Reverse Mortgage Foreclosure Process
This chapter covers reverse mortgages and the information necessary to initiate and conduct a foreclosure in compliance with the terms of the deed of trust and Texas law. For purposes of this chapter, the type of reverse mortgage referred to is a home equity conversion mortgage (HECM). HECMs are federally insured mortgages, backed by the U.S. Department of Housing and Urban Development (HUD). HECMs comprise the vast majority of the reverse mortgage market, accounting for over 90 percent of the total market share. The origination, servicing, and foreclosure of any non-HECM security instrument is virtually similar, with the sole exception of the necessity for HUD approval under certain circumstances.
§ 31.2Reverse Mortgage Defined
A constitutional reverse mortgage is defined in terms of an extension of credit made in conformity with the provisions of section 50, article XVI of the Texas Constitution, sections (k) through (p), as authorized under section 50(a)(7). See Tex. Const. art. XVI, § 50(k)–(p). In Texas, reverse mortgages are a type of home equity loan granting homeowners, aged sixty-two or older, the ability to convert the equity in their home into tax-free proceeds without having to sell their home, transfer title, or cope with a new monthly mortgage payment. As defined by Texas courts, a reverse mortgage allows homeowners aged sixty-two or older to convert home equity into payments or advances made by the lender to the homeowner during the life of the homeowners. See Washington-Jarmon v. OneWest Bank, FSB, 513 S.W.3d 103, 105 (Tex. App.—Houston [14th Dist.] 2016, no pet.). Reverse mortgages are aptly named because the stream of payments is in “reverse” in that a lender makes payments to the borrower, in contrast to a “forward” mortgage, where the borrower makes payments to the lender.
§ 31.3:1Constitutional Authorization under Section 50(a)(7)
Strictly construed, reverse mortgages are authorized under Texas Constitution article XVI, section 50(a)(7), in compliance with sections (k) through (p). Consequently, the laundry list of origination restrictions applicable to home equity loans contained in Tex. Const. art. XVI, § 50(a)(6) do not apply to reverse mortgages. This is noteworthy since Texas courts have long held that a valid lien cannot be originated on a homestead property in any manner other than strict compliance with the requirements of the statutes and Constitution. See Toler v. Fertitta, 67 S.W.2d 229, 230 (Tex. Comm’n App. 1934, holding approved). Also noteworthy is the fact that reverse mortgages are nonrecourse to both the property owner and spouse under Tex. Const. art. XVI, § 50(k)(3).
§ 31.3:2Two Notes and Two Deeds of Trust
As referenced above, HECMs are backed by HUD. Every HECM loan has two notes and two deeds of trust, each referencing the exact same debt with identical terms. The only material distinction between the two is the beneficiary. The beneficiary of the first is the lender, while the beneficiary of the second is HUD. Typically, the first security instrument is foreclosed. After foreclosure or full satisfaction of the first lien, the second lien is released by HUD. While typically recorded concurrently, it is important to ensure the first deed of trust is recorded before the second deed of trust.
In the event the loan balance of the first lien reaches 98 percent of the maximum claim amount, the lender may assign the first lien to HUD. Under these circumstances, HUD will continue to service the loan until the occurrence of a maturing event, upon which HUD will appoint an authorized foreclosure commissioner to conduct a foreclosure sale in compliance with federal law. See 12 U.S.C. §§ 3751–3768.
Like “forward” mortgages, before initiation of any foreclosure proceeding, there must be the occurrence of a maturing event. The four constitutional grounds for default are: (1) the death of all borrowers; (2) the homestead property securing the loan is sold or otherwise transferred; (3) all borrowers cease occupying the homestead property for a period of longer than twelve consecutive months without prior written approval from the lender; or (4) the borrower (a) defaults on an obligation specified in the loan documents to repair and maintain, pay taxes and assessments on, or insure the homestead property; (b) commits actual fraud in connection with the loan; or (c) fails to maintain the priority of the lender’s lien on the homestead property, after the lender gives notice to the borrowers, by promptly discharging within ten days after the date the borrower receives the lender’s notice any lien that has priority or may obtain priority over the lender’s lien, unless the borrower (i) agrees in writing to the payment of the obligation secured by the lien in a manner acceptable to the lender; (ii) contests in good faith the lien by, or defends against enforcement of the lien in, legal proceedings so as to prevent the enforcement of the lien or forfeiture of any part of the homestead property; and (iii) secures from the holder of the lien an agreement satisfactory to the lender subordinating the lien to all amounts secured by the lender’s lien on the homestead property. Tex. Const. art. XVI, § 50(k)(6)(A)–(D). Only the occurrence of a maturing event may initiate the foreclosure process, subject to obtaining any necessary prior approval from the secretary of HUD. See section 31.5 below concerning the approval requirement.
