Reversal of Forture
In a national TV ad campaign, Tom Selleck’s deep resonating voice touts the benefits of a reverse mortgage. He appears as the trusted spokesman for the loan. The sales pitch peddles the ability of senior homeowners to easily tap their home equity and receive a monthly stream of payments. Selleck is one of several celebrities who have advertised these loans over the years, namely: Robert Wagner, Henry Winkler, and Senator Fred Thompson. They make it sound like an easy and beneficial transaction.
Although Home Equity Conversion Mortgages (“HECM”) or “Reverse Mortgages” are the least common of home loans, approximately 448,000 reverse mortgages were approved since 2015. (see Annual HECM Production Numbers-NRMLA). Often, residences subject to these liens find their way into a consumer bankruptcy. Accordingly, it is important to understand the nature of these loans and their impact in a case. Reverse mortgages are generally costly, with higher interest rates, lower loan to value ratios, and fees and costs paid at origination of the loan. Although a reverse mortgage provides liquidity to senior homeowners, it does so at a cost. As such, the cost benefit analysis will include emotional factors that are not necessarily based on the economics of the transaction. This includes the need for immediate cash. However, the economic factors may ultimately catch up and lead one into a bankruptcy filing.
Reverse mortgages present particular and unique issues in the chapter 13 context. This is so when it involves a debtor who is the borrower. Even more so, when the debtor acquired the property from a family member by inheritance and is considered a non-borrower, how will they address paying the claim?
An example: A debtor resides in a home secured by a reverse mortgage his deceased mother obtained several years prior to her death. The HECM loan is due upon death of the borrower or sale of the collateral real property. The debtor has 5 siblings who upon the death of their mother also hold an interest in the property. No estate has been filed. The debtor has continuously resided in the home for many years. The debtor commenced this chapter 13 case to forestall foreclosure of the home, and to propose a repayment plan to the creditor holding the HECM loan. Question: May a non-borrower debtor obtain plan confirmation that includes repayment over 5 years of the HECM loan? May the debtor, who holds a 1/6 interest in the property do so? What requirements will the debtor be subject to? Will he be able to modify the creditor’s claim or be subject to the anti-modification Code provisions relating to residential mortgages? What will be the interest rate, term, and amount of the claim to be paid?
Let us review first the components of a HECM or reverse mortgage:
- A borrower must be 62 years old or older.
- The borrower must reside in the home fulltime.
- Eligible properties include single family homes, 2–4-unit dwellings, or HUD approved condominiums
- Loan options are open lines of credit, term loans, or tenure plans. Term loans provide monthly stream of payments to a borrower for a set term perhaps 10 or 15 years. Tenure plans are like term loans, except payments are paid and calculated for as long as the borrower lives in the home.
- Amount of the reverse mortgage is calculated between 40% and 60% of the home’s appraised value.
- Closing costs to be paid by the borrower include: the appraisal, title search surveys, inspections, recording costs, taxes, and loan origination fees.
- The reverse mortgage is required to be paid upon the death of the borrower, sale of the home, or when the borrower no longer resides fulltime in the property.
In re: Berry 649 BR 319 (Bankr ED Wis 2023) is the case containing the facts recited in the example above. In this case the lender objected to plan confirmation arguing 1) the debtor cannot provide for payment of the claim prior to completing probate of his mother’s estate 2) the non-borrower debtor cannot modify the terms of the reverse mortgage and 3) the debtor may not “cramdown” the lien. The court in overruling the lender’s objections found the debtor had sufficient interest in the property under state law regardless of probate. In a footnote the Court stated that it addressed modifying rights of a reverse mortgage in a prior case of In re: Sandovel 640 BR 165 (Bankr ED WI 2022). There the court allowed the debtor who inherited property subject to a reverse mortgage to modify the lienholder rights under Section 1322(c)(2). Further, the debtor could propose a plan to pay the lender’s claim in full, therefore not a cramdown.
In another reverse mortgage bankruptcy case, the debtor resides in his deceased parent’s home and there are 4 other siblings. The debtor desires to remain in the home. In re: Godwyn 652 BR 669 (Bankr ED NC 2023) the debtor filed a Chapter 13 case listing his one-fifth interest as tenant in common in his residence. The debtor’s deceased mother who owned the home, died intestate with the debtor and his four siblings inheriting the undivided interests in the real property, The debtor’s mother had entered a reverse mortgage transaction, and the terms of the loan required it to be paid in full or the property sold upon the death of the borrower. Since only the deceased mother was obligated under the reverse mortgage and note, the lien creditor was unable to assert a deficiency claim against the debtor or his siblings. The court stated the value of the home at the filing date was $96,236. The debtor proposed a plan to pay that amount plus interest under a confirmed plan. In overruling the creditor’s objection to the plan under the anti-modification provision of Section 1322(b)(2) there was an exception. In this case the loan became due pre-petition, and the plan proposed to pay the full amount of what would be due pre-petition plus interest, and as such the exception applies, and the plan is confirmable under Section 1322(c)(2).
