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Re-activateEven though Henry "Fonzie" Winkler is the latest celebrity spokesperson appearing in ads urging aging baby boomers to turn their home equity into "tax-free cash that you can use for anything," these are far from happy days for the reverse mortgage industry.
The AARP Foundation has filed a lawsuit against the U.S. Department of Housing and Urban Development stating that confusing rules and unfair policy changes for federally insured reverse mortgages have forced some borrowers into foreclosure.
Reverse mortgages allow people age 62 or older to cash in some of their home equity for a lump sum or regular payouts while staying in the home. Marketing for these loans traditionally has conveyed the message that borrowers—who pay hefty premiums for federal insurance backing the loans—would never owe more than the home was worth at the time of repayment, based on HUD rules in place since 1989. But ARRP's suit, filed on behalf of three surviving spouses of reverse mortgage borrowers from Indiana, New York and Maryland, alleges that they are facing imminent foreclosure and eviction from their homes because HUD in 2008 abruptly changed its policy.
Under new rules, surviving spouses whose names were not originally on the loans now are required to repay the full loan balance in order to keep their home, even if its current market value is less than the amount due. The lawsuit filed in U.S. District Court for the District of Columbia, seeks an injunction prohibiting HUD from abandoning its long-standing rules and from illegally foreclosing on surviving spouses, according to AARP.In September 2009, a Consumer Reports article warning of reverse mortgage dangers described the case of Ernest Minor, who was placed in just such a predicament after the death of his wife, whose name had been the sole one listed on the reverse mortgage for the couple's Marysville, Calif. home. More recently, Consumer Reports reported that a growing number of reverse mortgage borrowers are potentially facing foreclosure because they've depleted the equity in their homes and are unable to pay property taxes and insurance.
These recent developments underscore the importance of looking beyond the hype accompanying these complex loans. As we've previously recommended, before pursuing any type of reverse mortgage, consider whether you can better meet your needs by selling your home and downsizing. Also investigate less-costly options, such as low-cost home-improvement loans or state property-tax postponement programs. Consumers Union, the nonprofit publisher of Consumer Reports, offers a list of helpful reverse mortgage tips and resources on its Defend Your Dollars website.—Andrea Rock
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