Budget legislation recently signed by the Governor introduced an important new pre-foreclosure notice specifically addressing defaults triggering reverse mortgage foreclosures affecting senior homeowners, while also making a technical fix to changes governing pre-foreclosure notices and settlement conferences for reverse mortgages that were signed into law in 2017, which were previously reported in these pages. Jacob Inwald, “Residential Foreclosures: Reverse Mortgages Now Covered in New York,” N.Y.L.J. (July 25, 2017). These amendments to New York Real Property Law (RPAPL) 1304 and Civil Practice Law and Rules (CPLR) 3408 appear in Part HH, 2018 Sess. Laws of N.Y., Ch. 58 (A. 9508-C) (McKinneys). They supplement the 2016 amendments to New York’s residential foreclosure settlement conference law, detailed in an earlier article. Jacob Inwald, “Residential Foreclosures: Legislative Changes to Settlement Conference Law,” N.Y.L.J. (July 29, 2016).
Reverse mortgages are loans that allow homeowners aged 62 and older to tap into their home equity while remaining in their homes, and can be an important resource for seniors who have insufficient income to cover their living expenses. Instead of making a payment each month to cover principal and interest, the debt accrues against the borrower’s home equity, and the loan (which most typically is insured by the Federal Housing Administration, known as a Home Equity Conversion Mortgage, or “HECM”) is not due and payable until the borrower’s death. But the marketing and origination of reverse mortgages are sometimes accompanied by unfair and deceptive practices, as the many late-night television ads attest; borrowers are often not aware that they are responsible for payment of taxes and insurance, known as property charges, and that a failure to pay such charges can trigger a reverse mortgage “default” that can result in a foreclosure, as can non-compliance with other conditions of the mortgage, such as continuing to reside in the premises.
Recent years have seen a spike in reverse mortgage foreclosures, many triggered by “property charge” defaults that could be resolved if the default is brought to the borrower’s attention. But reverse mortgages had inexplicably been excluded from New York’s fundamental foreclosure prevention tools—pre-foreclosure 90-day notices and mandatory settlement conferences.
Last year’s budget legislation intended to correct that problem by amending the definition of “home loan” in RPAPL 1304, so that reverse mortgages defaults would receive 90-day pre-foreclosure notices, and by revising CPLR 3408 to permit many reverse mortgage cases to qualify for mandatory settlement conferences at which home-saving alternatives to foreclosure can be negotiated. But due to a scrivener’s error in the drafting of the legislation, the change to the definition of “home loan” was made to the version of RPAPL 1304 that goes into effect in 2020 when the current version sunsets. (When originally enacted, this provision applied only to sub-prime, high cost loans and non-traditional loans, and 2009 amendments applying this provision across the board to all home loans are currently set to sunset in 2020.)
The legislation recently signed by the Governor fixed the effective date confusion, making the revisions to the pre-foreclosure notice law and the foreclosure settlement conference law effective now (while leaving them in place in the versions that will come back into effect in 2020). Equally important, the law added a new section to RPAPL 1304, which goes into effect 30 days after the bill becomes law, i.e., May 12, 2018, providing for a pre-foreclosure notice designed specifically to capture the reverse mortgages default that can lead to foreclosure. This was needed because the existing pre-foreclosure notice for conventional mortgages addresses only failure to make monthly payments of principal and interest due, and does not provide information about the triggers of reverse mortgage defaults that are not payment related.
The legislation now provides (in a new RPAPL 1304 (1-a)) for a special pre-foreclosure notice to be used just for reverse mortgages, which provides detailed information about the asserted reverse mortgage default and discloses basic information to reverse mortgage borrowers at risk of foreclosure, along with the other information provided to conventional mortgage borrowers. The new notice contains a list of possible grounds for a lender’s assertion of a default specific to reverse mortgages. This will provide much-needed transparency, because until now not only did reverse mortgage borrowers receive no RPAPL 1304 pre-foreclosure notice, but even after a reverse mortgage foreclosure action was commenced in court borrowers had no idea what triggered the default because reverse mortgage foreclosure complaints typically failed to specify the nature of the default allegedly leading to the foreclosure.
The new reverse mortgage-specific notice mandated by RPAPL 1304 (1-a) itemizes the following possible claimed defaults that can trigger a reverse mortgage foreclosure:
• failure to occupy the home as a principal residence; • failure to submit required annual certificate of occupancy; • death of the named borrower; • failure to pay property taxes (with a requirement to detail property taxes advanced by the mortgage servicer); • failure to maintain homeowner’s insurance (with a requirement to detail any insurance procured and paid for by the mortgage servicer); • failure to pay water or sewer charges (with a requirement to detail any such charges advanced by the mortgage servicer); • failure to make required home repairs.
Additionally, as with the 90-day notices provided for conventional mortgages, the new provision requires a lender asserting a default based on failure to pay property taxes, water and sewer charges, or to maintain homeowner’s insurance, to specify that the homeowner can cure the alleged default by making a specified payment amount for such payments advanced by the servicer.
The reverse mortgage notice provides senior homeowners with additional important information, including the right to dispute the asserted default by contacting the servicer; the availability of possible grants, loans or repayment plans that may permit homeowners to cure defaults on property charges; and programs available to permit non-borrowing spouses to remain in their homes following the borrower’s death and extensions available for seniors over 80 with long-term illnesses. It also provides all the other information already required by RPAPL 1304 for conventional mortgages, while making it clear that a lender who sends the reverse mortgage-specific pre-foreclosure notice is not required to also send the more generic pre-foreclosure notice pursuant to RPAPL 1304(1).
With this legislation, the confusion resulting from last year’s effective-date codification error has been put to rest, leaving no question that pre-foreclosure 90-day notice requirements and mandatory foreclosure settlement conferences apply to reverse mortgages both now and after the current versions of those laws are scheduled to sunset, rectifying the anomalous exclusion of these basic consumer protections from reverse mortgage foreclosures. The effect, additionally, is to make the provisions of RPAPL 1306, which requires lenders to make informational filings with the New York State Department of Financial Services (DFS) following service of 90-day notices to borrowers, applicable to reverse mortgages. The database maintained by DFS pursuant to RPAPL 1306, which was intended to monitor the extent of foreclosure filings across the state, and facilitate outreach to at-risk borrowers, will no longer exclude reverse mortgages. These changes rectify a substantial gap in New York’s judicial foreclosure framework and consumer protections, and offer hope to a vulnerable population of seniors who have been facing a rising tide of reverse mortgage foreclosures exacerbated by their exclusion from New York’s fundamental foreclosure prevention consumer protections.
Jacob Inwald is director of foreclosure prevention at Legal Services NYC.