Where a debtor is the reverse mortgage borrower, questions may arise as to the applicability of mortgage notices and rules, particularly FRBP 3002.1(c). The Court in In re: Legare-Doctor 634 BR 453 (Bankr D. SC 2021) held that FRBP 3002.1(c) applied to a reverse mortgage and the creditor, was required to provide notices of advances to the debtor-borrower. But see in another case, In re: White 641 BR 717 (Bankr SD GA 2022) where the Court held the opposite. It found the reverse mortgage did not fit the definition that would bring it under the FRBP 3002.1(c) notice requirements.
Bankruptcy courts have also permitted cramdowns of reverse mortgages. This case involved a debtor/wife who was a non-borrower. Her late husband had executed the reverse mortgage. See In re: Michaud 548 B.R. 582 (Bankr. S.D. Florida 2016). The debtor filed a motion to value the property and reduce the secured value. The creditor objected making two arguments. First, that Section 1322(c) exception to modifying the home mortgage did not apply. Second, that debtors could intentionally default on the reverse mortgage to obtain the Section 1322(c) exception. The Court held Section 1322(c) applies in this case. The borrower died pre-petition and therefore the lien was due and payable before a final plan payment. The original due date for the final payment for the reverse mortgage was 2095, eighty-eight years from the execution of the mortgage in 2007. It would be absurd to treat that as the final payment date for purposes of Section 1322(c). The Court also rejected the creditor’s 2nd argument regarding intentional defaults. The Court stated death of the borrower is the predicted event at the heart of a reverse mortgage. It is not the same as defaulting on other terms of the mortgage and would not be treated as such. The objections were overruled and the reverse mortgage was stripped down.
Reverse mortgages may be addressed in an individual’s bankruptcy. A chapter 13 plan may cure defaults, and in certain instances cramdown the lien. Debtors may include the borrower, a non-borrower’s surviving spouse, or non-borrower beneficiaries of the property. Critical to the analysis will be the pre-petition events of default of the reverse mortgage. As such, it will be important to review the documents. Also, one should obtain an accounting of the reverse mortgage funding, fees and costs, escrows, and distributed payments to the debtor. This will greatly assist in forming a strategy in the bankruptcy case.
Printed with permission, NACTT Academy, Considerchapter13.org, March 31, 2025)
1521 Concord Pike
Home Equity Conversion Mortgages
Reversal of Forture
In a national TV ad campaign, Tom Selleck’s deep resonating voice touts the benefits of a reverse mortgage. He appears as the trusted spokesman for the loan. The sales pitch peddles the ability of senior homeowners to easily tap their home equity and receive a monthly stream of payments. Selleck is one of several celebrities who have advertised these loans over the years, namely: Robert Wagner, Henry Winkler, and Senator Fred Thompson. They make it sound like an easy and beneficial transaction.
Although Home Equity Conversion Mortgages (“HECM”) or “Reverse Mortgages” are the least common of home loans, approximately 448,000 reverse mortgages were approved since 2015. (see Annual HECM Production Numbers-NRMLA). Often, residences subject to these liens find their way into a consumer bankruptcy. Accordingly, it is important to understand the nature of these loans and their impact in a case. Reverse mortgages are generally costly, with higher interest rates, lower loan to value ratios, and fees and costs paid at origination of the loan. Although a reverse mortgage provides liquidity to senior homeowners, it does so at a cost. As such, the cost benefit analysis will include emotional factors that are not necessarily based on the economics of the transaction. This includes the need for immediate cash. However, the economic factors may ultimately catch up and lead one into a bankruptcy filing.
Reverse mortgages present particular and unique issues in the chapter 13 context. This is so when it involves a debtor who is the borrower. Even more so, when the debtor acquired the property from a family member by inheritance and is considered a non-borrower, how will they address paying the claim?
An example: A debtor resides in a home secured by a reverse mortgage his deceased mother obtained several years prior to her death. The HECM loan is due upon death of the borrower or sale of the collateral real property. The debtor has 5 siblings who upon the death of their mother also hold an interest in the property. No estate has been filed. The debtor has continuously resided in the home for many years. The debtor commenced this chapter 13 case to forestall foreclosure of the home, and to propose a repayment plan to the creditor holding the HECM loan. Question: May a non-borrower debtor obtain plan confirmation that includes repayment over 5 years of the HECM loan? May the debtor, who holds a 1/6 interest in the property do so? What requirements will the debtor be subject to? Will he be able to modify the creditor’s claim or be subject to the anti-modification Code provisions relating to residential mortgages? What will be the interest rate, term, and amount of the claim to be paid?
