Reverse Mortgage Servicing

Beth Shay, SeniorLAW Center

Sarah White, Connecticut Fair Housing Center
Overview
• Reverse mortgage basics
• Property charge defaults
• Occupancy defaults
• Fair Housing issues
• Non-borrowing spouses
Reverse Mortgage Basics
• Most are FHA-Insured Home Equity Conversion Mortgages (HECM)
• Also Fannie Mae HomeKeeper reverse mortgages
• Servicing guide available at https://www.fanniemae.com/content/guide/reverse-mortgage-
loan-servicing-manual.pdf
• “Jumbo” or proprietary reverse mortgages subject to investor guidelines
• Borrower must be 62+
• Proceeds may be taken as a lump sum, line of credit, an annuity, or
combination of these. Borrower can change payment plan.
• No monthly payments of principal or interest; interest and servicing fee is
added to the loan balance each month
• Loan comes due upon a triggering event: death, sale, non-occupancy, or
non-payment of property charges.
Reverse Mortgage Basics
• Loan balance may grow to exceed the value of the house
• Nonrecourse loan
• FHA insurance (can assign to HUD when the loan balance reaches 98% of the
Maximum Claim Amount)
• Initial principal amount loaned is based on:
• Appraised value of the house
• Prevailing interest rates
• Age of the youngest borrower (older = higher loan proceeds)
HECM Loan Documents
• 2 liens filed on property – one in favor of the lender, one in favor of
HUD
• Each lien is recorded for 150% of the Maximum Claim Amount
• Maximum Claim Amount = appraised value at the time of closing, up to
$625,500
• Lender will be in first position, HUD in second
• 2 notes and loan agreement specifying payment plan for proceeds
Due and Payable Events
• The last surviving borrower dies
• The last surviving borrower sells the home or conveys title (however,
borrowers can convey title after closing as long as they retain at least
a life estate interest in the property)
• The borrower changes their principal residence
• Requires HUD approval
• A borrower may be away from the home for up to 12 months if the absence is
due to medical reasons
• Borrower fails to pay property charges or maintain the property in
“saleable” condition
• Requires HUD approval
HECM regulations and guidance
• National Housing Act, 12 U.S. Code § 1715z–20
• 24 C.F.R. §§ 206.1 - 206.211
• Amendments in effect 9/19/2017.
• Final rule: https://www.nrmlaonline.org/wp-content/uploads/2017/01/HECM-Final-
Rule.pdf
• Mortgagee Letters
• https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hec
mml
• For loss mitigation, see ML 2016-07 and 2015-11
• For NBS, see ML 2015-15
• HUD Handbook 4235.1 REV-1 (from 1994)
• FAQs https://portal.hud.gov/hudportal/HUD?src=/FHAFAQ
Background on Property Charge Defaults
• Loan documents and 24 C.F.R. § 206.27(b)(6) require borrower to
timely pay “property charges.”
• This includes property taxes, hazard insurance premiums, and HOA dues.
• HUD’s final rule defers including utilities as property charges. But servicers may be
paying utility liens w/ priority status (like water/sewer).
• Borrowers may be unaware of the requirement or have disabilities that
affect their ability to timely pay.
• If a borrower doesn’t pay, then the lender will advance the funds,
resulting in a default.
• Sometimes money is initially paid through a set-aside or line of credit
• Borrowers may think their loan is escrowed or that there are few
consequences to letting the lender pay.
Hazard Insurance Defaults
• Appropriate coverage likely value of improvements at closing.
• RESPA force-placed insurance reg. applies. See 12 C.F.R. § 1024.37:
• 45-day and 15-day letters to borrower
• Must cancel/refund within 15 days of proof of coverage
• Reasonableness of charges and limits on amount of force-placed
coverage usually determined by state law.
Why are there so many more reverse
mortgage foreclosures?
• ML 2015-11 (April 23, 2015)-- loss mitigation for unpaid property
charges became permissive, not mandatory.
• Servicers required to call the loan due and foreclose if default is not
cured.
• Servicer must submit due & payable request to HUD
• May request from HUD an extension of foreclosure deadlines if servicer
determines a loss mitigation option is available
• Must complete foreclosure within prescribed due diligence time periods
Nearly one in ten borrowers are in default for
property charges.
• In 2012, HUD reported that 9.8% of loans were in default for property
charges.
