Reverse Mortg. Solutions, Inc. v. United States Dep't of Hous. & Urban Dev., Case No. 18 C 2149

CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
Writing for the CourtJudge Harry D. Leinenweber
Docket NumberCase No. 18 C 2149
Decision Date05 February 2019

URBAN DEVELOPMENT, et al., Defendants.

PATRICIA WILSON, Crossclaim Plaintiff,
URBAN DEVELOPMENT, Crossclaim Defendant.

Case No. 18 C 2149


February 5, 2019

Judge Harry D. Leinenweber


Before the Court is Defendant United States Department of Housing and Urban Development's Motion to Dismiss Crossclaims by Plaintiff Patricia Wilson. For the reasons stated herein, the Motion (Dkt. No. 15) is granted in part and denied in part.


This case concerns a home equity conversion mortgage, also known as an "HECM" or "reverse mortgage," and an insurance program

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run by the United States Department of Housing and Urban Development ("HUD"). Plaintiff Patricia Wilson's ("Ms. Wilson") husband Walter Wilson Jr. ("Mr. Wilson") took out a reverse mortgage that was insured by HUD on their home. Now Mr. Wilson has passed away and, as a result, Ms. Wilson is facing foreclosure. The foreclosure led Ms. Wilson to bring suit against HUD under the Administrative Procedures Act ("APA"), 5 U.S.C. §§ 551, et seq., asserting that HUD's implementation of its insurance program caused the foreclosure action. For convenience of the reader, the Court will provide a brief overview of reverse mortgages and HUD's insurance program before turning to the specific facts of this case.

A. Reverse Mortgages and the HUD Regulation at Issue

Reverse mortgages are a form of equity release in which a mortgage lender makes payments to a borrower based on the borrower's accumulated equity in his or her home. The lender provides the borrower with a lump sum or periodic payments, and the borrower need not repay the outstanding loan balance until certain "trigger" events occur (such as the death of the borrower or the sale of the home). Because borrowers can typically defer repayment until death, reverse mortgages function as a way for elderly homeowners to receive funds based on their home equity.

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Reverse mortgages are "non-recourse" loans, meaning that if a borrower fails to repay the loan when due and the sale of the home is insufficient to cover the balance, the lender has no recourse to any of the borrower's other assets. The only routes to repayment are voluntary payment of the loan in exchange for release of the mortgage, voluntary conveyance of the residence, or foreclosure. If the proceeds resulting from a foreclosure are insufficient to cover the loan balance, the lender cannot seek a deficiency judgment against the borrower or their estate. This feature is favorable to borrowers but carries significant risk for lenders. If the borrower elects to receive regular disbursements rather than a lump sum, the disbursements can continue until the borrower's death. If the borrower lives longer than expected, and the disbursements exceed the value of the home equity, lenders can face a significant financial loss.

Congress, concerned that this risk to lenders was deterring them from issuing reverse mortgages, amended Title II of the National Housing Act to authorize HUD to administer an insurance program for reverse mortgages. 12 U.S.C. § 1715z-20 ("authorizing statute"). HUD, through its component agency the Federal Housing Administration ("FHA"), is authorized to provide insurance to private lenders who offer qualifying reverse mortgages to elderly homeowners. Borrowers must be at least 62 years of age to qualify.

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See 12 U.S.C. § 1715z-20(b)(1). To prevent a lender from incurring uninsured losses after reaching the maximum loan amount, the lender can elect to assign the reverse mortgage to the FHA when the reverse mortgage reaches 98% of the maximum loan amount. See 24 C.F.R. § 206.107(a). If the lender makes that election, HUD takes on responsibility for servicing the loan until a trigger event occurs; when such an event occurs HUD may foreclose the home if necessary. The insurance program also compensates lenders for some or all their loss when the proceeds from the sale of a house are less than the outstanding loan balance. In exchange, lenders must comply with HUD regulations and pay a monthly mortgage insurance premium ("MIP"). See 24 C.F.R. § 206.27(b)(7). Lenders generally pass the MIP costs directly on to the borrowers.

But Congress wanted to do more than just incentivize lenders. It also created the reverse mortgage insurance program to "meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing and subsistence needs at a time of reduced income." 12 U.S.C. § 1715z-20(a). The section of the authorizing statute at the heart of this case, titled "Safeguard to prevent displacement of homeowner," states:

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner's obligation to satisfy the loan obligation is

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deferred until the homeowner's death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary. For purposes of this subsection, the term 'homeowner' includes the spouse of a homeowner.

