Reverse Mortgages: Can A Reverse Mortgage Loan Be Reinstated?

Reverse Mortgage Solutions, Inc. v. Nunez, 598 B.R. 876 (S.D. Fla. 2019) –

A debtor filed a chapter 13 plan that proposed to cure defaults under a reverse mortgage by paying unpaid taxes and insurance. The mortgagee objected, arguing that because the debtor was not a “Borrower,” it was entitled to accelerate the loan and the debtor was required to pay the loan in full in order to retain the property. The bankruptcy court ruled in favor of the debtor, and the mortgagee appealed to the district court.

Prebankruptcy the debtor’s mother obtained a reverse mortgage secured by her home. Prior to the reverse mortgage transaction, the debtor and her mother had owned the home as joint tenants. In connection with the transaction, they executed a quit claim deed transferring the debtor’s joint interest and granting a life estate to the debtor’s mother with the debtor retaining a remainder interest.

The debtor’s mother defaulted by failing to pay taxes and insurance. The mortgagee commenced a foreclosure action based on this default. Subsequently the debtor’s mother passed away, and the mortgagee revised the foreclosure action to allege an additional default based on her death.

Two years after commencement of the foreclosure action and one year after the death of debtor’s mother, the debtor filed a chapter 13 bankruptcy. Under the plan proposed by the debtor, the debtor proposed to keep the property and cure the outstanding mortgage defaults by paying the taxes and insurance.

The mortgagee objected on the grounds that the debtor was required to pay off the loan in full as a condition of retaining the property:

The Note states that it is “secured by a mortgage, deed of trust or similar security instrument that is dated the same date as this Note and called ‘Security Instrument.'” [The debtor’s mother] as ”Borrower” under the Note, has ”no personal liability for payment of the debt.” The lender may only “enforce the debt through the sale of the Property covered by the Security Instrument.” Any principal and interest advanced under the Note is due on February 7, 2070, but the Iender ”may require immediate payment in full of aII outstanding principal and accrued interest if … Borrower dies and the Property is not the principal residence of at Ieast one surviving Borrower.”

The mortgage contained similar language regarding acceleration of the loan upon the death of a Borrower.

The debtor’s mother executed a number of documents in connection with the transaction. The only document executed by the debtor was the mortgage. The debtor’s name showed up in two places: (1) The mortgage stated that the debtor’s mother was mortgagor as to a life estate and the debtor was mortgagor as to the remainder. (2) The signature page included the debtor’s signature, identifying her as “ALEIDA C. NUNEZ, AS REMAINDERMAN.”

Virtually every document identified the Borrower as only the debtor’s mother. However, the mortgage signature page stated that “BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Security Instrument and in any rider(s) executed by Borrower and recorded with it.” Both the debtor and the debtor’s mother signed below.

The mortgagee contended that the debtor was not a “Borrower” for purposes of the reverse mortgage loan documents, and thus it was entitled to accelerate and require payment in full of the loan. The debtor countered that the mortgage was unambiguous in defining “Borrower” to include both the debtor and her mother.

The bankruptcy court found in favor of the debtor, holding that it was not necessary or appropriate to consider the other loan documents given that the mortgage was unambiguous. So, the mortgagee appealed to the district court.

The district court reviewed the state cases considered by the bankruptcy court and disagreed with its analysis. The district court concluded that state law required the court to read all of the numerous documents entered into as part of the reverse mortgage transaction together. Further, under state law the “doctrine of mutual construction” provided that when a note and mortgage are executed at the same time and the mortgage refers to the note, they should be considered together and the note controls if there is an inconsistency.

In this case the note and mortgage were executed together and the mortgage referenced the note. Under the note, upon the death of the sole Borrower – debtor’s mother – the lender was entitled to require immediate payment in full of the note. Under the debtor’s interpretation taking the mortgage out of context, the lender was prevented from demanding payment because the debtor qualified as a Borrower and was still alive and occupying the home as a principal residence. The district court found that adopting the debtor’s interpretation would cause the mortgage to nullify the terms of the note when state law required the note to prevail.

As an aside, the court noted in a footnote that the debtor could deal with a mortgage in a chapter 13 plan even if the debtor was not personally liable on the debt secured by the mortgage. The court also commented that neither party disputed this point. The issue was not whether the debtor could include the mortgage but rather how the mortgage was to be treated.

Accordingly, the district court held that all of the transaction documents should have been considered together, and when the mortgage was interpreted in context, the debtor was not a Borrower.

Typically, a reverse mortgage product is structured as a nonrecourse loan to a senior that will become due if the senior is no longer residing in the home (whether due to death or otherwise). There may be joint borrowers (such as spouses) that can continue as long as at least one is alive and occupying the house, but it is not surprising that the lender did not intend to allow the next generation to continue to receive the benefit of the loan.

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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