• A 2016 study analyzing a sub-set of borrowers found a baseline
default rate of 15.6%.
• Borrowers with lower credit scores or who made large initial withdrawals
significantly more likely to default.
• See “Reducing Default Rates of Reverse Mortgages,” available at
http://crr.bc.edu/wp-content/uploads/2016/07/IB_16-11.pdf
• HUD estimates a lifetime property charge default rate between 20-
25%.
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ML 2015-11: Required Notices
Property Charge Delinquency Letter (as soon as Servicer knows of default)
• Must inform borrower of these options:
• Refinancing the defaulted HECM if possible
• Local assistance programs (e.g., Hardest Hit Funds program)
• Or, if neither of these two options will work, servicer may offer:
• Repayment plan
• Extension of foreclosure timelines for “At Risk” Mortgagor age 80+
Due and Payable Notice (within 30 days of default unless Loss Mitigation
extension)
• Must reference any available loss mit., mention option to sell or execute
deed in lieu, and refer to HUD counseling agency
• May not accelerate the loan until 30 days after Due & Payable Notice
Verify Charges Claimed
• Ask for an itemized list of disbursements made for property charges
• Send a Request for Information pursuant to 12 C.F.R. § 1024
• In some cases, property charges are incorrect
• E.g. lender took out forced-place insurance policy, even though the borrower had
coverage; FPI charge can be reversed with borrower’s proof of coverage
• E.g. repayment plan proceeds weren’t applied properly, or client hadn’t defaulted
• Send a Notice of Error pursuant to 12 C.F.R. § 1024 if charges are incorrect
• Note: borrower cannot be required to repay other fees, such as property
inspections, foreclosure costs, etc.
• Those charges can only be added to the loan balance, not assessed for
reimbursement by the borrower
Cure Default in Full
• Borrower has the right to cure the default in full at any time prior to
foreclosure.
• Cure amount is only for property charges advanced (not for
foreclosure costs, etc.)
• Could be an option for low default balances, or seniors with
savings or family able to contribute
• Explore local programs that might be able to assist; e.g. Hardest
Hit funds
ML 2015-11: Repayment Plans
Servicer should:
• Determine the total amount due for unpaid property charges and
property charges coming due in the next 90 days
• Minus HOA fees, which cannot be included in the repayment plan
• Determine the borrower’s ability to repay the charges through a
repayment plan
• No longer than 5 years
• Payment no more than 25% of monthly surplus income
• Or such shorter period so as to ensure repayment before the loan hits 98% of
the Maximum Claim Amount
98% of Maximum Claim Amount
• “Maximum Claim Amount” = appraised value at the time of closing,
up to $625,500
• Amount on recorded security instrument is 150% of the MCA (i.e. secured
amount÷1.5 = MCA).
• Max HUD will pay on lender’s FHA insurance claim
• Per ML 2016-07, may offer a repayment plan that will go beyond
98% of the MCA, but claim amount cannot exceed MCA
• Some servicers are exercising their “discretion” to deny payment plans
where loan balance would exceed 98% MCA
Loss Mitigation After Foreclosure Initiated?
• ML 2015-11: Payment plan not available after foreclosure initiated
• ML 2016-07: for loans that were in foreclosure when ML 2015-11 was issued
(April 23, 2015), a repayment plan is allowed
• FAQ 5/26/16: “Mortgagees may evaluate a HECM borrower for permissive loss
mitigation after first legal action has been taken [to initiate foreclosure].”
• Problem: servicers are still refusing loss mitigation once in foreclosure unless
HUD grants an extension (b/c they can lose interest and fees on their insurance
claim if they don’t foreclose timely)
ML 2016-07: Additional Options
• Issued March 30, 2016
• New option: Servicer may delay foreclosure if the arrearage is less than $2,000
and the borrower has expressed willingness to pay and is attempting to pay, or
lender has not yet been able to reach the borrower. But unevenly followed.