§ 31.4:1Death of All Borrowers
Pursuant to the terms of the loan agreement, “borrower” is defined as one who signs the note. Given the minimum age requirement associated with reverse mortgages, the death of all borrowers is the most common maturing event. See Tex. Const. art. XVI, § 50(k)(6)(A). Definition of the term “borrower” has been a frequent source of litigation during reverse mortgage foreclosures. “[A] deed of trust is construed along with the note it is intended to secure.” Financial Freedom Senior Funding Corp. v. Horrocks, 294 S.W.3d 749, 753 (Tex. App.—Houston [14th Dist.] 2009, no pet.). If there are conflicting terms in a note and a deed of trust, the terms of the note control. See Larsen v. OneWest Bank, FSB, No. 14-14-00485-CV, 2015 WL 6768722, at *12 (Tex. App.—Houston [14th Dist.] Nov. 5, 2015) (mem. op.) (quoting Pentico v. Mad-Wayler, Inc., 964 S.W.2d 708, 715 (Tex. App.—Corpus Christi–Edinburg 1998, pet. denied)).
While confusing at times, one court of appeals has clarified who indeed is a borrower under a reverse mortgage loan agreement. In Washington-Jarmon v. OneWest Bank, FSB, 513 S.W.3d 103 (Tex. App.—Houston [14th Dist.] 2016, no pet.), despite the reference to each signor to the deed of trust and usage of the word “borrower” under their respective signature lines, the “borrower” is only the person who signs the note. The court referenced the definition of “borrower” in the note as “each person signing at the end of this Note.” Washington-Jarmon, 513 S.W.3d at 106. Additionally, the deed of trust stated “that the agreement to repay is evidenced by Borrower’s Adjustable Rate Note dated the same date as this Security Instrument.” Washington-Jarmon, 513 S.W.3d at 109. The court surmised the deed of trust’s own terms negated the appellant’s assertion as a borrower, despite the shorthand references therein, because the deed of trust looks to the note to define the debt. Washington-Jarmon, 513 S.W.3d at 109.
§ 31.4:2Sale or Transfer of Homestead Property
The sale or transfer of all of the borrower’s title in the homestead property is a maturing event. See Tex. Const. art. XVI, § 50(k)(6)(B). In addition to the occurrence of the transfer of title of all of a borrower’s title interest in the property, most reverse mortgage standard deed of trust forms created for use in all states provide that no other borrower shall retain the following: (1) title to the property in fee simple; (2) a leasehold under a lease for less than ninety-nine years which is renewable or a lease having a remaining period of not less than fifty years beyond the date of the one hundredth birthday of the youngest borrower; or (3) a life estate in the property.
§ 31.4:3Nonoccupancy of Property
Failure to occupy the homestead property by all borrowers for a period of longer than twelve consecutive months without prior written approval from the lender is a maturing event. See Tex. Const. art. XVI, § 50(k)(6)(C).
§ 31.4:4Breach of Obligation in Loan Documents
Multiple maturing events can be set out in the deed of trust. The most common are the failure of the borrower to repair and maintain, pay taxes and assessments on, or insure the homestead property. Fraud in connection with the loan origination, as well as failure to maintain the priority of the reverse mortgage lien, are also defined as maturing events. See Tex. Const. art. XVI, § 50(k)(6)(D).
While not required under the Texas Constitution, HECM security instruments require approval from the secretary of HUD before calling the loan due and payable for certain types of maturing events, such as nonpayment of taxes or insurance or failure to properly maintain the property.
A notable case involving reverse mortgages held that HUD regulations are not a private cause of action. Johnson v. World Alliance Financial Corp., 830 F.3d 192, 196 (5th Cir. 2016). The Fifth Circuit elaborated by expressly confirming that HUD regulations govern the relationship between the reverse mortgage lender and HUD as insurer of the loan. HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated in the lender-borrower agreement. Johnson, 830 F.3d at 196 (citing Smith v. JPMorgan Chase Bank, N.A., 519 F. App’x 861, 864 (5th Cir. 2013) (holding that federal statutes and regulations can form the basis of a breach of contract claim if expressly incorporated in the contract)).
Other maturing events, such as the death of all borrowers or transfer of title, do not require HUD approval to enforce the borrower’s loan agreement by foreclosure.
