Reverse-Mortgage Rule on Surviving Spouse Tossed by Judge

A rule of the U.S. Department of Housing and Urban Development governing repayments of reverse mortgages by surviving spouses conflicts with federal law, a judge in Washington ruled.

HUD erred “when it insured the reverse mortgages of plaintiffs’ spouses pursuant to regulation, which permitted their loan obligations to come due upon their death regardless of whether their spouses were still alive,” U.S. District Judge Ellen Huvelle said in an opinion released today.

The widowers who sued HUD cited a federal law that defers an obligation to pay off such loans until the homeowner’s death and defines “homeowner” to include the surviving spouse.

HUD rules make it more likely that a surviving spouse will end up in foreclosure, according to the suit, which was filed in 2011.

Brian Sullivan, a spokesman for HUD, didn’t immediately respond to telephone and e-mail requests for comment on Huvelle’s ruling.

Home’s Equity

Reverse-mortgage loans pay out a home’s equity to the homeowner, sometimes in installments, and are usually repaid when the borrower dies or moves out of the house. Borrowers are considered behind on payments if they don’t stay current on their property taxes and insurance.

The loans are available only to borrowers who are at least 62 and who have significant equity in their homes.

The language HUD used when implementing the law states that the loan comes due “if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor.”

In defending its wording of the regulation, HUD said that it was concerned that a homeowner, after taking out a reverse mortgage, might marry a young spouse, which would increase a lender’s risk, according to a filing in the suit.

The complaint initially was dismissed by Huvelle, who found that since the widowers weren’t borrowers on the loans, winning the lawsuit wouldn’t save their homes because it was the lender’s decision whether to foreclose.

HUD Remedies

In reinstating the case earlier this year, an appeals court said HUD could come up with remedies to keep widowers in their homes.

“HUD could accept assignment of the mortgage, pay off the balance of the loans to the lenders, and then decline to foreclose,” Circuit Judge Laurence Silberman wrote in the appeals court ruling.

Craig Briskin, a lawyer for the plaintiffs, said he didn’t know how many homeowners are affected by the ruling, “but the number of people who have contacted us is in the high hundreds, perhaps more than a thousand.”

“The court has told HUD, protect these people,” Briskin said. “They do have discretion to figure out how are we going to accomplish this.”

The case is Bennett v. Donovan, 11-cv-00498, U.S. District Court, District of Columbia (Washington).

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