REQUIRED READING: Federal government agencies are supposed to be responsible for protecting consumers. So how did the U.S. Department of Housing and Urban Development (HUD) recently become the center of an AARP-led lawsuit regarding the department's home equity conversion mortgage (HECM) policies?
To answer that question, we need to understand HUD's definition of ‘homeowner,’ its take on the HECM program's ‘actuarial soundness,’ its claim of ‘judicial deference’ for its interpretation, and its defense that it has ‘properly’ applied the disputed anti-displacement requirement of Subsection 20(j) of the HECM laws since the program's inception.
Let's start with definitions of ‘homeowner’ in HECM-land. How many definitions of the word ‘homeowner’ do we have in the HECM laws [Section 255 of National Housing Act /12 U.S.C. Â§ 1715z-20]? For our purpose, there are two. One definition says a homeowner is aged 62 years or older [Subsection 20(b-1)]. By this rendering, you do not qualify for a HECM reverse mortgage if you or your spouse is younger than 62 years old – this is HUD's preferred interpretation, and we'll call it program entry definition (PED).
The other definition is found in Subsection 20(j) [Safeguard to Prevent Displacement of Homeowner], and it says a homeowner ‘includes the spouse of a homeowner.’ From this description, it matters less whether a spouse is borrowing or non-borrowing, 57 or 65. If there is a HECM-qualified borrowing senior, then for this provision, the spouse is also considered the homeowner. If it excludes non-borrowing spouses, this provision is unnecessary and should have never been enacted.Â
This interpretation forbids HUD from insuring a HECM loan ‘unless such mortgage provides that the homeowner's obligation to satisfy the loan obligation is deferred until the homeowner's death, the sale of the home, or the occurrence of other events specified in regulations of the HUD secretary. For purposes of this subsection, the term ''homeowner'' includes the spouse of a homeowner.’ This is the interpretation favored by the plaintiffs, and we'll call it the anti-displacement definition (ADD).
In their motion to dismiss the ‘AARP lawsuit’ (Bennett et al v. Donovan), HUD argues that the spouse mentioned in Subsection 20(j) must have an ‘obligation to satisfy the loan obligation’ (i.e., a spouse who signed the mortgage note).
HUD says Subsection 20(j) means if lenders fail to meet an ADD condition – postponement of repayment obligation until the homeowner dies, sells the home or moves – they forfeit HUD's insurance for the loan they make. According to HUD, any interpretation that equates ADD with PED is dynamite that blows up the carefully crafted ‘actuarial balance’ of the HECM program and could lead to program-busting financial losses.
HUD's new games
So what is this ‘actuarial balance’? This is the math around which the HECM program's engine is built. It takes into account the home's value, interest rate and age of the borrower(s), and boils down to this formula: Older folks get more cash; younger folks get less (HECM $ = o+/y-).
Generally, a younger person has more years to live, and an older person has fewer left – so if you give a younger person more cash, the loan's life will be longer, the loan balance (and potential losses) will be larger (exceeding the home's value), and you will smash the ‘actuarial balance’ of the program and run up financial losses for HUD and taxpayers. This older-plus/younger-minus math is why the age of the youngest borrower is used in calculating payouts when more than one borrower applies for HECM loans.
In its marching orders to HUD, Congress decreed an ‘actuarially sound’ HECM program, and HUD's lawyers say if ADD is read as plaintiffs want it read, it will skew the math, creating a greater danger that must be avoided. So which is the correct definition of "homeowner" in the HECM laws and regulations?
HUD argues its interpretation of ‘homeowner’ (i.e., PED) is the correct one, not only because of its actuarial fitness, but also because it is entitled to ‘judicial deference’ as a federal administrative agency. The judicial deference rule says courts should respect interpretations of law favored by an administrative agency, since agencies are the experts in the laws they are charged with carrying out.
Needless to say, plaintiffs' lawyers reject HUD's narrower interpretation of "homeowner," its notion of ‘actuarial integrity,’ its claim of ‘judicial deference,’ and its position that it has all along been properly implementing the contested anti-displacement requirement of Subsection 20(j). You might want to ask the following: If HUD has been properly protecting the ‘homeowner’ from displacement as the law required, how can you explain the adverse events – foreclosures and evictions – that triggered the lawsuit?Â
How did HUD the protector – an agency that routinely disciplines lenders and others for abusing consumers – end up as the non-protector in this case? Based on a layperson's reading of the complaint, HUD's motion to dismiss, plaintiffs' opposition motion, events leading up to the case, and conversations with other students of the lawsuit, here are some theories to consider.
HUD believes the program's actuarial survival and protection for non-borrowing spouses are incompatible. In other words, the program's financial survival trumps protection for potentially very young non-borrowers who may be trying to ‘beat the system’ by using the older spouse to get more cash for the benefit of both spouses – they knew the risk they were taking.
The plaintiffs in the lawsuit are 69, 77 and 79 years old, and there was no evidence that they tried to ‘beat the system.’ They were all married to their dead borrowing spouses at the time the HECM loan papers were signed.
Then there is the problem of bureaucratic rashness in not seeing how the needless shift in HECM nonrecourse policy (now rescinded Mortgagee Letter 2008-38) could expose seniors and their spouses and heirs to financial hardship and displacement, as well as subject HUD and lenders to litigation, and financial and reputational risks. There is also bureaucratic arrogance in ignoring multiple public appeals to repeal ML 2008-38 before it caused the injuries that have now led to a harvest of litigation and bad publicity for HUD and the nation's reverse mortgage industry.
Furthermore, there is bureaucratic ineptitude in not finding creative and humane ways to address the specific predicament of the non-borrowing spouse consistent with the intent of Congress and the clear language of Subsection 20(j). To find evidence of bureaucratic ineptitude, look no further than Mortgagee Letter 2006-25, where HUD – after directing non-borrowing spouses to seek HECM counseling – actually advised them to quitclaim their interests in their marital homes.
In the end, HUD's persuasive but unwise and harmful interpretations of ‘homeowner’ gave birth to the foreclosures and evictions that triggered the harvest of litigation, calling into question its reputation and role as a protector of unprotected non-borrowing spouses in HECM reverse mortgage transactions. Caught between the rock of ‘actuarial soundness’ (or program financial survival) and the hard place of ‘protection for the non-borrowing spouse,’ HUD chose the former while artfully claiming to honor the later.
Atare E. Agbamu is the author of the ThinkReverse blog and a former director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. He can be reached at firstname.lastname@example.org.