AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

August 5, 2011

Aida Lemus, 70, cries as she is evicted from her foreclosed condominium in Anaheim, California, June 23, 2009.  REUTERS/Lucy Nicholson AARP’s legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.

The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due — typically after the borrower’s death.

AARP’s litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.

At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

AARP’s litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

HUD also changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The first AARP lawsuit alleged that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

Although HUD reversed itself, AARP attorneys have continued to receive calls from distressed families facing foreclosure by Wells Fargo and other lenders. “It’s difficult to know how widespread the problem is,” says Jean Constantine-Davis, a senior attorney at AARP. “We only know about the people who have called us, and there are dozens.”

The plaintiff in the new class action suit is Robert Chandler of Elk Grove, California, whose mother died in 2010, five years after obtaining a reverse mortgage. The suit contends that Chandler was not notified of his right to purchase the property for its current value, and that he was told by Wells Fargo that he would have to pay off the full mortgage balance.

That’s contrary to the standard HECM contract language, which specifically states that the property can be purchased at market value. Wells Fargo subsequently foreclosed on the home, acting on behalf of Fannie Mae, which owned the mortgage. The home had been in the Chandler family since the 1940s.

Wells Fargo announced plans to exit the reverse mortgage market in June, although it continues to service existing loans. The bank is one of three major lenders that has stopped writing loans this year.

The lawsuit comes as Wells Fargo and other major banks continue to deal with foreclosure-related problems in the traditional forward loan market.

A Wells Fargo spokesman noted the rule change issued by HUD in April: “When the HUD rules changed, we adopted them including providing notice to the heirs. We intend to defend our company in this case.”

Fannie Mae declined to comment.

17 comments

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Another glaring example of collusion between bankers and government officials to cheat general public, under Republican presidency. This is the reason that GOP is against regulations so that they do not even have to grease the extended palms of regulators and legislators! There should be a public ombudsman who should vet any suggested regulations by government agencies or amendments to existing regulations before they are passed by legislatures. As long as expensive election battle is the norm, it will be very difficult to control corruption in all the three wings of government. nirmalasuman@yahoo.com

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Anyone surprised?

Big Banks bilking seniors out of their homes? Naw, we have regulations in place to prevent that, don’t we?

Posted by NobleKin | Report as abusive

“Reverse Mortgages” have always sounded like a con game to steal any home equity from the aged.

This just proves the point to me.

Posted by bobw111 | Report as abusive

Put the bank executives in prison for Federal bank fraud, using the sentencing guidelines for fraud based on value. Nothing like a few thousand of the highest paid bankers in the country doing 10 years Federal time, no parole, no suspended sentences. Would do more to clean up dirty American finance than Congressional Hearings!

Posted by txgadfly | Report as abusive

It’s hard to stop the foreclosure fraud, because allot of rich people are sort of in a continual ecstasy over their control of the people living in those distressed houses. It’s kind of like hitting an ant hill with a shovel, because the ant hill is growing in your backyard.

Posted by Penor_Water | Report as abusive

Show no Mercy for these Banksters.. This is just another disgusting example of their Black Souls..

Posted by Treeeblehooks | Report as abusive

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I’m confused regarding the negative comments about bankers. My family is very glad there are bankers willing to lend money to us so that we can buy our own home. Without them most of us would be living some other slumlord type of place or we would be forced to improve our rental under the threat of being asked to move out at any time.

Before lambasting someone, put yourself in their shoes. Let’s say you were responsible for managing your grandfather’s retirement account (that’s what a banker does)… and you lent money to a man in a reverse type loan.

Market crashes, man dies in 2010. So far you have lent man $120k but his home is only worth $100k. Bottom line you have more than paid for the man’s home. He has gotten all his money and then some while he was alive (a good time to get it btw).

So you start the steps to put the house in your name so that you can use the cash from selling it for your grandfather. But the man’s son comes along and want’s you to carry back the paper on the house to him with a principal balance of $95k. Somehow you are the bad guy because you no longer want this investment, you had made a commitment until the man died… and he has.

(how is this stealing the home from the aged? the aged is dead and you’ve already paid more than the house is worth).

Opps here i am on my soapbox about dissing bankers and realize i have my own diss targets. The people in gov.

