U.S. Supreme Court Rules Tax Foreclosure Sale Surplus Retention Unconstitutional

The elderly are often vulnerable to punitive home foreclosures.  The United States Supreme Court has handed down a decision ruling in favor of an elderly homeowner who lost her real property to a tax foreclosure action. The homeowner, 94-year-old Geraldine Tyler, failed to pay property taxes on her condominium for several years. Hennepin County, Minnesota seized the property through tax foreclosure. The county then sold it for $40,000, reimbursed itself for the approximate $15,000 she owed, and kept the $25,000 excess. A unanimous SCOTUS court ruled that the County violated the Takings Clause of the Fifth Amendment of the United States Constitution. It declined to rule on whether it also violated the Excessive Fines Clause of the Eighth Amendment. See Geraldine Tyler v. Hennepin County, Minnesota, et al., (U.S., No. 22–166, May 25, 2023).

The Court ruled that Hennepin County had the power to sell Ms. Tyler’s home to recover unpaid property taxes, but, it could not take more than it was due. The county’s action constituted a taking in which a government directly appropriates private property for its own use. The idea that government may not take from a taxpayer more than what is due is rooted in U.S. and other legal precedents going back hundreds of years. This is also consistent with the laws of 36 U.S. states and the federal government, which require that excess value be returned to the taxpayer. Hennepin County’s position, fortunately, constitutes the minority position.

Furthermore, this action by Hennepin County harmed Ms. Tyler. Although the tax lien sale extinguished other liens, she remained personally liable for remaining unpaid mortgage debt and HOA fees. If Ms. Tyler had received the $25,000 surplus, she would have been able to satisfy other debts.

The Court considered but rejected the county’s argument that Ms. Tyler abandoned her property by failing to pay her property taxes.  The Court found that Ms. Tyler did not surrender or relinquish all rights to the property. She could have continued to use the property for several years after falling behind on the taxes until the foreclosure process was complete. A failure to contribute to her share of taxes to the government is not equivalent to abandonment sufficient to avoid complying with the Takings Clause. The court reversed the judgment of the Eight Circuit Court of Appeals is reversed.

Two SCOTUS judges also published a concurring opinion addressing Ms. Tyler’s argument that the county’s actions violated the Excessive Fines Clause of the Eighth Amendment. They cautioned that lower courts should not ignore the issue. Actions such as those of Hennepin County may be subject to claims that they violated the Eighth Amendment, where a statutory scheme partially punishes a taxpayer, regardless of whether it is somewhat or primarily remedial. Minnesota’s tax-forfeiture scheme was not solely remedial and had punitive elements. As such, the concurring Justices contend that the Eighth Circuit committed a further error when it dismissed Ms. Tyler’s Eighth Amendment claim, and warned that future courts should not follow suit.

Ohio Guardian's Sale of Medicaid Recipient's House Approved as being In Her Best Interest

A guardian can sell a Medicaid recipient's house even though the mortgage loan was in default, because the mortgage company had not foreclosed on the property and it was in the recipient's best interest to sell the property and retain her Medicaid benefits.  That is the decision of an Ohio Court of Appeals in the case of  Gasper v. Adkins (Ohio Ct. App., 10thDist., No. 17AP-294, Sept. 27, 2018).

Christopher Gasper was appointed guardian of Diantha Adkins, who was in a nursing home and receiving Medicaid benefits. Mr. Gasper petitioned the court to sell Ms. Adkins' house. The company that held the mortgage objected to the sale, claiming the mortgage loan was in default.  The company holding the mortgage argued that the guardian could not sell the property, but the guardian could only sell the ward's right to redeem the property from foreclosure.  The company that held the mortgage had not filed for foreclosure, though, so the company's argument would mean that the ward would have to continue to hold ownership of the property, which the guardian argued threatened the ward's Medicaid benefits. 

The court rejected the mortgage company's argument, found that the sale of the property was in the best interest of Ms. Adkins and authorized Mr. Gasper to execute a deed in lieu of foreclosure. The mortgage company appealed, arguing that the court couldn't authorize the sale of the property free and clear of the mortgage lien without the mortgage company's consent.

The Ohio Court of Appeals, 10th District, affirmed, ruling that the guardian was entitled to sell the property. According to the court, because the mortgage company had not foreclosed on the property, Ms. Adkins was not "divested of legal ownership" at the time Mr. Gasper sought the authority to sell her real estate. The court also held that it was in Ms. Gasper's best interest to sell the property in order to not jeopardize her Medicaid benefits.

