Reverse Mortgages: Ignore Loan Documents at Your Peril

D’Alessio v. CIT Bank, N.A., 587 B.R. 211 (Bankr. D. Mass 2018) –

A chapter 13 debtor sought a court determination that he was a “Borrower” for purposes of a reverse mortgage executed by his deceased wife. The mortgagee disagreed contending that only his wife was a borrower, and consequently it (1) objected to treatment of its claim in the debtor’s chapter 13 plan and (2) moved for relief from the automatic stay so that it could foreclose.

The debtor and his wife originally acquired title to a home as joint tenants. However, after a couple of years title was transferred to the wife so that she was the sole owner. Twenty years later she mortgaged the property to secure a home equity conversion mortgage loan:

[A] home equity conversion mortgage loan is a unique kind of loan available to homeowners age sixty-two or older. These mortgages are commonly referred to as “reverse mortgages” because, instead of making payments to the lender, the borrower receives cash from the lender, either as a line of credit, in monthly payments, or as a lump sum. As in a traditional mortgage, a reverse mortgage is secured by the borrower’s home. Unlike a traditional mortgage, however, the loan does not become due until the borrower dies or no longer lives in the home; interest and fees are added to the loan balance over time and the entire balance is typically paid from the sale of the home.

The debtor inherited the property after his wife’s death and continued to live in the home. Notwithstanding, the mortgagee sent him a notice that as a result of his wife’s death the loan was due and payable in full, and it intended to foreclose if it did not receive payment. The loan was not repaid, and the debtor filed bankruptcy before the lender could foreclose.

The promissory note provided as follows:

6. Immediate Payment in Full

(A) Death or Sale. Lender may require immediate payment in full of all outstanding principal and accrued interest, if: (i) A Borrower dies and the Property is not the principal residence of at least one surviving Borrower…

The mortgage contained a similar provision.

It was clear that a “Borrower” had died, so the issue was whether the debtor was also a “Borrower” – which would make him a surviving Borrower that resided in the house so that the lender had no right to accelerate the loan and foreclose.

The debtor contended that he was a borrower because the designation “Borrower” followed his signature on the mortgage. He argued that since the mortgage was a contract of adhesion, it must be strictly construed against the lender, and thus the designation created an ambiguity that must be construed in his favor. Further, the debtor argued the court should ignore the other documents executed in connection with the loan transaction.

The debtor also pointed to a federal statute that prohibited HUD from insuring a reverse mortgage unless the debt obligation was 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 the homeowner” (i.e. if HUD insured the mortgage it must have provided that the debt was deferred until after the debtor’s death since he was the spouse of a homeowner).

Unfortunately for the debtor, the designation following his signature on the mortgage provided a very tenuous foundation for his position. While the court agreed with the debtor that the mortgage was a contract of adhesion, this did not require a court to adopt the debtor’s interpretation but rather a court must determine the meaning that an “objectively reasonable person” would give to the language. Further, when there is an ambiguity in a document that is part of an integrated transaction with multiple documents, the documents must be considered as a whole.

With that in mind, the court reviewed the transaction documents:

  • Loan application: The wife was identified as the borrower, with her Social Security number, date of birth, and other information. The box for “co-borrower” was empty. The wife was also identified as the sole owner of the property. The debtor was only listed as an “Alternative Contact Person” and did not sign the application as a co-borrower.
  • Loan agreement: The wife was identified as the borrower, and only the wife signed the loan agreement as borrower.
  • Promissory note: “Borrower” was defined as “each person signing at the end of this Note.” Only the wife signed.
  • Settlement statement: Only the wife was listed in the section titled “Name & Address of Borrower” and only she signed the statement.
  • Mortgage: The preamble of the mortgage defined “Borrower” as the wife.
  • Non-Borrowing Spouse/Vested Owner Interview Acknowledgment Form“: The debtor signed a non-borrower acknowledgment that identified him as the “Non-Borrowing Spouse/Vested Owner.” He acknowledged that he had been advised of risks, including the risk that if the last borrower passed away, the non-borrowing spouse/vested owner or heirs would be required to pay the loan in full or else deed the home to the lender.
  • Borrower Interview Acknowledgment Form“: The borrower acknowledgment identified only the wife as borrower and was signed only by her. She acknowledged being informed of risks, including the risk identified in the debtor’s non-borrowing spouse form noted above.
  • Non-Borrower Spouse Ownership Interest Certification“: The debtor signed as “Non-Borrower” and his wife signed as “Borrower.” Among other things this acknowledged that if the wife predeceased the debtor and he continued to reside in the home, the home might need to be sold to repay the mortgage and the debtor might be required to move unless there were other means of repayment.

Not surprisingly, the court concluded that the debtor was not a “Borrower” within the meaning of the mortgage and other loan documents. As for the HUD argument, while noting that other courts found that argument persuasive, this court rejected it on the grounds that the statute did not govern the enforceability of contractual provisions between the parties. Accordingly, the court sustained the plan objection and granted the mortgagee’ s request for relief from the stay.

It is probably safe to say that many if not most people signing reverse mortgages do not fully understand the consequences. However, it is hard to see what else a lender could have done to make it clear to the debtor that he would not have any right to maintain the mortgage loan if his wife predeceased him.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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