The American Association of Retired Persons (AARP) has filed a class action lawsuit against Wells Fargo and Fannie Mae, alleging that the bank wrongly foreclosed on a home with a reverse mortgage without informing the homeowner’s heirs of their legal rights.
The lawsuit is the second that the AARP has filed this year alleging problems with foreclosures in the reverse mortgage sector. The prior suit involved the Department of Housing and Urban Development (HUD), alleging that a change that HUD had made to its rules was wrongly pushing some spouses of borrowers or their heirs into eviction. That suit was dismissed by a federal judge in July, though it is possible for the organization to re-file. HUD reversed the contentious rule change earlier this year.
The new suit is the first directed at a reverse mortgage lender, and comes as several large banks, including Wells, have been pulling out of the reverse market. The lawsuit alleges that the bank, in its role as servicer, foreclosed on a home after the homeowner’s death without informing the homeowner’s heirs of their right to buy the property for its assessed market value.
Reverse mortgages are distinct from normal mortgages in that the amount of the loan is dependent on the equity the homeowner has built up in the property, under the expectation that when the homeowner dies or moves, the loan will be repaid through the proceeds of the home’s sale. Lenders pledge not to foreclose on the property so long as the borrower is living, even if the home’s value falls and the property is worth less than the money owed. (Lenders may still foreclose due to other forms of default, such as when a homeowner fails to pay taxes and insurance).
With property values falling across the nation, the market value of many homes is now far less than what was projected when the reverse mortgages were originally granted. The AARP’s lawsuit contends that heirs should have a chance to purchase the home at fair market value just as any other buyer would —- but that Wells had been telling them they would have to pay off the full amount of the reverse.
That’s not kosher according to federal law, the AARP said. "In the wake of HUD’s reversal of its rule on the rights of surviving spouses and heirs earlier this year, we have been contacted by many, many [heirs] facing the same problem. It is difficult to understand why reverse mortgage lenders continue to deny them their contractual and legal rights," said Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation in a statement.
The suit is a sign that other large lenders may be facing legal complications from their involvement in the reverse mortgage market.
"With a large lender like Wells or Bank of America, the reverse is such a tiny part of their business, and considering the legal issues they’re facing now and the reputational risk, the reverse activity may be more of a distraction for them," said George Downey, founder of Harbor Mortgage Solutions in Braintree, especially in the context of the larger housing crisis.
In the current economic climate, Downey feels that demand for reverses will naturally increase.
Asked if news of the suits will worry potential borrowers, Downey admitted he’d discussed the issue some clients who have brought it up. "But I haven’t heard any express concern about it."
The National Reverse Mortgage Lenders Association declined to comment on the implications of the case.
