Judge Voids Reverse Mortgage, Says Counseling Fails to Prove Competency

In a ruling last month, Charles J. Thomas, a New York Supreme Court Judge voided a reverse mortgage and its subsequent refinancing on the grounds that the borrower’s mental illness made her unable to understand the reverse mortgage.

In the case, Matter of Doar, 31393/07, the borrower, Ms. Hermina Brunson, took out a reverse mortgage with Financial Freedom on her home in Queens for $300,000 in December of 2001, refinancing for $375,000 in June of 2003.

However, at the time, Ms. Brunson was being treated for chronic paranoid schizophrenia. By the end of 2001, her psychiatrist testified that Ms. Brunson was hearing voices, believed her neighbor was trying to take her home away from her, and claimed that she no longer had the deed to the home.

Despite the counseling session lasting 45 minutes over the phone, the judge wrote that it was “not meant to be perfunctory or a mere rubber stamp of the banking or mortgage industry. It was intended to secure that the rights of elderly homeowners were protected.  The mortgagee is entrusted with the responsibility of conducting an inquiry of the applicant’s understanding of the mortgage agreement.”

Judge Thomas continued, “There is no evidence that Ms. Brunson understood the terms of the mortgage or the Counseling Certificate that she signed on June 20, 2003.” He faulted the counselor for not unearthing the borrower’s mental illness and her delusions regarding her home. Most significantly for the industry, Judge Thomas ruled:

While the Certificate of Counseling is an indication that information was given to the homeowners it is not dispositive of the issue of the mortgagor’s knowledge and understanding of the implications of a reverse mortgage or that the National Housing Act has been satisfied.  That determination rests ultimately with the court.

As a result, the responsibility is on the lender to prove that the borrower understood the reverse mortgage, regardless of whether or not they received a counseling certificate.

The judge further faulted the counseling process, noting that there was no evidence as to the qualifications of the counselor, whether the counselor spoke to Ms. Brunson or only to her brother, if Ms. Bunson’s questions were answered, and what information the counselor provided.

While recent counseling reforms such as the qualification of the counselor addresses some of these issues, this is still a situation that could be repeated today.

In the ruling, Financial Freedom was ordered to void the mortgage, but the Guardian of the borrower is directed to reimburse Financial Freedom for monies paid out at the closing which includes taxes, water charges, and the New York City Department of Social Services liens.  It is unclear whether Financial Freedom will appeal.

Matter of Doar, 31393/07

Write to Reva Minkoff

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