12 U.S.C. § 1715z-20(j) (emphasis added).

HUD promulgated regulations to implement the Act. Until September 2017, one of those regulations required insured reverse mortgages to state that the mortgage balance "will be due and payable in full if a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor . . ." 24 C.F.R. § 206.27(c)(1) (1996) (since amended) (emphasis added). And HUD regulation 24 CFR § 206.3 (until September of 2017) defined "mortgagor" as "each original borrower under a mortgage. The term does not include successors or assigns of a borrower." By substituting "mortgagor" for "homeowner," HUD's regulations required lenders to issue reverse mortgages that required foreclosure when the borrowing spouse dies, despite the authorizing statute's clear mandate that HUD not insure reverse mortgages unless they deferred foreclosure until both spouses died. One such reverse mortgage is at issue in this case.

Legal challenges to 24 C.F.R. § 206.27(c) led HUD to take action in an attempt to change the effect of its regulations on surviving spouses. HUD first fashioned prospective relief in a "Mortgagee Letter" directed to participating private lenders,

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requiring all reverse mortgages issued after August 4, 2014, to include a Deferral Period. ML 2014-07 (April 24, 2014). The Deferral Period postpones a reverse mortgage's due and payable status (and subsequent foreclosure) until the death of the last eligible non-borrowing spouse. HUD later amended its regulations to codify this forward-looking relief. See 24 C.F.R. §§ 206.27(c), 206.55 (effective September 19, 2017). Thus, HUD implemented the anti-displacement intent of the authorizing statute for all reverse mortgages prospectively. However, reverse mortgages issued before August 4, 2014, still lacked protection for surviving spouses. In an attempt to address this gap, HUD issued additional requirements in Mortgagee Letter 2015-15. ML 2015-15 (June 12, 2015). ML 2015-15 created the Mortgagee Optional Election ("MOE") that is still in effect (prior versions of the MOE will be discussed below). The MOE allows a reverse-mortgage lender, at its election, to assign the reverse mortgage to FHA when the last surviving borrower dies, and the lender has met certain criteria. Once the reverse mortgage is assigned to HUD, the surviving spouse would be protected from displacement as long as they continue to maintain eligibility (e.g., they must continue to reside in the property secured by the reverse mortgage). The MOE applies to all HUD-insured reverse mortgages that were issued prior to August 4, 2014. However, there are several restrictions on eligibility for

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the ML 2015-15 MOE, one of which is at issue in this case: lenders must elect to assign the reverse mortgage within 120 days of the borrower's death. If that deadline is not met, lenders are required to foreclose on the subject property. See ML 2015-15 at 4.

B. Bennett, Plunkett, and Progeny

Before turning to the facts of this case, the Court will briefly note other U.S. district court cases that have dealt with the consequences of HUD's reverse mortgage regulations on surviving spouses. The first legal challenge took place in the U.S. District Court for the District of Columbia. See Bennett v. Donovan, 797 F. Supp. 2d 69 (D.D.C. 2011) ("Bennett I"), rev'd 703 F.3d 582 (D.C. Cir. 2013). In Bennett I, surviving spouses brought suit against HUD under the APA, claiming the original 24 CFR § 206.27(c)(1) violated the APA because it was inconsistent with the authorizing statute. The court dismissed the case for lack of standing, finding that the complaint lacked redressability because it hinged on the independent choices of a third party regulated by HUD—the reverse mortgage lender. Id. at 75. The D.C. Circuit reversed Bennett I, finding that plaintiffs did have a redressable injury to the extent that their requested relief depended on the actions of HUD. Bennett v. Donovan, 703 F.3d 582, 590 (D.C. Cir. 2013). The circuit court found that HUD had the capacity to provide relief to the plaintiffs under 12 U.S.C. § 1715z-20(i),

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eliminating the uncertainty of third party lender action. On remand, the district court granted summary judgment to the plaintiffs, finding that the HUD regulation was invalid as applied to plaintiffs because it violated the authorizing statute. Bennett v. Donovan, 4 F. Supp. 3d 5, 12-15 (D.D.C. 2013) ("Bennett II"). The court remanded the case to HUD to fashion relief.

While Bennett II was on remand to HUD, litigants filed Plunkett v. Castro, 67 F. Supp. 3d 1 (D.D.C. 2014). The Plunkett...

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