The entire bubble would have been avoided if the powers to be didn’t encourage the head of Freddie Mac and Fanny Mae to accept low-doc loans. Because there would have been no place for greedy loan originators to sell off there high risk loans. The heads of these two organizations could have been real men and refused to lower their standards, but no there was too much pressure from high gov types. I think anyone that put pressure on these guys to take crap loans should be the ones in prison. Sure seems like if we wanted to we could get them for security fraud or insider trading. One could only wish.

Posted by val_nic94 | Report as abusive

as usual the banks have found a new way to steal from the senior what has happen to these great Country of ours, take God out of the equation and what do you have a Country going to hell in a handbag

Posted by classylady | Report as abusive

Kick the seniors while they are down all these banks should have been liquidated. The bailout should have been used for the responsible seniors who became distressed or disabled or spouses have passed they deserve our respect and loyalty.

Posted by IvanM | Report as abusive

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Some “Banks” considered too big to fail need a lesson that the (US?) Congress is too afraid to give them: This all-out raid on the homes and property of American Citizens is not going to “pay”, period. This entire financial debacle, as currently explained is just a continuation of the 1980’s banking scandals with less protection for the public than one might think. To make a profit in business ventures should not become a sullied concept,ever. To remove the balance between right to profit in business and the rights of consumers to be protected against “unscrupulous wheeler-dealers” should be considered a crime, and the perps should be treated that way.
Consumer confidence depends on this balance, which is torn and tattered beyond recognition, by the inaction of those to whom think getting elected and staying elected is more important than the lives of those who voted them into office in the first place.
Now is not the time for consumers to “return to the marketplace”. Now is the time for every American (and the our overseas counterparts) to say NO to unbridled greed, fraud, deception and unmitigated race/economic warfare. Boycott, boycott,….until some of these people serve time in jail and lose the fortunes of ill-gotten gains to consumer class action suits. What do the little people have to lose–nothing, it has already been stolen.

If we fail to stop these people, then the economic slavery implied by all of the recent losses will one day be called “the tip of the iceberg”. Vote daily with your pocketbooks until the message is heard and appropriate change is made!!!!!

Posted by 1159pm | Report as abusive

By the way, how is it that we were taught in school that laws that changed existing contracts were illegal, but now we find that this practice is so common. Do you think that this makes for an upward swing in “lack of consumer confidence”?

Posted by 1159pm | Report as abusive

[…] AARP Sues Lenders for Wrongful Reverse Mortgage Foreclosures August 8, 2011 2:09 pm Jeff Matsen Elder Law, Estate Planning, News & Articles, Retirement Planning The AARP Foundation’s litigation unit filed suit late last week against Fannie Mae (Federal National Mortgage Corp.) and Wells Fargo Bank for failure to allow surviving spouses and other heirs of deceased reverse mortgage borrowers to purchase the property for appraisal value, according to a news report. […]

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My mother had a reverse mortgage and passed away in December, 2010. Initially, WF told me we would have to purchase the home for only the full amount of the loan (we know it to be “upside-down” by our own independent appraisals)…5 months later, and after denying an extension to “save’ the home, Wells Fargo told me I could now purchase my mother’s home for 95% of the appraised value (but gave me 3 weeks to make that decision). But, they wouldn’t give me the appraisal figures — and instead have put the home up for auction, scheduled 8/23.

Today I called WF, and they asked if I was prepared to payoff the full balance – and still would not give me the appraised value. My Home Preservation specialist (assigned to me only last week) said she couldn’t find my information in her system…How does this bs fit into the “implied covenant of good faith and fair dealing”????? I’m emotionally overwhelmed. The home is my principal residence — and I would like to find a viable solution to keeping the property…..

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After my mother found out she had Parkinsons disease and because her medical bills started mounting putting a strain on her retirement she reluctantly reverse mortgaged our family home in 2005. I had quit my job and became my mothers full time care giver until she passed away in April of 2010. Unlike Mr. Chandlers situation where the house has depreciated and is worth less than the reverse mortgage balance due. My mother reverse mortgaged for less than the full among she could have and subsequently even in the depreciated market my mother still has equity in her home which is now my primary residence. Unfortunately, my mother never set up the trust she was suppose to but she did have a will and although I was still unemployed I managed to get the house into probate and got the letters of testamentary in Dec of 2010. Wells Fargo had granted me the standard 1 year acquired 3 months at a time so it left me with only 4 months to sell the house. The 4 worst months in recent recorded history for the housing market here in Los Angeles. So at the end of April they started the Foreclosure procedure. They never told me what the appraised value of my house was and I was lead to believe it was underwater or wouldn’t sell for the 280,000 owed on the mortgage

