In our last post we reviewed reverse mortgages as a way to cash out of the equity in your home while allowing you to remain in your home. As long as you are 62 and older, own your home, and plan to live in it, it is possible to convert the equity in your home into a monthly income, a line of credit, or a lump sum, with some restrictions on the latter with respect to timing of the lump sum distribution. At some point, however, the loan becomes due and payable, which begs the questions of when and who pays?
A insured home equity conversion mortgage (HECM) reverse mortgage loan becomes due and payable when a triggering event occurs. This means that the borrower owes the lender the total amount of money the lender has disbursed to the borrower, plus interest and fees accrued during the life of the loan. Triggering events include:
- The borrower(s) move
- The property is sold
- Title to the property is transferred to another person
- The borrower fails to physically occupy the home for more than 12 consecutive months because of physical or mental illness (borrower cannot reside in a nursing home for more than12 months)
- Borrower fails to maintain property insurance, pay taxes, or keep up with repair and maintenance of the property
- All borrowers have died
When one of these triggering events occur, the heirs, or surviving spouse who is not a borrower may choose among the following:
- Repay the loan and keep the property
- Sell the property and use proceeds to pay back the loan
- Deed the property or transfer it to the lender
- Allow the property to go to foreclosure
A wrench in the acceleration clause
A recent New York appellate court held that the death of the borrower does not automatically accelerate a reverse mortgage. In Mortgage Solutions v. Fattizzo, _AD3d_, (2d Dep’t, May 1, 2019), the New York Supreme Court, Appellate Division, Second Department, considered whether the statute of limitations for enforcing reverse mortgage loans begins to run upon the death of the borrower. The statute of limitations is the period of time individuals or companies are allowed to sue someone for injuries or damages before their claim is time-barred.
In the Mortgage Solutions case, the defendant claimed that the foreclosure action commenced by the lender was time-barred by the six (6) year New York Statute of Limitations because the cause of action accrued on the date the borrower died more than six (6) years after the original borrower died.
The language of the reverse mortgage was controlling in determining the outcome of the case. In this case the reverse mortgage agreement read, “[l]ender may require immediate payment in full of all outstanding principal and accrued interest if …” (emphasis added) – and noted that it confers upon the holder of the note and mortgage the option, but not the obligation, to accelerate payment of the debt.”
To accelerate the debt the Court held, an affirmative act by the lender was required. Foreclosing on the property is an affirmative act. Therefore, in New York, absent different language in the reverse mortgage lending documents, the death of the borrower does not automatically amount to accrual of a cause of action for purposes of the statute of limitations. The foreclosure action was timely, and as a defense the homeowner or its heirs, could not rely on the statute of limitations as a defense in the foreclosure action. This is of particular note because it is a change from prior New York case law.
For more information about reverse mortgages, go to www.aarp.org/revmort.