Bad Reverse Mortgage Case Law –Now the New York Courts get it Wrong

A decision dated Dec 18, 2009 by New York Supreme Court (the highest court in the state of New York is the Court of Appeals) Judge Charles Thomas appeared in the New York Law Journal on January 8, 2010 (Judge faults lack of counseling to homeowner, saying she lacked capacity to enter into mortgage). The crux of the case involved the attempt of a temporary guardian to vacate a reverse mortgage placed upon the property by Financial Freedom.

The facts, as I understand them, are the following: Ms. Brunson purchased the home in 1974 and in 2001 deed the property to herself and her brother as JTWRS. On Dec 30 2001 and on June 20, 2003 the mortgagors obtained two different reverse mortgages.  The guardian claims that Ms. Brunson signed both mortgages under duress. At some point in time, the brother in some way mistreated Ms. Brunson and APS were called in. Ms. Brunson was treated at a psychiatric hospital until 2006 (Assuming as an out patient).

The holding in the case is that when one who is subsequently adjudicated to be incapacitated, the burden of knowledge shifts from the proponent seeking to void the agreement to the mortgagee when dealing with a reverse mortgage.

In other words, under New York law, while a mortgage cannot be voided unless the mortgagee has knowledge of the incapacity of the mortgagor, when the mortgage is a reverse mortgage, the knowledge and burden is shifted to the reverse mortgage lender.

This  ruling is clearly wrong and unsustainable.  It is for this reason that the counseling requirement was put into place. While the counseling protocols are more stringent today than they were back in 2001 and 2003, it by itself is not a reason to void the mortgage contract.  The counseling certificate is proof that proper counseling was done and that at the time of counseling there was no indication that the borrower did not understand what was being said.  To rule otherwise would make every counseling session meaningless , worthless and suspect and provide a way for families to circumvent counseling protocols put in place by HUD. However, the facts raise disturbing issues that  if ignored, the industry ignores same at its own peril.

Accordingly more subtle issues are raised regarding the new deed that conveyed a fifty percent interest in the property to Ms. Brunson’s brother. The actions of the brother raise rather bothersome questions that were not addressed by the court’s decision. The industry, however must develop training so that originators can recognize indicia of undue influence and fraud.

What I found rather disturbing is that the decision did not indicate any contact between the mortgagors and the originators of said loans. It would seem that this would be quite germane. Knowledge of the originator could be imputed to the lender. The decision totally ignores this aspect.

Also, without knowing what was discussed in counseling, the court concluded  that “counseling was not meant to be a rubber stamp for the banking and mortgage industry.”

I believe on appeal that the decision will be overturned because the lender did not have even a modicum of knowledge that there may have been cognitive issues at the time of these transactions.

Comments

[Beth Paterson, Prestige Mortgage/Reverse Mortgages SIDAC]

It is not always easy to determine our senior client’s mental illness during the times that was originators we meet with them. A counselor who only meets with them for an hour or so is unlikely to determine if one has mental illness. Even with mental illness there are times one can be rational and behave “normally.”

What concerns me if you read the documentation the doctor determined mental illness in 2000. At that time the doctor should have stated the borrower was not able to make decisions and required the guardian/conservator be appointed not waited until 2008 for that appointment.

Additionally it states that adult protection was called in at the end of 2001 (looks like about the same time the 1st RM was being done) and they took no action and closed the case. Adult protection representatives are more likely to observe and determine mental illness and move it to the next level of getting a guardian.

It looks like there were many steps and many persons along the way that should have made the determination of Ms. Brunson’s mental illness and set up a guardian before the reverse mortgage was completed. It should NOT fall on the originator, counselor or the lender to determine the mental capacity of a senior. Even if we do think there many be some issues we need letters from doctors to determine the incapacity. Yes, it is important that we involve family and/or advisers in the process but that is not always an option or desired by the borrower.

In this case the temporary guardian is stating that Ms. Brunson signed the mortgages under duress of her brother. A sister testified that there were signs of mental illness in 2000 so why didn’t she appeal to the courts for a guardian at that time?

It’s now obvious that Ms. Brunson has mental illness however the doctor, family and adult protection should have been the ones to determine this and take action. Not wait until years later and decide that an originator, counselor or lender was responsible for making the diagnosis and being responsible for her actions. Maybe the doctor should be charged with negligence for not reporting to the courts that a guardian be appointed. After all, according to the testimony, he determined Ms. Brunson couldn’t make decisions for herself back in 2000 even before the reverse mortgage was in place.

The document does not state why the home was in foreclosure. Makes me wonder if it’s not family or someone just trying to get more money out of the home and some of the decision makers in the case don’t understand reverse mortgages and have their own negative bias against them.

I sure hope that Financial Freedom appeals this case!