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Wells Fargo seems to use some very sneaky tactics. For example, they suddenly started using a different Loan Number on some correspondence, even though the original Loan Number continues to be used on the Reverse Mortgage Statements. They deny receipt of any correspondence that does not have the newer Loan Number on it, even if it has the still current Loan Number, name, address, etc. making it clearly identifiable. And, the number better be on each and every page of correspondence or documents or they will not admit that they have received it.

Posted by leahg | Report as abusive

My sister and I are going through the the same thing. My mother was taken advantage of by Wells Fargo when she was 83 years old and extremely sick. We had exhausted ourselves financially and wanted her to remain comfortable at home so we agreed to a reverse mortgage. We really didn’t get all the money that was promised, because they took out quite a bit in fees up front so they were a rip off from the start.

We now are trying to keep the family home in which we have lived since 1963 and they continually talk in circles and really tell us nothing except they will accept a short sell which is 95% of the loan owed whose interest continually grows and now exceeds the value of the home by at least $40,000 dollars and they have begun the foreclosure process.

I compalined to HUD and they simply referred me back to Wells Fargo and all they did was to quote laws which justify their poor behavior. Someone needs to set controls for this bank because they also did something to my mother’s bank account 3 days before she died. They claimed she owed them money and they drafted all the money she had in the bank which was $1412.03 sending her account into a negative $580 dollar negative because of other checks already out. My sister and I called their recovery department and a collections agent named Kyle was very nasty to us on the phone. Later they took her state retirement check which had been automatically deposited after her death and we had to complain to the bank, Wachovia ( which had been taken over by Wells Fargo) that they had taken a deceased woman’s money and it took them several days to return this money so we could in turn return the money to the State of NC. She did not owe them and they did not notify us of anything like this coming, this was 3 days before she passed and I will never forget her laying in ICU and us on the phone trying to recover her illegally taken funds and the nasty responses we received from their representatives.

When it comes to the reverse mortgage, they have mortgage specialist who are SUPPOSED TO HELP you but they seem to know nothing and continually talk in circles even though you are the legal heirs according to the will and will not tell you anything except about SHORT SELL unless you have probate court papers.

This bank has very disgusting and most unfair banking practices and I reallly hope someone is able to exert some way to put some controls on them. If not they are growing bigger and bigger everyday taking money and abusing the working people who cannot afford to stand up to them and they know this. I hope this lawsuit brings about some type of change and if I can help in anyway would love to assist.

Posted by martin1 | Report as abusive

We have a huge problem of unregulated Home Owner insurance companies in Florida. One anticipates HO insurance does increase from time to time, but several years after we did our reverse mortgage, State Farm increased our HO insurance 38%, beyond our ability to pay, and causing us to be in technical default on our Reverse Mortgage. We shopped all over Florida and were unable to buy HO insurance. There has been something fishy going on in the insurance industry here with State Farm threatening to leave and investing in reinsurance company instead, which is not regulated. Apparently none of the insurance companies that do business in Florida are competitive. The total of our property taxes and insurance comes to more than it would cost for us to RENT a nice place to live. Given that, plus the face that the market has collapsed so badly we cannot even sell our property for the amount we owe on it. Banks, insurance companies and our county tax collectors are all stealing from us,

Posted by palsimon | Report as abusive

One should never put money into checking accounts with the same bank that holds a mortgage because if you are in arrears on the mortgage the bank has a legal loophole which allows it to automatically take the money out of your checking account. BEWARE

Posted by palsimon | Report as abusive

[…] 17.AARP sues Wells Fargo, Fannie Mae over reverse mortgage … Aug 5, 2011 … AARP’s lawsuit charges that lenders failed to allow surviving … mother died in 2010, five years after obtaining a reverse mortgage. … He has gotten all his money and then some while he was alive (a good time to get it btw). … http://blogs.reuters.com/reuters-money/2 011/08/05/aarp-sues-wells-fargo-fannie-m ae-over-reverse-mortgage-foreclosure/ […]

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