AARP Sues Wells Fargo, Fannie Mae
August 6, 2011 by staff
The unit of AARP Foundation litigation filed a lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), a burden that does not allow the surviving spouse and the heirs of the borrowers of reverse mortgages to buy property for the value appraisal after the loan was due – usually after the death of the borrower.
Trial AARP has won an earlier round of foreclosures to invest in loans in April, when the U.S. Department of Housing and Urban Development (HUD) was invested in a rule forcing borrowers into foreclosure spouses.
At the heart of the dispute is what happens to the most popular type of reverse mortgage, Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passed to a spouse or an heir. The HECM is designed so that borrowers cannot owe more than the value of their homes, despite the increase in loan balances over time. The intention was to ensure that older borrowers were safe HECMs.
AARP lawsuit against HUD foreclosure relief sought for spouses of deceased borrowers of reverse mortgages. It was alleged that HUD illegally initiated two major rule changes in 2008. The first stated that the provision of not using only apply when the properties are sold. That meant that if the spouse dies, the surviving spouse does not sign would have to pay the total balance outstanding HECM, even if the value of the house had fallen.
HUD has also changed a rule that the borrower could sell a property insured in 95 percent to 100 percent of its appraised value. The new rule states that only “transactions market conditions” would be allowed in that price range. That effectively means that the surviving spouse does not sign could be removed only by a HECM to pay the entire loan, but a buyer could buy third property at least 95 percent of the estimated market value.
AARP the first complaint alleges that as a result of the rule, many spouses or heirs who want to buy the property have failed to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit alleges that the rule violates other HUD regulations and contracts between borrowers and lenders of reverse mortgage, and refuses a key objective for the borrowers had paid insurance premiums.
Although HUD has reversed, the AARP attorneys have continued to receive calls from struggling families facing foreclosure by Wells Fargo and other lenders. “It’s hard to know how widespread the problem,” says Jean Constantine-Davis, senior attorney for AARP. “All I know about people who have called us, and there are dozens of them.”
The plaintiff in the class action lawsuit is new Robert Chandler, Elk Grove, California, whose mother died in 2010, five years after obtaining a reverse mortgage. The lawsuit alleges that Chandler was not notified of their right to purchase the property for its current value, and that he told Wells Fargo that would pay the full balance of the mortgage.
That is contrary to the terms of the standard HECM, which specifically states that the property can be purchased at market price. Wells Fargo subsequently foreclosed on the house, acting on behalf of Fannie Mae, which owned the mortgage. The house had been in the Chandler family since 1940.
Wells Fargo announced plans to exit the market reverse mortgage in June, but continues to service existing loans. The bank is one of the top three lenders stopped writing loans this year.
The lawsuit comes as Wells Fargo and other big banks continue to address the problems of foreclosures in the market for traditional loans with interest.
A Wells Fargo spokesman said the change in the rules issued by HUD in April: “When HUD rules changed, that took as notice to the heirs. We intend to defend our company in this case.”
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