Losses could mount for FHA after reverse mortgage decision

by Ryan Smith03 Oct 2013

The Department of Housing and Urban Development may see further losses from its reverse mortgage program following a ruling Monday rejecting a government policy that led some homeowners to face foreclosure following the death of a spouse.

The federally insured program allows homeowners 62 or older to borrow against the value of their homes. The lender originating the reverse mortgage sells the home after the borrower moves or dies, repaying the loan with the proceeds. However, some homeowners whose names weren’t on the reverse mortgages have found themselves facing foreclosure after their spouses died, according to a Wall Street Journal report.

The AARP filed a lawsuit two years ago against the Department of Housing and Urban Development, alleging that HUD violated federal law when it required surviving spouses to pay off their mortgages in full or be foreclosed upon, the Journal reported.

The Federal Housing Administration, which falls under HUD, issues reverse mortgages by using actuarial tables to determine the size of the payment a borrower will receive, the Journal reported. Older borrowers usually receive larger payments, and brokers often encourage prospective borrowers to put only the name of the older spouse on the application. HUD made a motion in 2011 to dismiss the AARP’s lawsuit, claiming that allowing surviving spouses to stay in their homes and continue receiving payments would “eviscerate” the “actuarial balance of the program,” according to the Journal.

But U.S. District Judge Ellen Huvelle sided with the seniors’ advocacy group.

“The message was loud and clear. This reverse-mortgage statute is supposed to protect spouses from foreclosure,” said Craig Briskin, a lawyer for the plaintiffs.

The decision could mean even bigger losses for the FHA, which last week announced it would be taking a $1.7bn cash infusion from the Treasury to cover losses already sustained from the reverse mortgage program. A HUD official told the Journal Tuesday that the agency couldn’t estimate the potential loss because of staffing and resource shortages caused by the government shutdown.

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