• Can try to pay down the arrearage to <$2,000 and then negotiate with servicer to delay
foreclosure
• New option: “Mortgagee Funded Cure”
• Mortgagee may advance the funds to pay property charges
• May not include the advanced funds in a claim to HUD
• May not assign the loan for 3 years has passed where borrower has paid the
T&I on time
“At Risk” Extension (ML 2015-11)
• Mortgagee may request foreclosure extension if:
• Youngest living mortgagor is at least 80 years old, and
• Critical circumstances such as terminal illness or long-term physical disability of
borrower or family member living in the home
• Submit written request to servicer with supporting medical records or doctor’s letter
• Helpful to include a cover letter explaining medical issues, how they meet criteria
for an at-risk extension, and why it’s critical they stay in their home
• Mortgagee may submit request/documentation to HUD, which makes the ultimate
decision.
• HUD denies some requests. Denial letter doesn’t state reasons or provide appeal.
• Contact HUD directly? Involve legislator to contact HUD?
• Must resubmit supporting documentation on an annual basis for ongoing extension each
year
• Does not require repayment of property charges. Still due and payable status.
“At Risk” Extensions After Foreclosure
Initiated?
• FAQ 5/26/16 says the “at risk” extension is not available if loan is already in
foreclosure
• Trigger? “First legal action.” Not same as F/C referral.
• Servicers are not consistently telling qualified borrowers about availability of “at risk”
extension, so they don’t know to apply. Borrowers may not recognize they’re in default
until initiation of foreclosure.
• But HUD is still granting “at risk” extensions to borrowers in foreclosure
• Servicer may still accept application for at-risk extension and agree to seek a waiver from
HUD
• Can reach out to HUD/legislator if servicer refuses
• Consider making a reasonable accommodation request to servicer or HUD if borrower
didn’t apply pre-foreclosure because of disabilities (e.g. cognitive disability or visual
impairment).
Issues after At-Risk Extension Granted
• Foreclosure case is not withdrawn
• Can ask court to dismiss case, especially if the critical circumstances are long-term
• Future property charges
• Not currently a condition of extension
• Borrower should try to pay, if possible
• Some servicers aren’t advancing funds, so may be tax liens/foreclosures
• Annual Recertification
• Requirements for Annual Recertification not clearly explained in some approval
letters
• Servicers give 30 days prior to expiration of extension to submit supporting
documentation. Can’t be submitted earlier.
• Some borrowers may not successfully recertify without assistance.
Can Chapter 13 bankruptcy help?
• Servicer refuses to offer repayment plan or offers a shorter repayment plan
than what the borrower can afford
• Cure the taxes and insurance through chapter 13 plan
• Unlike a typical mortgage creditor, no P&I will be included in Proof of Claim
• Attorney’s fees and foreclosure fees should not be included in Proof of Claim
(just property charges)
Problem: Servicers paying property taxes early
or senior has payment plan
• Some low-income and elderly homeowners have special arrangements with the
taxing authority (or utilities) – payment plan, grace period, etc.
• Servicers cause problems by paying the taxes before they are due, then saying
the loan is in default and borrower must qualify for a repayment plan to pay
back the advances.
• HECM Loan Agreement:
▫ 2.10.5 – Lender can only pay the property charges if Borrower fails to pay in a timely manner,
has elected to have Lender make the payments, or if there is a pattern of missed payments
• Advocacy with tax offices to code account as not in default if senior is on
payment plan
• Advocacy with HUD regional office to prevent advance of funds when a payment
plan is in place
• Escalate advocacy to HUD’s RM Servicing Center if borrower’s municipal tax
agreement is not honored
The Financial Assessment & Future Property
Charge Defaults
• As of March 2, 2015, new HECM borrowers must pass a Financial
Assessment (FA) to ensure that borrower has money set aside to pay
future property charges. See ML 2014-22 (Nov. 10, 2014)

• Expect that this will limit the number of HECM foreclosures for
property charges in the future.

• Makes it more difficult to refinance with a new RM as an option to

cure default
Property Charge Funding Options
• As a condition for loan approval for borrowers who do not meet HUD’s financial
requirements, the mortgage company must require that HECM proceeds be used
to pay property taxes and homeowner’s insurance
• Lifetime Expectancy Set Aside; or
• Pay property charges from HECM monthly payments or line of credit as they
become due
• Borrower cannot cancel these arrangements
• Any Borrower can choose to opt into these payment options
Servicers Claim Non-Occupancy
• Borrower required to annual certify as to occupancy per 24 CFR § 206.211. Servicer
sends annual occupancy recertification, which borrower is supposed to return.
• Sometimes servicers claim the home is not occupied and seek to foreclose, even though
borrower is still living there.