Massachusetts High Court Reminds Reverse Mortgage Holders- Foreclosure IS possible; Rules that Lenders Don't Have to Spell Out Foreclosure Risk to Consumers

The Supreme Judicial Court of Massachusetts ruled in favor of a reverse mortgage lender in a foreclosure case earlier this month, finding that mortgagees don’t have to explicitly spell out their legal right to foreclose in their paperwork.

The case involved James B. Nutter Company and three reverse mortgage borrowers, all of whom secured Home Equity Conversion Mortgages in 2007 and 2008. Within the span of a few years, two had died and the third became too ill to remain in the home; J.B. Nutter then moved to foreclose by bringing actions against the borrowers or their executors in local land court.

But the case was delayed due to an objection over the company’s ability to foreclose on homes under state law. In Massachusetts, the Supreme Judicial Court (SJC) wrote in its opinion, foreclosures can proceed without a judge’s confirmation as long as the mortgage itself gives the lender “the power of sale” in such situations.

The problem stemmed from some imprecise language in J.B. Nutter’s standard reverse mortgage paperwork. The company informed borrowers that it “may invoke the power of sale and other remedies permitted by applicable law … At this sale, Lender or another person may acquire the Property. This is known as ‘foreclosure and sale.’ In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law.”

The disclosure, though left unresolved issues.  The form language  fails to directly refer to the “statutory power of sale,” which was insufficient to justify the lender’s power to foreclose after the death of a borrower or his departure from the property.

But despite the lack of legal specificity, the SJC found that “no reasonable borrower” could assume that a reverse mortgage lender did not have the power to sell his or her property in the event of a foreclosure.

“It matters that this is a contract for a reverse mortgage, rather than a traditional mortgage, where the borrower makes no monthly payments of principal or interest, where the lender cannot hold the borrower personally liable for the debt, and where the lender’s only recourse on default is to obtain repayment through a foreclosure sale,” the court wrote in its opinion.

“Without a power of sale, the only way that a lender can recover the principal of the loan, not to mention interest and fees, is through foreclosure by entry — a process that would take three years — or foreclosure by action, ‘a method rarely used’ in Massachusetts.”

The court also noted that J.B. Nutter would still have to abide by all other rules regarding foreclosures in the state.

Interestingly, the court had some words of praise for the reverse mortgage product in general — while also citing a controversial report from the Consumer Financial Protection Bureau that advised consumers against taking out the loans to delay Social Security payments.

“For many retirees, one of the most reliable potential sources of income in later life is the accrued equity in their homes,” the court wrote by means of introduction.

Like many financial products and strategies, a reverse mortgage has a specific purpose, and specific circumstances justify its use.  Unfortunately, like most financial products, consumers do not always understand fully these purposes or circumstances and find themselves suffering disadvantage or harm when they are misused. The consequences can be devastating. 

As discussed preciously on this blog, these financial devises can be particularly troubling for elderly couples that do not plan carefully.  See the articles posted here and here, for example. 

Feds Move to Protect Some Surviving Spouses of Reverse Mortgage Holders

A new federal rule has taken effect aimed at protecting certain spouses of reverse mortgage holders from being forced out of their homes when the mortgage holder dies.

Borrowers must be 62 years or older to qualify for a reverse mortgage.  Until now, if one spouse was under age 62, the younger spouse had to be left off the loan in order for the couple to qualify.  Some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way.

But couples often did this without realizing the potentially catastrophic implications.  If only one spouse's name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.  Although this prospect is, perhaps, explained by the disclosures made in specific instances, the truth is that most seniors are unaware, informed generally by advertisements touting the benefits of reverse mortgages,  which assure seniors that they can remain in their homes.

In 2012, AARP sued the Department of Housing and Urban Development (HUD) on behalf of the surviving spouses of individuals who took out Home Equity Conversion Mortgage (HECM), the most widely available reverse mortgage and are administered by HUD.  The spouses in the suit could not sell and repay their loans because, due to the housing downturn, the homes were worth less than the balance due on the reverse mortgage.

In a decision issued September 30, 2013, the U.S. District Court for the District of Columbia agreed with AARP and told HUD to find a way to shield surviving spouses from foreclosure and eviction.

HUD developed a new rule that took effect August 4, 2014, and that better protects at least some surviving spouses.  Under the rule, if a couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.”  If the older spouse dies, the non-borrowing spouse may remain in the home, provided that the surviving spouse establishes within 90 days that she has a legal right to stay in the home (this could, for example, be an ownership document, a lease, or a court order).  The surviving spouse also must continue to meet the other requirements of a reverse mortgage holder, such as paying property taxes and insurance premiums.

