The Supreme Court of the State of Florida overruled the decision of a trial court which was affirmed by the Third District Court of Appeals in a case involving a reverse mortgage loan which was accelerated, and foreclosed on by the lender. According to the decision of the case, the trial court and Third District erred in preventing a foreclosure on a reverse mortgage loan in which the primary borrower passed away, but in which the borrower’s spouse was still seeking to remain in the home. This is according to court documentation obtained by RMD.

Ultimately, the Florida Supreme Court decided in the favor of the lender and its succeeding entity. The original lender was OneWest Bank, which has been succeeded by WVMF Funding. The dispute arises over a reverse mortgage in which the primary borrower applied without including his spouse on the reverse mortgage, thus complicating the foreclosure process after his death.

Ultimately, the decision of the Supreme Court appears to come down to the failure of the lower courts to observe the ways in which terms surrounding the loan are defined, based on legal precedent cited in the majority opinion.

The case

Roberto Palmero and his wife Luisa initially applied for a reverse mortgage loan in August 2006 as co-borrowers, but withdrew the application and re-applied that December, with Mr. Palmero listed as the sole borrower. Of the five documents Mr. Palmero signed to originate the loan, one was an adjustable rate note which is regarded as having “primary importance” by the Court since it defines the term “borrower” as “each person signing at the end of this Note.

On this particular form – even in the presence of a non-borrower spouse ownership interest certification – Mr. Palmero’s name is the only one signed on the note itself. The certification also lists the husband as the sole borrower, according to the Court opinion based on review of the relevant documents.

Mr. and Mrs. Palmero both signed the reverse mortgage agreement itself, which bears the same date as the note and which also identifies Mr. Palmero as the sole borrower of the mortgage. Regular payments on the loan were issued by the lender until Mr. Palmero’s death in 2008, at which point the loan was accelerated to due and payable status. When the loan was not paid back, the lender at the time – OneWest Bank – sought to foreclose, but Mrs. Palmero and her adult children argued in court that she was a co-borrower and not subject to foreclosure while she still lived in the home as her primary residence.

“Following a bench trial, the trial court ruled that Mrs. Palmero was not a co-borrower,” the court opinion reads. “However, it denied foreclosure based on a federal statute that governs the insurability of reverse mortgages by the Secretary of the Department of Housing and Urban Development.”

This ruling was affirmed by the Third District Court of Appeals, and took things a step further by saying that the trial court had erred by saying that Mrs. Palmero was not a co-borrower. The Third District also did not allow the foreclosure to continue. Now reaching the Florida Supreme Court, that body has ruled that Mrs. Palmero is in fact not a co-borrower due to the note’s significance in defining who the borrowers under the agreement are.

“The Third District’s holding ignores not only that the mortgage expressly defines Mr. Palmero as the ‘Borrower,’ but it also ignores that this Court’s foreclosure precedent requires courts to read the mortgage together with the note it secures,” the decision reads in part.

The Court also notes, however, that the indication the Palmeros would have had at the time of origination was that more loan proceeds would have been possible by keeping Mrs. Palmero’s name off of the loan.

“We do note, however, that all of the other documents consistently show that the parties intended for Mr. Palmero to be the sole ‘Borrower,’ and the record shows that Mr. Palmero ‘qualified for—and received—a higher amount than would have been paid had Mrs. Palmero been a co-borrower,’” the opinion says, citing a previous court’s documentation.

Dissent, difference between forward and reverse

One of Florida’s Supreme Court Justices wrote in a dissent opinion that Mr. Palmero is the sole borrower in this case “as a matter of law,” according to the opinion of Justice Jorge Labarga who was joined in his dissent by Justice Ricky Polston.

“While I agree that, under both [cited precedents] the note prevails in the conventional mortgage context, there is no authority requiring the same result in the reverse mortgage context,” Justice Labarga wrote. “In relying on [the cited precedents], the majority looks to nearly one-hundred-year-old precedent which undoubtedly does not consider the intricacies of reverse mortgages, nor the incentives for the parties involved. Moreover, because [the cited precedents] are not reverse mortgage cases, they do not involve the same federal law concerns under [the law].”

The cited precedents were each cases from 1907 and 1934, respectively, decades before the record of the first American reverse mortgage took place in 1961. The modern Home Equity Conversion Mortgage (HECM) program was initiated by the signing of the Housing and Community Development Act of 1987, which went into effect in February of 1988 after it was signed into law by President Ronald Reagan.

This was a core component of the Palmeros’ argument in their case against the succeeding entity to OneWest Bank. The Court’s final decision disagreed with this contention due to the importance of the note prevailing in either traditional forward or reverse mortgage transactions equally.

NBS issues

The instance in this case accentuates some of the ongoing problems associated with reverse mortgages originated prior to the establishment of more stringent protections for non-borrowing spouses (NBS) handed down in 2014. Additional rules governing the protection of eligible NBS continue to persist in the realm of reverse mortgages, with the most recent such rules having been handed down by the Joe Biden administration in Mortgagee Letter (ML) 2021-11.

That guidance features four primary new protections for eligible NBS in a reverse mortgage transaction, including the expansion of criteria that begins a deferral period for HECM loans with case numbers assigned on or after August 4, 2014, including for a scenario in which the primary borrower resides in a healthcare facility for more than 12 consecutive months but the NBS has remained in the home.

It also featured expanded assignment criteria, as well as expanded definitions for who counts as eligible NBS. The National Reverse Mortgage Lenders Association (NRMLA) recently requested guidance from HUD asking for additional clarity on the new NBS provisions.