Let us review first the components of a HECM or reverse mortgage:
In re: Berry 649 BR 319 (Bankr ED Wis 2023) is the case containing the facts recited in the example above. In this case the lender objected to plan confirmation arguing 1) the debtor cannot provide for payment of the claim prior to completing probate of his mother’s estate 2) the non-borrower debtor cannot modify the terms of the reverse mortgage and 3) the debtor may not “cramdown” the lien. The court in overruling the lender’s objections found the debtor had sufficient interest in the property under state law regardless of probate. In a footnote the Court stated that it addressed modifying rights of a reverse mortgage in a prior case of In re: Sandovel 640 BR 165 (Bankr ED WI 2022). There the court allowed the debtor who inherited property subject to a reverse mortgage to modify the lienholder rights under Section 1322(c)(2). Further, the debtor could propose a plan to pay the lender’s claim in full, therefore not a cramdown.
In another reverse mortgage bankruptcy case, the debtor resides in his deceased parent’s home and there are 4 other siblings. The debtor desires to remain in the home. In re: Godwyn 652 BR 669 (Bankr ED NC 2023) the debtor filed a Chapter 13 case listing his one-fifth interest as tenant in common in his residence. The debtor’s deceased mother who owned the home, died intestate with the debtor and his four siblings inheriting the undivided interests in the real property, The debtor’s mother had entered a reverse mortgage transaction, and the terms of the loan required it to be paid in full or the property sold upon the death of the borrower. Since only the deceased mother was obligated under the reverse mortgage and note, the lien creditor was unable to assert a deficiency claim against the debtor or his siblings. The court stated the value of the home at the filing date was $96,236. The debtor proposed a plan to pay that amount plus interest under a confirmed plan. In overruling the creditor’s objection to the plan under the anti-modification provision of Section 1322(b)(2) there was an exception. In this case the loan became due pre-petition, and the plan proposed to pay the full amount of what would be due pre-petition plus interest, and as such the exception applies, and the plan is confirmable under Section 1322(c)(2).
Where a debtor is the reverse mortgage borrower, questions may arise as to the applicability of mortgage notices and rules, particularly FRBP 3002.1(c). The Court in In re: Legare-Doctor 634 BR 453 (Bankr D. SC 2021) held that FRBP 3002.1(c) applied to a reverse mortgage and the creditor, was required to provide notices of advances to the debtor-borrower. But see in another case, In re: White 641 BR 717 (Bankr SD GA 2022) where the Court held the opposite. It found the reverse mortgage did not fit the definition that would bring it under the FRBP 3002.1(c) notice requirements.
Bankruptcy courts have also permitted cramdowns of reverse mortgages. This case involved a debtor/wife who was a non-borrower. Her late husband had executed the reverse mortgage. See In re: Michaud 548 B.R. 582 (Bankr. S.D. Florida 2016). The debtor filed a motion to value the property and reduce the secured value. The creditor objected making two arguments. First, that Section 1322(c) exception to modifying the home mortgage did not apply. Second, that debtors could intentionally default on the reverse mortgage to obtain the Section 1322(c) exception. The Court held Section 1322(c) applies in this case. The borrower died pre-petition and therefore the lien was due and payable before a final plan payment. The original due date for the final payment for the reverse mortgage was 2095, eighty-eight years from the execution of the mortgage in 2007. It would be absurd to treat that as the final payment date for purposes of Section 1322(c). The Court also rejected the creditor’s 2nd argument regarding intentional defaults. The Court stated death of the borrower is the predicted event at the heart of a reverse mortgage. It is not the same as defaulting on other terms of the mortgage and would not be treated as such. The objections were overruled and the reverse mortgage was stripped down.
Reverse mortgages may be addressed in an individual’s bankruptcy. A chapter 13 plan may cure defaults, and in certain instances cramdown the lien. Debtors may include the borrower, a non-borrower’s surviving spouse, or non-borrower beneficiaries of the property. Critical to the analysis will be the pre-petition events of default of the reverse mortgage. As such, it will be important to review the documents. Also, one should obtain an accounting of the reverse mortgage funding, fees and costs, escrows, and distributed payments to the debtor. This will greatly assist in forming a strategy in the bankruptcy case.
Printed with permission, NACTT Academy, Considerchapter13.org, March 31, 2025)