Florida Court of Appeals Reverses Foreclosure of Reverse Mortgage by Expanding the Definition of “Borrower” to Include Surviving Spouse

Ballard Spahr LLP

Home equity conversion mortgages, commonly known as “reverse mortgages” are popular loan products in Florida. In order to foreclose on a reverse mortgage, the lender generally must allege that all conditions necessary to accelerate the loan have occurred. One common condition is that the borrower has passed away, and the property is no longer the principal residence of a surviving borrower. Recently, the Florida Court of Appeals expanded the definition of “borrower” to include a non-signing spouse.

In Smith v. Reverse Mortgage Solutions, Inc., Mr. Smith executed a promissory note creating a reverse mortgage. His wife, the plaintiff, did not sign the promissory note, but did sign the mortgage. After Mr. Smith died, the lender filed a judicial foreclosure action, and alleged that all conditions precedent to the acceleration of the loan and the foreclosure were met. Specifically, the lender asserted that Mr. Smith was the only borrower, and therefore, after his death, the property was no longer the residence of the borrower. The trial court agreed, and entered judgment in favor of the lender.

On appeal, the Florida Court of Appeals reversed, and found that Mr. Smith’s spouse was also a “borrower,” as that term is defined in both the mortgage and under Florida and federal law. With respect to the mortgage, the Court of Appeals held that, although the first paragraph of the mortgage defined the “borrower” as the husband, the final portion of the mortgage indicated that both spouses were the “borrower.” Specifically, the Court found that both spouses executed the mortgage as the “borrower” and the signatures of both spouses were jointly verified by two witnesses and a notary.

The Court of Appeals also relied upon Florida’s constitutional homestead exemption, which provides that a security interest is only valid if signed by both the owner of property and his spouse. The Court held that under the homestead exemption, the security instrument could only be valid if both spouses executed the instrument as “borrowers.”

Finally, the Court of Appeals relied upon federal law governing reverse mortgages. The reverse mortgage was insured by the Department of Housing and Urban Development (HUD), and therefore was governed by 12 U.S.C. § 1715z-20. Under this statute, HUD may not insure a reverse mortgage unless it provides that a homeowner’s obligation to satisfy the debt is deferred until the homeowner’s death. The provision also expressly defines the term “homeowner” to include the homeowner’s spouse. Because the reverse mortgage in this case was insured by HUD, the Court of Appeals reasoned that the mortgage should be construed to be consistent with the statute that regulated and governed the mortgage. Because the statute’s explicit safeguard against the displacement of elderly homeowners would be without effect if the lender could foreclose while a homeowner’s spouse still resided in the property, the Court concluded that, to be consistent with governing federal law, the term “borrower” in the mortgage should be construed to include the surviving spouse.

This decision from the Florida Court of Appeals will forestall lenders’ foreclosure actions on reverse mortgages in Florida with respect to a surviving spouse and the Court’s reasoning may be followed in other jurisdictions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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