Wells Fargo and Fannie Mae are being sued by the AARP over foreclosure practices concerning reverse mortgages. The advocacy group for people older than 50 contends that heirs of deceased people who had taken out reverse mortgages were deceived when they were told they couldn’t re-purchase homes.
Mortgage houses and bank accused of skirting rules
The AARP, the American Association of Retired Persons, has filed a lawsuit against Wells Fargo and mortgage underwriting house Fannie Mae, according to Reuters. The suit says laws concerning reverse mortgages were ignored after homes fell into foreclosure. Reverse mortgages are a loan against the equity a person owns in a home. One of the most popular types, according to the Federal Trade Commission, is a Home Equity Conversion Mortgage or HECM, which is insured by the Department of Housing and Urban Development. After a person who takes out an HECM dies, the heirs or a surviving spouse of the borrower is supposed to be able to purchase the home for its appraised value, according to Bloomberg. However, Wells Fargo and Fannie told people to pay the full loan or get lost.
HUD tried pulling a fast one
In 2008, the HUD passed two new rules concerning reverse mortgages. The first stated that non-recourse provisions, a clause in reverse mortgage contracts that mandates a loan has to be repaid in full, only apply if the borrower dies. The second mandated that the borrower could sell a reverse-mortgaged home for 95 percent of the home’s value, regardless of the loan balance. The effect was that a third party could purchase a reverse-mortgaged home for slightly less than what the home was worth, but heirs or the spouse of the loan borrower had to fully pay off the loan, which could exceed the value of the home itself. According to BNET, the AARP filed a class action suit because this rule contradicts other HUD rules allowing heirs of a person that borrowed a reverse mortgage to repurchase the home for the home’s current market value. The lead plaintiff in the case was told to pay more than it was worth for a home that had been in the family since the 1940s.
Reverse mortgages have benefits
The suit alleges that Wells Fargo and Fannie Mae ignored these rules by trying to foreclose on homes, evict the residents and put the homes on the market without allowing heirs to make an offer, which was their right. Reverse mortgages do have benefits. They are only available for people 62 years or older, and according to the Sun-Sentinel, can provide monthly cash advances or a line of credit. The borrower receives a monthly stipend or access to a line of credit they can draw from until the balance of the loan has been paid to the borrower, and the loan is due. However, scam artists have been known to simply take the title once signed over and vanish without paying, leaving seniors homeless and broke.