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AARP Sues Wells Fargo, Fannie Mae Over Reverse Mortgage Foreclosures
Reverse mortgages have come under scrutiny in recent years as a result of high fees and the numerous scams that populate the edges of the industry. Now, AARP is challenging reverse mortgage foreclosures, claiming that lenders failed to offer borrowers the option to purchase their property for 95% of the property’s appraised value—as required under the borrowers’ contracts with their lenders.
The class action lawsuit, filed against defendants Wells Fargo and Fannie Mae in U.S. District Court for the Northern District of California, is the second suit filed by AARP over this issue in the last year.
In contrast to a standard mortgage, where a homeowner makes monthly payments that increase his or her equity in the property, a reverse mortgage makes payments to the homeowner that decrease the homeowner’s equity in the property. Amounts loaned to the homeowner under the reverse mortgage do not need to be repaid until the homeowner dies and the home is sold.
Reverse mortgages are often sold to consumers with the promise that a surviving spouse will have the right to stay in the home after their spouse dies. And some reverse mortgages give heirs, including surviving spouses, a right to purchase the property after the mortgagee’s death—often at discount to the appraised value of the property.
Under pre-2008 Housing and Urban Development rules, a reverse mortgage borrower (and their heirs) could never owe than the value of their home at the time of repayment. In 2008, the U.S. Department of Housing and Urban Development (HUD) changed its rules, with the result that an heir, surviving spouse included, who was not named in the mortgage was required to pay the full mortgage balance to keep the home, even where the mortgage balance was greater than the property's value.
The unfair result of the rule was that an unrelated purchaser had the ability to buy the home for its fair market value while an heir did not. That motivated the original AARP lawsuit.
Although the first AARP lawsuit was dismissed in July, HUD issued Mortgagee Letter 2011–16, which rescinded the 2008 rule change. According to AARP's second lawsuit, HUD’s reversal went back to "the fairer practice of not requiring payment that exceeded the updated value of the home."
AARP says that, although HUD corrected the rule, Wells Fargo and Fannie Mae, "[a]re still failing to give notice to surviving spouses and heirs of the rights to purchase the property for the lower value, and are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home."
The AARP believes that if Wells Fargo and Fannie Mae “insist on breaking those rules, then they intend on holding them accountable.”
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See also The Law Professor's blog at AdvisorFYI.
About the Author
William H. Byrnes, Esq.
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of 10 books and treatises and 17 chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.
He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.
Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).
Email: wbyrnes@nationalunderwriteradvancedmarkets.com
About the Author
Robert Bloink, Esq., LL.M.
Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.
Previously, he served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.
Mr. Bloink's insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures.
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