A federal judge has barred the Department of Housing and Urban Development from enforcing a blanket policy of refusing to insure reverse mortgages obtained with help from estate planning services.

The temporary restraining order was issued last Thursday.

HUD had announced the policy in a March 17 letter that complained of high fees some firms were charging to seniors. The agency "considers the use of such estate planning services in the loan origination process to constitute an imprudent and irresponsible business practice of a serious nature," the letter said.

A HUD investigation begun last month found that some third-party originators were charging as much as 10% of the amount borrowed to make these loans.

The restraining order, by Judge Harold Greene of U.S. District Court for the District of Columbia, came in response to a suit filed by Patriot Inc. and America's Trust Inc., two companies cited in HUD's letter.

HUD did not follow proper rulemaking procedures, said Sharon Babbin, a Washington-based lawyer for the two San Juan Capistrano, Calif., insurance companies.

The department "can't issue rules without following procedure," she said.

HUD responded with a two-paragraph letter, signed by Federal Housing Commissioner Nicolas P. Retsinas. "The department will not implement or enforce the provisions" of the March 17 letter "until further notice," the new letter said.

A HUD spokesman said the agency is "determined" to stop the companies from charging senior citizens for helping them through the reverse mortgage process. "We believe our directive was proper and will be reinstated in future court action," the spokesman said. "Our actions have helped save senior citizens around the country from falling victim to these scams."

But the companies argue that HUD does not market the loans or educate senior citizens about them, so the estate planners must do so. Reverse mortgages are "like a well-kept secret," said Todd Bauman, senior vice president at America's Financial, a Las Vegas estate planning firm that was making these loans using an America's Trust package. "These estate planners are out marketing and have people educating seniors about them, and that costs money."

America's Financial stopped working with America's Trust when it learned the company was being investigated, Mr. Bauman said. "Now, I tell seniors to call HUD directly," he said.

The companies being investigated provide a valuable service, said Ms. Babbin, the lawyer for two of them.

A representative from the American Association of Retired Persons said it is "not at liberty to comment on the court decision" but questioned the argument that the advisers were being fairly compensated for necessary services.

"For $8,000 to $10,000?" the spokeswoman asked. "What does it cost to drive someone to an appointment or locate documents?" These agents may be performing nominal services, she said, but "nothing that approaches the fees that they're charging."

Lenders who fund this kind of loan say they are still refusing to accept such business.

Some sources also said Fannie Mae had refused to buy loans originated by estate planners. But a spokeswoman said, "Fannie Mae has no intention of stopping its purchases of mortgages originated through the HUD program. We believe it's a very good program."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.