Reverse mortgages are becoming a popular source of income for aging Massachusetts residents who have accrued equity in their home. These homeowners borrow against their home equity in exchange for liquid assets to help pay for daily living expenses. A home equity conversion mortgage is one of these loans available to homeowners over the age of 61 under which payments are made to the owner as a line of credit. These are either provided in a lump sum or in monthly payouts. The loan does not become due until the borrower dies or no longer lives in the home, with interest and fees typically paid by the sale of the home. With a reverse mortgage, the borrower is usually not personally liable for the repayment of the debt. The lender looks solely at the mortgaged property for repayment. This means upon the owner’s death or choice to live elsewhere, the entire loan and fees come due, and it is up to the heirs to repay the loan by selling the home. Failing to do so may mean the lender can foreclose on the mortgage and sell the home.
The Massachusetts Supreme Court recently issued an opinion (SJC-12325) dealing with three Massachusetts foreclosure actions initiated by a lender, which chose to pursue actions in Land Court against each borrower or the executors of their estate, seeking a declaratory judgment to foreclose on the respective homes through the statutory power of sale. The language of the reverse mortgage in this case stated the lender may invoke the power of sale and other remedies allowed by applicable law in the event of a default. The court felt the central question was whether or not Massachusetts G. L.c. 183, § 21 allowed the lender to foreclose in such a manner.
The reverse mortgage form in this lawsuit gave the lender the power to require immediate payment in full if the borrower dies or the property is no longer the borrower’s principal residence. Under this agreement, the borrower held no personal liability for repayment of the debt, and the lender could not pursue a deficiency judgment against them in the event of a foreclosure. The only means of enforcement was through the sale of the property.
The lender moved for partial judgment on the pleadings in all three lawsuits, asking for a judicial declaration that the language in its agreement with the borrower incorporated the statutory power of sale. The trial court granted the motions, determining the use of statutory power of sale was provided by law. The court reported the cases to the appeals court as dictated by Massachusetts Civil Procedure Rule 64(a), which was then transferred to the Supreme Court on its own motion.
The Commonwealth’s Supreme Court noted Massachusetts is a nonjudicial foreclosure state that does not require judicial authorization to foreclose on a mortgaged property. This means if the mortgage document includes the power of sale, mortgagees may foreclose without a judicial proceeding. This was enacted to provide a speedier process and is regulated through the Massachusetts General Laws. The statute allows mortgagees to incorporate the power of sale by reference, following the guidelines within G. L. c. 183, § 21. Failing to do so voids the sale.
The reverse mortgage at issue did not recite the exact language of G. L. c. 183, § 21 in its document, nor did it define a power substantially similar to the language of the paragraph. To see if there was an adequate incorporation by reference, the Supreme Court looked at the language of the document. The court concluded the mortgage was ambiguous as to whether or not it incorporated the statutory power of sale. The lender and drafter of the document failed to include the word “statutory” in its agreement with the borrower, and therefore it made it unclear that this authority can and would be used against the borrower or the borrower’s estate. The court found the language to be particularly confusing because it seemed to refer to judicial foreclosure instead of foreclosure through the power of sale. The court also disliked the use of language that referred to the borrower’s right to a potential remedy through a lawsuit for foreclosure of sale. Since Massachusetts offers a non-judicial procedure, the court found this clause to be misleading to a borrower because they may rely on a remedy through a process they must initiate.
Despite this analysis, the Supreme Court found that the only reasonable and practical interpretation of the mortgage, as read by an objectively reasonable borrower of reverse mortgages, is that the mortgage does incorporate the statutory power of sale. The order granting the lender’s partial motion for judgment on the pleadings was affirmed.
Financial decisions at the end of life can have unanticipated consequences. If you would like to review the potential effects of your estate plan, contact the experienced Massachusetts estate planning attorneys at Karsner & Meehan today at 508.822.6600.
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