• Did borrower return occupancy verification?
• Did servicer take any additional steps to verify occupancy (e.g. calls, inspection)?
• Does servicer have information suggesting borrower lives there (e.g. abode service at
residence, contact with borrower, occupancy inspection reports)?
• Security deed says failing to occupy as principal resident is a due and payable event, not
failing to return the occupancy verification.
Curing Occupancy Issues
• Proof of occupancy should “cure” any default under the mortgage:

and

• Borrower can provide utility bills, ID listing property address, etc.

• If borrower is out of the home for less than 12 months (such as in
nursing home), loan can properly be called due. But if borrower
returns, arguably the default has been cured.
Advocacy Under the Fair Housing Laws
• Reverse mortgage borrowers may be persons with disabilities covered
by fair housing laws.
• 38% of Americans over 65 report having one or more disabilities
• Many borrowers potentially eligible for at-risk extensions have
disabilities that affect their ability to apply before foreclosure is
initiated
• More than 20% of Americans over 80 have cognitive disabilities (serious
difficulty remembering, concentrating, or making decisions)
• 15% of Americans over 75 have vision loss (difficulty seeing even with glasses)
• Servicers aren’t orally informing borrowers of the availability of at-risk
extensions and the written notices are confusing, so many eligible borrowers
don’t know to apply.
Overview of Fair Housing Laws Protecting People
with Disabilities
• Federal Fair Housing Act, 42 U.S.C. § 3601 et seq.
• 3604(f): prohibits discrimination on the basis of disability in connection with:
• sale or rental of a dwelling or that “otherwise make[s] unavailable or den[ies], a dwelling”
• in “terms, conditions, or privileges” of sale or rental of a dwelling
• “in the provision of services or facilities in connection with such dwelling.”
• Disability discrimination defined to include “a refusal to make reasonable accommodations”
• 3605: covers real-estate related transactions. Prohibits discrimination on the basis of
disability in
• “making available such a transaction”
• “terms or conditions of such a transaction”
• no definition of what constitutes disability discrimination and whether this includes failure to
make a reasonable accommodation.
• 3608: HUD must affirmatively further fair housing in administration of its programs,
including insurance/guaranty programs like HECM.
Overview of Fair Housing Laws Protecting People
with Disabilities
• Section 504 of the Rehabilitation Act, 29 U.S.C. § 701 et seq.
• Prohibits discrimination on the basis of disability in programs, activities, and
services administered by federal government or that receive federal financial
assistance.
• Covers HUD but not HECM servicers; insurance programs not considered
financial assistance.
• Equal Credit Opportunity Act, 5 U.S.C. § 1691 et seq
• Disability not a protected class. Protects age and receipt of income from
public assistance program, including SSI and SSDI.
• State and local fair housing laws
What is a disability?
• Defined in 42 U.S.C. § 3602(h)
• First Definition – A physical or mental impairment that
substantially limits one or more major life activities
• Physical or mental “impairment”
• A condition or disease that affects the mind or body
• That “substantially” limits
• For a long period of time or to a great degree
• One or more “major life activities”
• Walking, talking, thinking, breathing, seeing, hearing, caring for
oneself
What is a disability?
• Second Definition
• A record of having a substantial impairment
• Receipt of SSDI or SSI, history of treatment or
hospitalization, etc.
• Third Definition
• Considered by others to be disabled
• Elderly may be perceived by others to be disabled
Discrimination against people with disabilities
• Disparate treatment
• Treating people differently because of membership in a protected
class.
• Making discriminatory statements (eg. telling borrower she shouldn’t live independently,
isn’t competent to make decisions, or is better off losing home to foreclosure)
• Steering borrowers with disabilities into a particular loss mitigation option (eg. payment
in full vs. repayment plan or at-risk extension)
• Refusing to provide information or providing different information about loss mitigation
programs to borrowers with disability
• Offering different loss mitigation terms to borrowers with disabilities
• Refusal to make a reasonable accommodation
• Mixed-law on whether this applies to mortgage servicing.
Discrimination against people with disabilities
• Disparate impact
• Neutral rule that has an adverse effect on people in a protected
class
• Statistically show that a policy disproportionately harms people with
disabilities
• Burden shifts to defendant to show the policy has a legitimate, non-
discriminatory justification
• Burden shifts back to plaintiff to show there’s a less discriminatory
alternative
What is a reasonable accommodations?
