SAN FRANCISCO (CN) - A man whose mother died before paying off a reverse mortgage has no right to buy her property at 95 percent of its value, a federal judge ruled.
Home equity conversion mortgages (HECM), more commonly known as reverse mortgages, involve a homeowner taking out a loan against the property's equity.
"In the reverse of a typical mortgage, an HECM borrower generally receives the loan proceeds in gradual payments and pays back the loan in a lump sum," according to the ruling.
The death of the borrower is a qualifying event that triggers full repayment of the loan, and Wells Fargo thus informed Robert Chandler that he had to pay off a full loan balance of $388,000 when his mother died in January 2010 with a reverse mortgage encumbering her home in Elk Grove, Calif.
Bought by Chandler's mother in the 1940s, the Elk Grove home had a value of approximately $252,000.
When the bank put the loan in default, Chandler filed a putative class action against the bank and Fannie Mae, which had bought the reverse mortgage at some point.
Noting that Housing and Urban Development insured his mother's reverse mortgage, Chandler accused
the banks of violating HUD guidance that allows for a borrower's heirs to satisfy mortgage debt by paying the lesser of the loan balance or 95 percent of the current appraised value of the property.
Wells Fargo and Fannie Mae countered that they are not obligated by the 95 percent rule under the HECM deed issued to Chandler's mother.
HUD regulations also do not support an heir's claim of right to notice and opportunity to purchase mortgaged property at 95 percent of its appraised value, the companies claimed.
U.S. District Judge Samuel Conti agreed with the defendants and dismissed the case with prejudice Friday.
"There are a few problems with plaintiff's contention that paragraph 9(d) [of the HECM deed] entitles him to notice and an opportunity to take advantage of the 95 percent rule," Conti wrote. "First and foremost, paragraph 9(d) specifically omits any reference to paragraph 9(a)(i), which pertains to the death of a borrower, as a triggering event for notice. Second, paragraph 9(d) refers to the rights of the borrower, not the borrower's heirs. Third, because paragraph 9(d) provides that notice is only required where the HECM becomes due and payable pursuant to paragraphs 9(a)(ii) and 9(b), neither of which pertain to the death of the borrower, and because paragraph 9(d) only allows for options such as the purchase of the property for 95 percent of the appraised value 'after notice,' it follows that the HECM deed does not expressly provide the borrower's heirs with the right to take advantage of the 95 percent rule after the death of the borrower."
Conti noted that another paragraph of the deed "merely provides that the lender shall not be permitted to obtain a deficiency judgment against the borrower if HECM deed is foreclosed."
"Nothing in this provision is inconsistent with refusing to allow a borrower's heirs to purchase a borrower's property for 95 percent of its appraised value," the judge added.
Chandler had also tried to rely on guidance that HUD issued in 2011 even though, at the time of his mother's death in 2010, less favorable HUD guidance from 2008 was controlling, according to the ruling.
Michael Ng with Kerr & Wagstaffe represented Chandler. Wells Fargo and Fannie Mae were represented by Rebecca Snavely Saelao of Severson & Werson.