Reverse Mortgages and the Collection of Unpaid Assessments

Community Associations pursuing the collection of unpaid assessments from owners in the current real estate market often find that the mortgage debt on the delinquent property exceeds the fair market value of the property.  However, where the loan in question is a home equity conversion loan, also sometimes called a reverse mortgage, it should not be assumed that the mortgage lender has a lien against the property for the full amount indicated on the face of the mortgage instrument. 

This is because a reverse mortgage is not like a traditional mortgage.  The proceeds of a reverse mortgage loan are typically paid out to the borrower over an extended period of time.  At the end of the loan term, the borrower must pay back the proceeds of the loan, with interest, or the owner’s property will be sold and the proceeds of the sale used to repay the lender.  Accordingly, the lender’s lien against the property secures repayment of only those amounts the lender has previously advanced to the owner.  This can be substantially less than the full amount available to the borrower as reflected on the face of the recorded mortgage.  So, associations should not assume the owner has no equity in his or her property based on the face amount of a reverse mortgage.

The stream of income received by a delinquent owner via a reverse mortgage loan may also represent a means of collecting delinquent assessments for a community association.  In a recent case in New Jersey, a court considered whether the periodic payments made to a judgment-debtor under a reverse mortgage could be garnished by a judgment-creditor of the borrower.  In the case, the lender, Wells Fargo, opposed the creditor’s writ of garnishment, arguing that the payments made to the judgment-debtor were not a “debt” that Wells Fargo owed the borrower, but rather were extensions of credit that had to be paid back to Wells Fargo.  The trial court agreed with Wells Fargo’s position and denied the judgment-creditor’s request to re-direct the reverse mortgage payments from the borrower to the judgment-creditor.

The Superior Court of New Jersey reversed the trial court’s decision.  The appellate court drew attention to the fact that Wells Fargo was legally obligated under the terms of the reverse mortgage to pay $959 a month to the borrower and that the borrower’s obligation to repay these loan proceeds would only arise upon the death of the borrower.  Furthermore, the court held, Wells Fargo had no personal recourse against the borrower.  Its only means of recovery was via a sale of the property.  Accordingly, the court noted, the borrower was in effect converting the equity in his property to cash for his personal benefit while simultaneously arguing that the cash was exempt from execution by creditors, and this the court would not allow.

As no appellate court in Florida has issued a published opinion interpreting Florida law as it relates to whether payments made under a reverse mortgage are exempt from execution by creditors, we do not yet know how Florida courts would view the issue. The specific terms of a particular reverse mortgage instrument would also affect a court’s ruling.

Source: Orlando Sentinel - April 2013