• “A change to a rule, policy, or practice that may be necessary to afford
a person with a disability an equal opportunity to use or enjoy a
dwelling.” 42 U.S.C. §3604(f)(3)(B)
• May be necessary – may ameliorate one or more symptoms
• Examples: large print, assistance from advocate, additional time to apply for
loss mitigation programs
• A reasonable accommodation request must be granted unless:
• It poses an undue financial or administrative burden
• It would change the fundamental nature of the program
How to request a reasonable accommodation
• Request doesn’t have to be in writing or on a form prescribed by the
servicer
• Can use the CT Fair Housing Center’s Disability Letter Generator:
http://www.ctfairhousing.org/raletters/
• Give a deadline
• If the disability is obvious and the need for the change in the rule,
policy, or practice is obvious, housing provider cannot ask for medical
documentation
• Questionnaire for medical provider:
http://www.ctfairhousing.com/ra/doctornote.pdf
• Cannot require person requesting a reasonable accommodation to give
access to medical records
• An extended delay in responding is treated as a denial
Are reverse mortgage servicers obligated to
make reasonable accommodations?
• It’s not clear.
• Problem is that reasonable accommodation requirement appears
only in 42 U.S.C. § 3604 (titled “Discrimination in the sale or rental
of housing and other prohibited practices”) and not in 42 U.S.C. §
3605 (titled “Discrimination in residential real estate-related
transactions”).
• See Brittany McCormick and Annette Kirkham, “Reasonable
Accommodations in Mortgage Servicing and Loss Mitigation.”
Housing Law Bulletin, Vol. 45 (2015).
Argument for reasonable accommodations in
reverse mortgage servicing
• Sec. 3604 and 3605 are not mutually exclusive, and sec. 3604 applies broadly, including
to mortgage lending/servicing.
• Reverse mortgage default servicing also makes “housing unavailable” (by foreclosure).
• Mortgage lending and servicing are “services and or facilities in connection” with a
dwelling
• See, e.g., Beard v. Worldwide Mortg. Corp, 354 F. Supp. 2d 789, 809 (W.D. Tenn.
2005) (Sec. 3604 applies to home improvement and refi loans); Hirschfeld v. Metlife
Bank, N.A., 2012 WL 3240669, at *6 (E.D.N.Y July 31, 2012) (mortgage lending is a
service that may “otherwise make unavailable or deny” housing); Nat'l Cmty.
Reinvestment Coal. v. Accredited Home Lenders Holding Co., 573 F. Supp. 2d 70, 76-77
(D.D.C. 2008); Nat’l Cmty. Reinvestment Coal. v. Novastar Fin., Inc. 2008 WL 977351, at
*2 (D.D.C. Mar. 31, 2008); Nevels v. W. World Ins. Co., Inc., 359 F. Supp. 2d 1110,1120
(W.D. Wash. 2004) (homeowner’s and liability insurers subject to reasonable
accommodation requirements of 3604(f)(3)).
Argument for reasonable accommodations in
reverse mortgage servicing
• HUD treats mortgage servicing as subject to both Sec. 3604 and Sec. 3605, and
regulators require lenders to make reasonable accommodations.
• Fair Housing Act’s Discriminatory Effects Standard, 78 Fed. R. 32 (Feb. 15. 2013)
• FDIC policy letter, https://www.fdic.gov/regulations/laws/rules/5000-3860.html
• OCC Comptroller’s Handbook, Fair Lending,
https://www.occ.gov/publications/publications-by-type/comptrollers-
handbook/fairlend.pdf
Argument against reasonable accommodations in
reverse mortgage servicing
• Gaona v. Town & Country Credit, F.3d 1050, 1057 (8th Cir. 2003)
• Sec. 3604 and 3605 are mutually exclusive, and Sec. 3605 applies to mortgage
lending/servicing
• Sec. 3605 doesn’t specifically define disability discrimination to include refusing to make
reasonable accommodations
• Servicers therefore have no obligation to make a reasonable accommodation.
• Webster Bank v. Oakley, 265 Conn. 539, 556-557 (2003)
• same reasoning, terrible facts, little consideration of federal case law other than Gaona.
• BUT, failure to make a reasonable accommodation, especially when coupled with
discriminatory statements or a program that operates to exclude people with
disabilities, may still be evidence of disparate treatment.
