By Viji Sundaram, NAM Contributor
SAN FRANCISCO – A California resident has become yet another victim of the reverse mortgage program that is making it difficult for him to stay in the home he grew up in.
When Robert Chandler’s mother died last year, Chandler got saddled with a reverse mortgage loan that his mother had taken out five years earlier on the Elk Grove, Calif. home he inherited. When he was unable to pay the full loan balance, Wells Fargo initiated foreclosure proceedings on his home.
The bank didn’t tell him that he could have purchased his home for the current market value, as per the contract.
On Aug. 3, AARP Foundation Litigation, along with two law firms, filed a class action suit against both Wells Fargo and Fannie Mae on behalf of Chandler and other reverse mortgage heirs for foreclosing on their homes without giving them notice of the right to purchase their homes for the market value.
Chandler, who is in his 60s, believes that he should not have been told by Wells Fargo that he had to pay the approximately $338,000 outstanding balance on his mother’s reverse mortgage loan. His lawyers say he should have been allowed to pay just the $194,000 market value at the time of her death, and get clear title to it.
“What Wells Fargo did doesn’t make sense,” asserted Kelly Corcoran of the San Francisco-based law firm Kerr and Wagstaff, which co-filed the lawsuit. In fact, “it was wrongful and irrational.”
Teri Schrettenbrunner, senior vice president of the San Francisco-based office of Wells Fargo Home Mortgage Communications, declined to comment on the Chandler case, citing pending litigation. She would only say that the bank had operated in accordance with the U.S. Housing and Urban Development (HUD) guidelines.
“We are bound to operate within the rules set by HUD,” Schrettenbrunner said.
The Chandler case is yet another dispute stemming from the nation’s housing collapse, much of which can be blamed on steering people of color toward subprime loans by some of the country’s top banks.
But the complexities of reverse mortgage rules seem to be creating problems for the borrowers and their heirs.
“Historically, there have been widespread abuses in the marketing of reverse mortgages that are not in the best interest of seniors,” said Caryn Becker, policy counsel with the Center for Responsible Lending.
Reverse mortgages allow homeowners 62 or over to borrow against the equity of their home so that they can receive a lump sum or monthly payments from the lender.
Authorized by Congress some 25 years ago, the Home Equity Conversions Mortgages (HECM) program, the most popular reverse mortgage program, which is insured and regulated by HUD, was intended to protect borrowers from financial upheavals they may face in their later years.
The borrowers pay high upfront costs when they sign the contract, as well as monthly insurance premiums to cover any decline in value of their property. After their death, the house is sold and the mortgage is paid off.
In 2008, HUD changed its policies on reverse loans, forcing scores of spouses and heirs of borrowers into foreclosures. One of the changes HUD made was to a rule that allowed the heir to sell a property for 95 percent to 100 percent of its appraised value at the time of the borrower’s death. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a surviving spouse or heir could retire a reverse mortgage only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of the appraised market value.
The heir “could sell the property to anyone off the street for 95 percent of the appraised value and that would have satisfied the bank,” Chandler’s attorney, Corcoran, said. “Because Chandler wanted to purchase it himself, the bank wouldn’t allow it.” That, she said, was illegal.
AARP sued HUD in April, saying that as a result of the rule change, many spouses and heirs who want to purchase the property have been unable to do so because they can’t get financing that exceeds the current value of the property.
That lawsuit argued that the rule violates existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.
Two months after AARP sued HUD, the federal agency reversed that rule.
Called for a comment, HUD declined to discuss the issue.
According to Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation, Chandler’s mother, Rosemarie, got a reverse mortgage loan in 2005 on a home the family has owned and lived in since the 1940s.
Rosemarie’s contract with Wells Fargo allowed her, and by extension her heir, to sell off the property at 95 percent of the fair market value at the time of her death.
Soon after his mother died, Chandler said he spoke to a Wells Fargo home mortgage consultant in Elk Grove on three occasions about purchasing the property for the appraised value, according to the lawsuit. The consultant allegedly told him that he wouldn’t be allowed, and that he would have to pay off the full loan balance if he wanted to keep the house.
This past January, Wells Fargo, acting as a servicer for Fannie Mae, issued a “notice of default” to the property, and told Chandler he could “cure the default” by paying off the $338,000 balance as of January 6, 2011.
“Wells Fargo did not inform him of the 95 percent rule,” asserted Constantine-Davis, noting that Chandler’s case is not an “isolated one.”
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 others facing the same problem.”
And, she noted: “It is difficult to understand why reverse mortgage lenders continue to deny (heirs) their contractual and legal rights.”