Seniors group sues HUD over reverse mortgages

WASHINGTON Tue Mar 8, 2011 6:05pm EST

WASHINGTON (Reuters) - The largest advocacy group for U.S. seniors sued the Obama administration on Tuesday over policy changes it says make it easier for older Americans to lose their home to foreclosure.

AARP, formerly known as the American Association of Retired Persons, sued Housing and Urban Development Secretary Shaun Donovan in federal district court through its charitable arm, the AARP Foundation, on behalf of three homeowners facing foreclosure and then eviction.

"HUD changed the rules in the middle of the game without following federal law and told people they had to pay far more than they were promised," said Jean Constantine-Davis, a senior attorney at the AARP Foundation.

The lawsuit centers around so-called reverse mortgages, which allow those over 62 to collect monthly payments based on the equity in their home instead of making monthly mortgage payments.

The loan balance on the home is not due until one of several triggering events takes place, including the sale of the home, the homeowner moves out or death of the last remaining homeowner.

A key provision of the reverse mortgage, known formally as Home Equity Conversion Mortgage and backed by the Federal Housing Administration, had been that the loan amount, which gets larger over time, could never exceed the value of the home for the borrower or the borrower's heirs.

FHA, which does not make loans directly but guarantees those that meet certain conditions, is a division of HUD.

The lawsuit alleges that the Bush administration in late 2008 changed HUD practices so that a surviving spouse who is not on the mortgage would be required to pay the full loan balance, even if that balance was for more than the home's value.

"HUD has basically ignored the protections guaranteed for spouses of borrowers as well as the borrowers themselves," Constantine-Davis said.

A stranger, perversely, could purchase the home that was worth less than the loan amount for market value and the FHA insurance fund would kick in the difference.

A HUD spokeswoman declined comment, citing the pending litigation.

Former Federal Housing Administration Commissioner Brian Montgomery, who signed the HUD letter responsible for the changes, did not respond immediately to a voicemail seeking comment.

(Reporting by Corbett B. Daly; Editing by Kenneth Barry)

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