The Department of Housing and Urban Development has rescinded a controversial letter to lenders that held homeowners or their heirs responsible for repaying, in full, a government-insured reverse mortgage if they wished to keep the property.
By nature, Home Equity Conversion Mortgages (the name for reverse mortgages guaranteed by HUD's Federal Housing Administration) are nonrecourse. The 2008 letter gave a different interpretation of the HECM's nonrecourse provision than what had been previously understood.
With the nonrecourse provision in place, the borrower would never owe more than the value of the property.
But the letter said if the borrower wanted to retain the property and pay off the loan early, or if the borrower or any heirs wanted to keep the property when the loan became due, they needed to repay the full amount given.
The letter also had a provision regarding arm's-length transactions, where the lender agreed to accept less than the full balance due.
The department sent a notice rescinding the 2008 letter on Tuesday. A HUD spokesman said: "This guidance was intended to make certain that the sale of the property is a legitimate market driven sales transaction and based on the property's real value. Since there has been some uncertainty in interpreting the guidance in that mortgagee letter, new guidance will be issued in the future."
In the meantime, lenders should rely on other published guidelines, the spokesman said.
In March, AARP filed a suit in the U.S. District Court for the District of Columbia seeking an injunction to stop enforcement of the 2008 mortgagee letter.
AARP says not only did that mortgagee letter violate HUD rules, it also violated existing contracts between reverse mortgage borrowers and lenders.
The HUD spokesman said the agency does not comment on pending litigation. A call to AARP was not returned by press time.
