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11th Cir. Holds HUD Regs Did Not Prevent Reverse Mortgage Foreclosure on Non-Borrower Surviving Spouse

The U.S. Court of Appeals for the Eleventh Circuit held that 12 U.S.C. § 1715z-20(j) did not alter or limit the lender’s right to foreclose under the terms of the valid reverse mortgage contract where the non-borrower spouse was still living in the home.

Accordingly, the Eleventh Circuit affirmed the trial court’s dismissal of the plaintiff’s petition for injunctive relief to prevent the foreclosure sale.

A copy of the opinion in The Estate of Caldwell Jones, Jr. v. Live Well Financial, Inc. is available at:  Link to Opinion.

A borrower obtained a reverse mortgage that was subsequently assigned to the defendant lender.  The mortgage was secured by the house the borrower shared with his wife and their minor daughter, and was insured by the Department of Housing and Urban Development (HUD).

The borrower’s wife was not designated a borrower in the mortgage, nor could she be, as she was not yet 62 years old at the time it was extended.

After the borrower died, the lender asserted a right to repayment under a provision of the mortgage authorizing it to “require payment-in-full of all sums secured by this Security Instrument” if “[a] Borrower dies and the Property is not the principal residence of at least one surviving Borrower.”

When the loan was not repaid, the lender initiated non-judicial foreclosure proceedings.  In response, the borrower’s wife (“plaintiff”) filed a petition in state court, individually and on behalf of the borrower’s estate and their minor daughter, seeking injunctive relief to prevent the foreclosure.

The plaintiff argued that 12 U.S.C. § 1715z-20(j) prohibited the lender from foreclosing while she lived in the home because even though she was not a “borrower” under the terms of the mortgage contract, she was nonetheless a “homeowner” protected by the statute.

As you may recall, 12 U.S.C. § 1715z-20(j) provides:

The Secretary may not insure a home equity conversion mortgage under this section unless such mortgage provides that the homeowner’s obligation to satisfy the loan obligation is deferred until the homeowner’s death, the sale of the home, or the occurrence of other events specified in regulations of the Secretary.  For purposes of this subsection, the term ‘homeowner’ includes the spouse of a homeowner.

The state-court judge granted a temporary restraining order and enjoined the foreclosure.  Thereafter, the lender removed the case to federal court and filed a motion to dismiss.

The trial court granted the lender’s motion to dismiss, concluding that section 1715z-20(j) addresses only HUD’s authority to insure loans and does not affect the lender’s contractual right to foreclose.  The plaintiff appealed.

On appeal, the plaintiff argued that the trial court’s order should be reversed because it was “contrary to public policy and Congress’s express intent to protect the non-borrower surviving spouse of a [r]everse [m]ortgage [b]orrower from displacement from their residential home.”

The Eleventh Circuit disagreed.

In so ruling, the Court first noted that the lender had the right under state law to foreclose under the express terms of the mortgage contract.

Specifically, the mortgage authorized the sale of the property to recover the balance due if “[a] Borrower dies and the Property is not the principal residence of at least one surviving Borrower.”  Although the plaintiff remained in the house following the borrower’s death, she acknowledged that she was not a “borrower” under the mortgage contract.

The plaintiff next argued that notwithstanding the contract terms, section 1715z-20(j) protected her from displacement as a non-borrowing surviving “spouse” who remained in the home. The plaintiff asserted that “Congress’s clear ‘intent’ in enacting § 1715z-20(j) was to require lenders to defer homeowners’ loan obligations beyond the homeowner’s death until his spouse either dies or sells the property.”

Thus, the question for the Eleventh Circuit was “whether . . . federal law effectively supersedes the mortgage contract’s contrary terms.”

Initially, the Court noted that it agreed with the plaintiff “that § 1715z-20(j) reflects Congress’s ‘intent’ to safeguard widowed spouses.”  Moreover, “we can assume (without deciding) that HUD shouldn’t have insured the mortgage contract at issue here because it failed to protect the widowed non-borrower from displacement following the death of her borrower spouse.”

However, “[w]hile Congress might have ‘intend[ed]’ for non-borrower spouses to enjoy protection under HUD-insured mortgages, § 1715z-20(j)’s plain language applies only to HUD and speaks only to what the Secretary can and cannot do.”

Further, “the mortgage contract here created and embodies an independent legal relationship between [the lender] and [the borrower].”  Because section 1715z-20(j) “says nothing about private contractual obligations one way or the other,” it “cannot be read to alter or affect the enforceability of the mortgage contract or its terms.”

Thus, “even assuming that HUD insured [the borrower’s] mortgage in violation of § 1715z-20(j), [the lender] still had a private contractual right – independent of the statute – to demand immediate payment and, if necessary, pursue foreclosure.”

Accordingly, the Eleventh Circuit held that the trial court properly granted the lender’s motion to dismiss.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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