Recent Reverse Mortgage Ruling Shows That Wording Matters

The Supreme Judicial Court of Massachusetts sided with a reverse mortgage lender in a recent foreclosure case — but a leading legal publication says the industry shouldn’t necessarily celebrate.

In a recap of the case, The National Law Review said reverse mortgage lenders should pay close attention to the wording in their contracts going forward.

“The Supreme Judicial Court criticized the lender at length for not being more explicit in describing its remedies in the event of default,” the publication noted in a post from late last week.

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James B. Nutter & Co. v. Estate of Murphy focused on whether or not state law regarding foreclosures could be enforced even if a lender used legally inexact wording in its contracts. The lender, Nutter, omitted a key phrase — “statutory power of sale” — in its standard reverse mortgage forms. Lawyers for three reverse mortgage borrowers in foreclosure argued that Nutter thus didn’t have the legal right to take ownership of the properties for eventual sale.

But the SJC ruled that “no reasonable borrower” could interpret the documents any other way than the meaning Nutter intended: in the event of a borrower’s death or departure from the property, the lender has the right to foreclose and sell the home. The court also specifically pointed to features of the Home Equity Conversion Mortgage that make foreclosure such a necessary option for lenders.

“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 loan,” they wrote. 

“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 SJC continued in its ruling.

The decision represented a victory for Nutter, but The National Law Review found reasons for HECM companies to be concerned.

“The lender could have avoided this problem simply by using the term ‘statutory power of sale’ instead of the term ‘power of sale,’” the publication pointed out. “The fact that the court viewed this as a close issue underscores the need for lenders to be explicit in their remedies upon default.”

Check out the full analysis at The National Law Review.

Written by Alex Spanko