• Servicing policies that aren’t accessible to borrowers with disabilities common
among elderly (like sending small-print notices that borrowers with visual
impairments can’t read) could also give rise to a disparate impact claim.
Using reasonable accommodation requests in
your advocacy
• Request an RA from the servicer. Stronger requests will have (1) a close nexus
between the disability and the requested accommodation and (2) will not
fundamentally alter servicer’s HECM program or pose an undue burden
• Examples of stronger requests:
• Accepting late application for at-risk extension and requesting waiver from HUD because
borrower did not understand availability of program due to cognitive disabilities.
• Asking servicer to communicate important info. via telephone or send large-print notices
because borrower has a visual impairment and cannot read notices.
• Asking servicer to communicate with a family member because borrower has cognitive
disabilities that affect their ability to think and remember.
• Asking servicer to reinstate payment plan when default was caused by borrower’s cognitive
disability.
• Asking servicer to accept second reinstatement w/in 2 years when default caused by
disability.
Using reasonable accommodation requests in
your advocacy
• Examples of less strong requests:
• Asking servicer to offer a repayment plan to borrower over 98% MCA who
defaulted on taxes due to cognitive disability when servicer has made a
business decision not to offer this to anyone.
• Potential financial burden b/c HUD won’t compensate if default.
• Request is stronger if borrower can show low likelihood of default, e.g. receives recurring
income and payee will send payments to servicer.
• Not foreclosing on borrower because property charge default caused by job
loss due to disability.
Using reasonable accommodation requests in
your advocacy
• Request an RA from HUD. HUD has to make RAs in its administration
of HECM per Sec. 504 and must affirmatively further fair housing per
Sec. 3608.
• HUD approves at-risk extensions, not the servicer
• HUD also approves due and payable requests for property charges +
occupancy
• File an administrative complaint with HUD. Easy process, HUD
investigates for you, and can get your client the relief they need.
How to file a fair housing complaint with HUD
• Use HUD’s template to draft your complaint. Make clear why you
think your facts constitute a violation of the Fair Housing Act. Attach
and refer to relevant documents. Have your client sign the complaint.
• Contact your regional HUD Fair Housing Enforcement Office for
submission instructions.
• The investigator will set-up an interview with your client.
• The case will also be assigned to a conciliator, who will attempt to
mediate.
Potential Fair Housing Issues in Reverse
Mortgage Servicing
• Borrowers with cognitive disabilities seem more likely to default on
property charges and less likely to get loss mitigation.
• Servicers’ loss mitigation notices are confusing and have short deadlines for
compliance.
• Combination of servicer policy and HUD policy.
• How do we show disproportionate impact? Are these policies necessary to shore up
the insurance fund? What are the less discriminatory alternatives?
• Is HUD failing to meet its fair housing obligations to borrowers with disabilities in its
administration of the HECM program?
• Any evidence of disparate treatment by servicers?
• Neighborhoods with higher concentrations of people of color have higher
HECM borrowing rates, and Black and Hispanic borrowers more likely to
default on HECMs.
• Non-borrowing spouses are more likely to be female.
Non-Borrowing Spouse Problem
• Until Aug. 2014, reverse mortgages only protected the borrower from
foreclosure, even if there were a non-borrowing spouse.
• An estimated 20,000 HECMs with non-borrowing spouses
• Lenders regularly remove a (younger) spouse from a deed when closing a
HECM because:
• The younger spouse is not yet 62;
• Higher loan proceeds (and origination fees) if remove younger spouse.
• Although HECM brokers often told non-borrowing spouse they could be added
back onto the deed later, loan docs called the loan due and payable upon the
death of the borrower;
• HUD reg (24 CFR 206.27) and loan docs did not protect non-borrowing spouse,
contrary to language in HECM statute (12 USC 1715z-20(j)) that expressly
protects the homeowner and “the spouse of a homeowner” (not only HUD–
defined “borrowers”)
ML 2015-15: “Mortgagee Optional Election”
(MOE) Criteria
• (1) Spouse must have been legally married to the borrower at time
of the loan (with an exception for same sex couples who could not
legally marry) and must have been legally married at the time of
borrower's death;
• (2) Home must be spouse’s principal residence from the time of
origination to the present;
• (3) Loan not due and payable for any other reason - If there has been
a default on property taxes or homeowner's insurance, spouse must
cure any such default before the loan can be eligible for assignment.
