After a home secured by a reverse mortgage was damaged in a fire that resulted in the death of the borrower and one of their adult children, the lender is eligible to receive insurance proceeds from the damage, even after the home’s sale proceeds were applied to the mortgage balance. This is despite the nonrecourse feature of a Home Equity Conversion Mortgage (HECM) loan, according to a ruling in the Appellate Court of Maryland.
Reverse mortgage borrower William Pyle took out his loan in early 2013 from Urban Financial, the predecessor entity of Finance of America Reverse (FAR). FAR retained Celink as the subservicer of the loan, which would be the entity to foreclose on the property if the arrangement called for it.
On October 17, 2016, Pyle, 73 and his son Christopher, 44, were killed in a fire that damaged the secured home. Upon Pyle’s death, his reverse mortgage became due and payable and Celink foreclosed, with the company buying the home at its foreclosure option for “substantially less than the balance due on the loan,” according to court documents reviewed by RMD.
At that point, Celink and Pyle’s estate disputed how much of the proceeds from the home’s fire insurance policy should be divided between the estate itself and Celink. Under normal circumstances, a home worth less than the mortgage balance at the end of the transaction would not make the homeowner liable for the difference — that difference is typically made up by Federal Housing Administration (FHA) insurance on a HECM transaction.
However, since a fire damaged the home, Celink contended that it was entitled to access some of the fire insurance policy’s proceeds in order to be made whole.
“Celink asserts that it is entitled to the difference between what it paid at auction and the total amount due on the loan. Celink concedes that the Estate is entitled to the balance of the policy proceeds,” the court’s decision said. “The Estate contends that all of the proceeds are payable to it.”
An initial ruling in the Circuit Court for Cecil County ruled that the insurance proceeds were the property of the estate, but Celink appealed the decision on two grounds: the initial ruling’s decision that the foreclosure sale extinguished the debt was an error; and that the court’s decision to “disregard the contractual assignment of insurance proceeds to Celink” was also made in error.
While the second contention by Celink was disregarded in the final decision of the appellate court, the first one was sufficient enough for the court to decide in Celink’s favor.
“We sympathize with Mr. Pyle’s survivors,” the decision said. “However […] the circuit court erred when it concluded that Celink’s claim to a portion of the insurance proceeds were extinguished by the foreclosure sale. We will reverse the judgment of the circuit court and remand this case for entry of a judgment consistent with this opinion.”
The reverse mortgage loan required Pyle to maintain homeowners and accident insurance on the property, in addition to keeping the home in good repair as is typical of all HECM loans.
“[That requirement] provides that if there is a loss, and restoration or repair of the property is not ‘economically feasible,’ the policy proceeds are to be applied to the balance due on the note, with any excess to be paid ‘to the entity legally entitled thereto,’” the decision explained.
At auction, Celink purchased the property for $175,000, which was “$208,108.25 less than the balance due on the loan and the costs of sale.” After the sale, the insurer issued a check jointly to the estate and Celink for $287,531.47, and the estate sought a ruling entitling it to the full proceeds amount. Celink contended that it was owed the difference between the home’s sale price and the loan balance.
“[T]he circuit court concluded that Celink’s foreclosure of the property eliminated any indebtedness and therefore any claim to the insurance proceeds,” the decision said. “The court was incorrect. Maryland law is clear that, as a general rule, if the proceeds of a foreclosure sale are not adequate to discharge the debt, the lender may attempt to recover the balance due from the borrower.”
While the court cites several previous cases in its reasoning for the final decision, it also said that neither it nor Celink have found any precedent cases like this that involved reverse mortgages and deeds of trust.
“Nonetheless, application of the loss before foreclosure rule makes sense in this case,” the court said. “Mr. Pyle’s residence, together with the fire insurance policy that he was required to maintain to protect the lender’s interests, was the security for the repayment of the loan.”
Despite the fact that this case involves a reverse mortgage, the court saw “no reason why the legal principles that were first articulated by the Supreme Court of Maryland nearly two centuries ago to protect a lender’s interests when the collateral is damaged by fire should not apply in this case.”
When reached, representatives of Celink declined to comment for this story.