However, the non-borrowing surviving spouse cannot access the remaining loan balance, and the new rule protects only spouses who were married to the borrowing spouse at the time the loan was taken out.  Spouses who married the borrowing spouse after the mortgage was taken out are not protected. 

One major downside is that under the new rule, spouses will no longer be able to leave a younger spouse off the mortgage in order to get a larger loan amount.  This means that loan amounts will be less for such couples because loans are based on the younger spouse’s age.  This is a particularly unfortunate event where the younger spouse is unable to support the couple, and is not the heir of the home at any rate, such as where there is a prenuptial agreement.

Finally, the new HUD rule affects only loans written after August 4, so it does not protect non-borrowing spouses on existing reverse mortgage loans, as Hayward, California, elder law attorney Gene Osofsky points out in his excellent blog post on the new rule. However, Osofsky notes that surviving non-borrowing spouses on older loans might still attempt to seek protection under the umbrella of the court’s ruling in the AARP case. 

Prof. Jack M. Guttentag, the self-styled “Mortgage Professor,” has been critical of the change and sees one particularly ominous consequence. Writing in a July 19 article, he said that in anticipation of death a borrower could draw the full amount of any unused credit on the loan, making it accessible to the non-borrowing spouse.  “This is a horror show waiting to happen that will seriously endanger the integrity of the program,” Guttentag warns.  He does not elaborate on what the horror show could be, but presumably it involves more foreclosures. 

Reverse Mortgages Are Causing Some Homeowners to Lose Their Homes

A reverse mortgage can be a great tool in the right circumstances, but if you aren't careful you could end up losing your home. A recent front-page article in the New York Times lays out some of the problems homeowners are encountering with these mortgages.

You must be 62 years or older to qualify for a reverse mortgage, which allows you to use the equity in your home to take out a loan. The loan does not have to be paid back until you sell the house or die, and the loan funds can be used for anything, including providing money for retirement or to paying for nursing home expenses.

It all sounds like a no-lose proposition, but there are downsides. For example, these loans carry large insurance and origination costs, they may affect eligibility for government benefits like Medicaid, and they are not ideal for parents whose major objective is to safeguard an inheritance for their children. There also have been complaints about aggressive marketing techniques.

In addition to these drawbacks, the Times points out two more important potential pitfalls:

• Pay attention to whose name is on the mortgage. When purchasing a reverse mortgage, be sure to put both spouses' names on the mortgage. If only one spouse's name is on the mortgage and that spouse dies, the surviving spouse will be required to either pay for the house outright or move out. This might happen if only one spouse is over 62 when the mortgage is signed. According to the Times, some lenders have actually encouraged couples to put only the older spouse on the mortgage because the couple could borrow more money that way.

• Watch out for a lump-sum loan. Usually reverse mortgages come in a line of credit with a variable interest rate. This allows homeowners to take money only when they need it. According to the Times,some brokers have been pushing lump-sum loans because the brokers earn higher fees. The problem is these loans have a fixed interest rate. The interest charges are added each month, so that over time the total amount owed can surpass the amount of the original loan.

The Consumer Financial Protection Bureau, which was created in the wake of the mortgage crisis in part to scrutinize consumer mortgages, is working on new rules to better regulate reverse mortgage lenders and provide disclosures to seniors.

To read the New York Times article about reverse mortgages, click here

CitiMortgage Program to Aid Borrowers Avoid Foreclosure Costs

According to an article written by Les Christie, and published on CNNMoney.com, CitiMortgage, one of the nation's largest mortgage servicers, launched a pilot program Friday designed to ease the pain of some homeowners heading for foreclosure.  The program, a modification of a traditional deed in lieu of foreclosure, gives borrowers new and substantial  incentives to avoid the legal and administrative costs of foreclosure.

Instead of borrowers falling further and further behind on their mortgages, leading to an eventual foreclosure sale, they can stay in their homes for up to six months, if they agree to then hand over the deed to the lender. 

CitiMortgage will then, additionally, pay the borrowers a minimum of $1,000 to help with relocation expenses.  CitiMortgage will also provide relocation counseling, and may even cover some monthly property expenses while the borrowers remain in their homes, if Citi determines the borrowers can't afford the expenses.Citi will also forgive any difference between the value of the home at time of repossession and what the borrower owes. Once the deed goes back to the lender, the borrowers walk away free and clear.