The Department of Housing and Urban Development (HUD) has agreed to withdraw a controversial rule that could have led to foreclosure for certain surviving spouses of homeowners with reverse mortgages.

The agency made the announcement about one month after the American Association of Retired Persons (AARP) filed a lawsuit on behalf of three surviving spouses who were faced with the loss of their homes as a result of the rule.

The rule, issued in 2008, specified that heirs of a reverse mortgage holder who are not named on the mortgage - including a surviving spouse - must pay the full mortgage balance to keep the home after the demise of the mortgage holder, even if the home has declined in value. The AARP contended the rule violated federal law and HUD's own rules that specify that the heirs or surviving spouse of a reverse mortgage holder can never owe more than the home's actual value.

"This is terrific for surviving spouses and families of reverse mortgage borrowers," said Steven Skalet, an attorney helping to represent the three surviving spouses. "We still need to understand the details and where HUD is going on the issues we have raised, but we are pleased by this first significant step."

The HUD decision is not the end of the federal lawsuit, however; several other issues still remain. Key among them is whether a surviving spouse who is not listed on the mortgage is a homeowner for purposes of the reverse mortgage.

The AARP argues that federal law says that a homeowner with a reverse mortgage cannot be displaced from his or her home until the reverse mortgage terminates. It notes that the law defines "homeowner" to include the spouse of a borrower who obtained the reverse mortgage, even if that spouse is not named on the mortgage. It therefore contends that such a surviving spouse cannot be displaced from the home upon the death of the borrower.

HUD has never recognized this type of protection for a surviving spouse who was not named on the reverse mortgage or property deed, however. The agency has agreed to suspend foreclosure actions against the three plaintiffs pending resolution of the lawsuit, however.

The suit was filed in federal court in the District of Columbia on March 8 on behalf of plaintiffs in Maryland, New York and Indiana.

Published on April 13, 2011