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AARP Sues U.S. Over Effects of Reverse Mortgages

    Reverse mortgages, which pay elderly homeowners a regular sum against the equity in their house, are supposed to shield borrowers from economic upheaval. But the popular loan has gotten tangled up in the real estate collapse.

    AARP, the retirees’ organization, filed suit Tuesday against the Department of Housing and Urban Development, which regulates reverse mortgages. The suit asserts that policy changes by HUD are pushing older homeowners into foreclosure.

    The case was filed in Federal District Court in Washington by the AARP Foundation, the charitable arm of AARP, and the law firm of Mehri & Skalet on behalf of the surviving spouses of three homeowners who had purchased reverse mortgages. All three are now facing eviction, the suit says.

    “HUD has illegally and without notice changed the rules in the middle of the game at the expense of vulnerable older people,” said Jean Constantine-Davis, an AARP Foundation senior lawyer.

    The lawsuit focuses on reverse mortgages where only one spouse signed the loan document. It argues that HUD shifted course in late 2008, making changes in its procedures so that surviving spouses who are not named on the mortgage must pay the full loan balance to keep the home, even if the property is worth less.

    Reverse mortgages were intended to be nonrecourse, which means that even if the value of the house shrivels, the borrower can never owe more than the property is worth.

    It is unclear how many elderly homeowners are facing foreclosure for reasons related to the lawsuit, but Ms. Constantine-Davis said that hundreds and perhaps thousands of elderly people were in positions similar to the three plaintiffs.

    Nearly a quarter of all homes with mortgages in the United States are worth less the loan. These so-called underwater properties are difficult to sell and impossible to refinance.

    The suit also accuses HUD of making policy changes that allow underwater homes with reverse mortgages to be sold to strangers in arm’s-length transactions for less than the full mortgage balance, but that require spouses or heirs to pay the full amount. Finally, the suit says HUD is ignoring its own provisions against displacing a surviving spouse.

    A HUD spokeswoman said the agency did not comment on pending litigation.

    One plaintiff in the case, Delores Jeanne Moore of Covington, Ind., was not on the reverse mortgage because her husband had owned the house before they married. He died in 2008.

    Under the new HUD rules, the suit says that if Mrs. Moore wants to keep the house, she must pay the balance of the loan, $91,000. But a third-party buyer could get the house for 95 percent of its appraised value, or about $81,000.

    Mrs. Moore’s lender has been seeking to foreclose since August 2009.

    “When the housing market was constantly ticking upwards, these new provisions would not have mattered so much,” Ms. Constantine-Davis said. “Now it’s a much bigger problem.”

    More than half a million people have received reverse mortgages since Congress first authorized the program a quarter-century ago. Those who get the cash must be at least 62 and have substantial equity in their houses. Participants receive either a lump sum or monthly payments from lenders.

    Robert Bennett, a 69-year-old retired cook at the United States Naval Academy, is also a plaintiff. He and his wife, Ophelia, got a reverse mortgage on their house in Annapolis, Md., three years ago so they could make ends meet.

    Mr. Bennett said he did not realize that his new mortgage took his name off the title of the home he had owned for decades. When Mrs. Bennett died shortly after the reverse mortgage was set up, all payments to the couple stopped. The value of the property shrank in the recession and now the lender is calling for repayment of the loan.

    “It’s a miserable thing to be thinking you’re going to get kicked out after you’re living all this time and you’re retired,” Mr. Bennett said in an interview. “If I thought a reverse mortgage was going to set me up in a situation like this, I never would have participated.”

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AARP Sues U.S. Over Effects of Reverse Mortgages

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