When it comes to reverse mortgages, the Department of Housing and Urban Development (HUD) reversed a rule that will spell relief for homeowners and heirs.

The rule reversal came about in the wake of an important victory last week by AARP Foundation Litigation in its ongoing battle to challenge a 2008 rule change in the administration of reverse mortgage policy by HUD.

A reverse mortgage is a loan option available to seniors aged 62 or older, who typically use it to obtain cash based on the amount of equity in the property and how old the homeowner is at the time the reverse mortgage is obtained

Senior homeowners have been warming to reverse mortgages because the homeowner’s obligation to repay the loan is deferred until the owner dies, the dwelling is sold, or the owner relocates. Prior to the 2008 rule change, the general practice stipulated that surviving spouses, who may have been removed from the title in order for the elder partner to qualify for the reverse mortgage, could purchase the home for 95 percent of the property’s true market value.

But at the close of 2008, which Jean Constantine-Davis, a senior attorney with AARP Foundation Litigation, characterizes as “uniquely bad timing because the real estate market had plummeted and was continuing to plummet,” HUD issued a letter that changed the game. In it, policy was amended to require that an heir pay the full mortgage balance to remain in the home, even if it exceeds the value of the property.

As Constantine-Davis notes, “it put most of the [reverse] mortgages underwater immediately.”

In March of this year, AARP Foundation Litigation filed a formal challenge to the rule on behalf of three surviving spouses of reverse mortgage borrowers. Of the many reasons behind the suit, Constantine-Davis highlights the lack of due process behind the sudden reversal in policy: “They changed a rule via letter instead of following proper administrative procedures and allowing interested parties to comment.”

Last week in Washington D.C., HUD, perhaps realizing that the increased attention garnered by reports of widespread foreclosures on seniors was bad public relations, proactively rescinded the 2008 letter, heading off foreclosure proceedings for the plaintiffs, and by extension, thousands of others.

Constantine-Davis asserts that the AARP will do its part to help HUD spread the word. “These foreclosures should be stopped. HUD issued a letter to the servicers and the onus is on them to communicate with the homeowners. We’re still working with HUD to ensure the word gets out. There’s no question that people who are being foreclosed on now, and about to be evicted, will be helped by this.”

The reversal of the 2008 rule only addresses part of the original lawsuit, but the AARP’s legal team has reason for optimism. The other half of the equation, the Equity Conversion Mortgage program (HECM) statute, specifies that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure. However, in light of last week’s capitulation, Constantine-Davis believes momentum is on the people’s side:

“I don’t know what steps HUD is going to take from here. They have filed a motion to dismiss the case. HUD may issue a new rule altogether. We would then have to look at that rule to see if it offers enough protection for people. This could be good news for heirs.”

HUD has indicated that while it rescinded its prior rule to make certain that all sales of properties were legitimate market driven sales and based on the each property’s real value, new guidance would be issued in the future on this issue.