March 9, 2011; Source: New York Times | There's already plenty of public discussion about the lack of success federal policies have had in aiming to stem the pace of mortgage foreclosures. But when the federal government aids and abets the foreclosure process by devising policies that actually increase the likelihood of foreclosure, it's a head-scratcher.
For the AARP Foundation, it is enough to take the federal government to court. The Department of Housing and Urban Development regulates a type of mortgage called a "reverse mortgage." You've probably seen actor Robert Wagner and actor/politician Fred Thompson pitching reverse mortgages on T.V. For homeowners, typically the elderly, who have built up a lot of equity in their homes, reverse mortgages pay those homeowners a regular amount (a regular payment, an annuity, a line of credit, or lump sum payment) against their homes' equity value. Essentially, they are borrowing against the equity in their homes, with the loan balance coming due only if the home is sold or if the homeowner dies.
HUD not only regulates reverse mortgages, but provides one of the most popular ones, the Home Equity Conversion Mortgage (HECM). According to the AARP, HUD changed its policies for regulating reverse mortgages "illegally and without notice…in the middle of the game at the expense of vulnerable older people." Reverse mortgages are supposed to be non-recourse, meaning that the most that the homeowner can possibly lose if he or she is unable to pay the mortgage or if the value of the property declines below the size of the mortgage is the house itself. The mortgagee cannot seek any other payment or asset other than the house.
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In late 2008, HUD changed its policy, saying that in the case of the death of an elderly spouse, the surviving spouse must pay the full loan balance – even if the house is worth less than that. So elderly, probably limited income, homeowners whose spouses have passed can find themselves having to pay a mortgage that is more than the value of the house.
The problem is exacerbated by some of the reverse mortgage marketing that tells older homeowners that they'll never be on the hook for more than the value of their homes, that reverse mortgages are easy (they aren't, they're expensive in terms of loan origination, mortgage insurance, and lender servicing fees), and that they'll never lose their homes (tell that to the AARP plaintiffs who are facing foreclosure-related evictions). The AARP suit is a good example of the kind of consumer advocacy that nonprofits do frequently and do well.—Rick Cohen