▫ Loans in the MOE “deferral period” cannot get a repayment plan for T&I
default; spouse must cure the default within 30 days
ML 2015-15: MOE Criteria (cont.)
• (4) Spouse must have, or be able to obtain within 90 days of the
death of the borrower, “good, marketable title to the property” or a
legal right to stay in the home until his/her death.
• Timing: within 90 days of the death (but what about deaths that occurred
years ago and you are now trying to meet conditions for the MOE? Argue
that so long as spouse can arrange it now, in time to meet MOE deadlines,
should be OK)
• What is “good, marketable title”?
• Legal right to stay until death
• Long-term lease
• Court order
• Partial ownership interest? (one of several heirs)
• Silent requirement: homeowner’s insurance in spouse’s name
Planning Ahead for Non-Borrowing Spouse
While Borrower Still Living!
• Make sure spouse will take title to the property immediately, or as
quickly as possible, after borrower’s death:
• Transfer on death deed (statute?)
• Joint tenancy/quitclaim deed
• Trust
• Same-sex couples need to marry if they haven’t already
• Keep taxes and insurance current – if lender advances funds for
these expenses, ideally couple should repay immediately as
opposed to repayment plan (because spouse will have to bring
current quickly after borrower’s death)
Litigation Options
• If your non-borrower spouse client still cannot satisfy the requirements of ML
2015-15 (or mortgagee refuses to assign for some other reason), consider
bringing legal claims or defending mortgage on the basis of:
• Administrative Procedure Act
• Reformation or breach of contract claims
• Fraud/misrepresentation (against original lender and assignee)
• Equity
Did the Non-borrowing Spouse Sign the
Security Instrument?
• Celia Smith v. Reverse Mortgage Solutions, 2015 WL 4257632 (Fla. 3
DCA 2015), Unpublished Opinion-Not Final
• Smith Court determined that the “plain and unambiguous” language
of the mortgage defined both spouses as “borrower” and therefore
that a condition precedent for foreclosure (namely the death of the
last surviving borrower) had not occurred. Judgement of foreclosure
was reversed.
• See also Edwards v. Reverse Mortgage Solutions, 2016 WL 822084
(Fla. 3rd DCA 2016); Nationstar v. Fernandez, 23 Fla. L. Weekly Supp.
19a; Kostopolous v. OneWest, 60 F.Supp. 3rd 804 (E.D. Mich. 2014)
Using Bankruptcy to Stop a Foreclosure?
• Basic principle in bankruptcy that a “claim” includes a debt secured
by the debtor’s home, even if debtor has no personal liability on the
note.
• Non-borrowers must be allowed to de-accelerate the note and cure
arrearage in a chapter 13 plan.
▫ See In Re Smith, 469 B.R. 198 (Bankr. S.D. N.Y. 2012); In Re Jordan, 199
B.R. 68 (Bankr. S.D. Fla. 1996); In Re Curinton, 300 B.R. 78 (M.D. Fla 2003);
Citicorp Mortg. v. Lumpkin, 144 B.R. 240 (Bankr. D. Conn. 1992); In Re
Alexander, 20 Fla. L. Weekly Fed. B 463 (Bankr. N.D. Fla. 2007); see also
Johnson v. Home State Bank, 501 U.S. 78 (1991).
• Can the debtor (non-borrower spouse) propose a viable chapter 13
plan? Plan to refinance; sell; litigate against HUD?
“Cramdown” of reverse mortgages in
bankruptcy
• Using the chapter 13 plan to modify the balance owed on a
mortgage to the fair market value of the home and reduce the
interest rate to prime + a margin for risk
• See In Re Delois Grey, 503 B.R. 501 (Bankr. S.D.F.L. 2015)
• Normally, a homeowner cannot “cramdown” a first mortgage that is
secured by the homeowner’s principal residence, however…
• An exception to the rule exists under 11 U.S.C. 1325(a)(5) for
mortgages that mature (i.e. become fully due and payable) prior to
the filing of the bankruptcy petition.
Questions?
• Subscribe to the NCLC Reverse Mortgage Listserv
• http://lists.nclc.org/subscribe/
• Beth Shay, [email protected]
• Sarah White, [email protected]