Commerce Commissioner calls 'widow foreclosures' a ticking time bomb

- An 83-year old widow who has lived in her Minnesota house for more than 50 years is facing foreclosure and state officials say it could happen to other unsuspecting spouses who have reverse mortgages.

Colleen Hodroff and her husband, Monroe, moved into their Minneapolis home in 1963 and raised six children in a tidy tudor just off of Cedar Lake. They were often called the Brady Bunch of Ewing Avenue.  

"We've loved this house. It's our heart and soul," Colleen said in an interview with the Fox 9 Investigators.

It was a classic marriage of the times. Carol raised the kids and Monroe, who ran several convenience stores, paid the bills. He died two years ago at the age of 92. 

"My husband and I've loved this home, to think of it being taken away is gut wrenching," Colleen commented.

Just 10 days after Monroe died, she got a letter from the bank saying it was foreclosing on the home and she had 60 days to leave. 

10 years ago the Hodroff's had taken out a reverse mortgage.  Monroe had seen a commercial for a company called Financial Freedom, promising people 62 or older they could live off the equity already built up in their home, get cash up front, or pay off debt,  all with no mortgage payments. 

As the Hodroff's understood it, they could both live in their home until they died, when the bank would take possession of the house.

Suing to keep her home

Colleen filed a lawsuit against the bank. According to her attorney, John Braun, one of the documents Hodroff signed over at the time was the deed to the house. She had given up her interest in their home, by literally taking her name off their mortgage. She said she couldn’t fathom the implications of such a decision.

"What she tells me is: when her husband presented her something to sign, she signed it," said Braun.

In return, the bank got to calculate the reverse mortgage based on Monroe's life expectancy, who was more than a decade older than his wife. The Hodroff’s got more money based on that calculation. The bank would also likely get their money more quickly that way. 

The practice even has a name, "widow foreclosures,” and sometimes the changes are made at the last minute.

"This particular lender is notorious for making statements at or near the closing where the excluded spouse is told don't worry about it you'll be able to live there as long as you want, we'll put you back on later," said Braun.

Financial Freedom was the reverse mortgage division of the notorious IndyMac, the sub-prime lender that collapsed in the 2008 financial crisis. 

It was sold to a group of billionaire investors, including Donald Trump's new campaign fundraiser, Steve Mnuchin, who renamed it OneWest Bank. OneWest Bank merged last year with CIT Group. 

According to a watchdog group, the California Reinvestment Coalition (CRC), Financial Freedom has a 17 percent share of the reverse mortgage market, but is responsible for nearly 40 percent of all reverse mortgage foreclosures (2009-2015).  Recent financial disclosure documents for CIT indicate HUD’s Inspector General is currently investigating Financial Freedom reverse mortgages. 

The U.S. Department of Housing & Urban Development (HUD) insures the vast majority of reverse mortgages for those over 62 years of age. For all new loans originating after August 2014, HUD policy is that a non-borrowing spouse may remain in the house even after the borrower dies as long as certain conditions are met. But for those loans originating before August 2014, HUD will continue to insure reverse mortgages for non-borrowing spouses, but it is completely voluntary for the banks and they could still foreclose

"You're sort of leaving the fox guarding the hen house," Braun said. "The lender can say we want to be a nice bank today, or we don't want to be a nice bank. And there aren't many instances when they're deciding to be a nice bank." 
 
CRC has been tracking complaints against Financial Freedom for years.

"In many cases they (homeowners) were urged to keep the younger spouse off the reverse mortgage to their detriment and without their knowledge," said CRC Associate Director, Kevin Stein.

And CRC contends HUD policy of extending insurance to cover non-borrowing spouses doesn’t seem effective.  In a Freedom of Information Act (FOIA) response, HUD admitted that only 100 people have applied to have their loans transferred to HUD, and only 32 have had their loans transferred,  38 have been denied, and 30 were pending.

And yet, Minnesota may be unique. Under state law going back to 1905, both spouses must be on the mortgage of homesteaded property.  The law's intended to protect one spouse from being financially swindled by the other.

"And this mortgage was specifically crafted to end run around that statute. As a result, our opinion, is that was fraud," said Braun.

The courts have yet to agree. Colleen Hodroff's case has dragged on for two years. 

Warning about reverse mortgages

Minnesota Commerce Commissioner, Mike Rothman said it's just one of many cautionary tales when it comes to reverse mortgages. And the true scope of the problem, isn't even known.

"These are ticking time bombs. There's only one spouse on them and usually an older spouse, and they're still out there," said Rothman.

Minnesota has a law that requires a 7-day “cooling off period” after a borrower accepts a reverse mortgage.  It’s designed to protect a borrower from being rushed into signing closing papers.

The federal “Truth-In-Lending  Law” (also known as Regulation Z) has a 3-day “right of rescission.”  For any reason and without penalty, a borrower can withdraw from a reverse mortgage loan within 3 days. The rescission notification must be in writing.

Consumer tips on reverse mortgages

The Minnesota Commerce Department has consumer tips on reverse mortgages click here

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