shameful and we intend to make HUD honor the representations and promises they made to borrowers when they signed up for these government-insured loans,” Steven A. Skalet, of Mehri & Skalet, the law firm representing the case, said.

HUD refused to comment due to the pending nature of the litigation.

AARP alleges that as a result of these policy changes, all three plaintiffs - Delores J. Moore of Covington, Ind.; Leila Joseph of Brooklyn, N.Y.; and Robert Bennett of Annapolis, Md. – who were left off of the loan documents for a variety of reasons, are now facing eviction from their homes. 

The organization said that the imminent foreclosures are in further violation of a provision introduced by Congress as part of Home Equity Conversion Mortgage program that says a surviving spouse cannot be arbitrarily displaced from the home upon the death of the borrower. AARP said HUD had never recognized the provision.

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