A federal district court ruled that banks cannot foreclose on surviving spouses of reverse mortgage holders when the spouses are unable to pay off the mortgages. Bennett v. Donovan, Civil Action No. 11-0498 (District of Columbia, September 30, 2013)

The case involved the surviving spouses of three individuals, each of whom who took out a Home Equity Conversion Mortgage (HECM), the most widely available reverse mortgage administered by the Department of Housing and Urban Development (HUD). A reverse mortgage allows homeowners who are at least 62 years old to borrow money on their houses.

Since 1989, HUD rules governing reverse mortgages have stated that a borrower or his or her heirs would never owe more than the home was worth at the time of repayment. But at the end of 2008, the agency’s policy was changed to state 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 value of the property.

The HECM borrowers all died, leaving their spouses, who were not listed on the loan documents, living in the mortgaged homes. Because of the housing downturn, the homes were worth less than the balance due on the reverse mortgage. None of the three spouses could obtain loans for more than their homes were worth and faced imminent foreclosure and eviction from their homes.

The American Association of Retired Persons (AARP) filed a lawsuit in federal court against HUD on behalf of the three surviving spouses. AARP charged that HUD violated federal law in not protecting spouses from foreclosure.

In a decision issued September 30, 2013, the U.S. District Court for the District of Columbia agreed with AARP, finding that HUD’s rules contradict federal law governing reverse mortgages which protects surviving spouses. The court remanded the case to HUD, directing the agency to find a way to shield surviving spouses from foreclosure and eviction. At the present time, it is not clear how HUD will correct the problem.

To read the court’s decision in the case, click here: Bennett v. Donovan

(Case summary courtesy of the ElderLawAnswers website.)