§ 31.6Notice of Maturing Event
Upon occurrence of a maturing event, the lender may not commence foreclosure until notice is provided by mail to the borrower. The notice must specifically give the borrower at least thirty days to do one of the following: (1) remedy the condition causing the default, (2) pay the debt secured by the property, or (3) convey the property to the lender by a deed in lieu of foreclosure. In the event the maturing event is for failure to maintain the priority of the reverse mortgage lien, only twenty days’ notice is required. See Tex. Const. art. XVI, § 50(k)(10).
Texas law holds a person must bring suit for recovery of real property under a real property lien or the foreclosure of a real property lien not later than four years after the day the cause of action accrues. See Tex. Civ. Prac. & Rem. Code § 16.035(a). Further, a sale of real property under a power of sale in a mortgage or deed of trust that creates a real property lien must be made not later than four years after the day the cause of action accrues. See Tex. Civ. Prac. & Rem. Code § 16.035(b). After the foreclosure crisis of 2008 through 2010, the statute of limitations became the most heavily litigated topic in foreclosure law. This trend also impacted reverse mortgage foreclosures.
In 2009, a Texas appellate court opinion held the lender’s cause of action to enforce the lien accrued and limitations period began to run upon the death of the borrower, not when the lender sent its notice of acceleration. See Financial Freedom Senior Funding Corp. v. Horrocks, 294 S.W.3d 749, 754–55 (Tex. App.—Houston [14th Dist.] 2009, no pet.). The court distinguished its holding from that in Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562 (Tex. 2001), because the notes at issue in Horrocks did not provide for repayment through periodic installments but rather that payment would be made in full once specified conditions occurred. Horrocks, 294 S.W.3d at 754. Because the entire debt would always be due upon demand, there was never any requirement that the debt be accelerated first. See Ogden v. Gibraltar Savings Ass’n, 640 S.W.2d 232, 234 (Tex. 1982). Further, the court opined that because the notes are payable at a definite time, in this case, the death of the borrower, the cause of action accrued then. See Horrocks, 294 S.W.3d at 754.
The same appellate court considered a similar issue in Powell v. CIT Bank, N.A., No. 14-15-00949-CV, 2016 WL 7323312 (Tex. App.—Houston [14th Dist.] Dec. 15, 2016, no pet.) (mem. op.), withdrawn and superseded on other grounds, Powell v. CIT Bank, N.A., No. 14-15-00949-CV, 2017 WL 4228893 (Tex. App.—Houston [14th Dist.] June 8, 2017, no pet.). In reviewing when the cause of action accrued for statute of limitation purposes, the court again looked to the loan documents, specifically whether or not the note or deed of trust contained an optional acceleration clause. Powell, 2016 WL 7323312, at * 3. If a note or deed of trust contains an optional acceleration clause and the holder exercises its option to accelerate, the claim accrues when the holder actually exercises the option to accelerate. See Tex. Civ. Prac. & Rem. Code § 16.035(e); Holy Cross, 44 S.W.3d at 566. In Powell, the court held that neither the note nor the deed of trust contained a clause giving the creditor the option of accelerating the indebtedness in the event that the sole borrower died. Powell, 2016 WL 7323312, at *3. Instead, under the plain terms of the note and deed of trust, all outstanding principal, accrued interest, and other charges became immediately due and payable on the date of the borrower’s death. Powell, 2016 WL 7323312, at *3. The court elaborated by distinguishing Powell from Horrocks because the notes at issue in Horrocks did not provide for repayment through periodic installments or for acceleration in the event of default. Powell, 2016 WL 7323312, at *3–4.
§ 31.7:1Cause of Action Accrual
Acceleration formally accelerates the maturity of the entire debt and starts the ticking of the clock for statute of limitations purposes. A foreclosure action accrues when the note is accelerated. See Holy Cross Church of God in Christ v. Wolf, 44 S.W.3d 562, 566 (Tex. 2001) (“Effective acceleration requires two acts: (1) notice of intent to accelerate, and (2) notice of acceleration.”). Unique to reverse mortgages, the type of default dictates when the cause of action accrues (also commonly referred to as “acceleration of the debt”).
§ 31.7:2Abandonment of Acceleration
Texas statutorily provides a manner in which a mortgagee can unilaterally rescind acceleration of maturity of a debt. See Tex. Civ. Prac. & Rem. Code § 16.038. See section 26.10:2 in this manual. However, in Powell v. CIT Bank, N.A., No. 14-15-00949-CV, 2016 WL 7323312 (Tex. App.—Houston [14th Dist.] Dec. 15, 2016, no pet.) (mem. op.), since all sums secured under the deed of trust became immediately due and payable upon the death of the borrower, the option to accelerate did not exist, and consequently the acceleration could not be abandoned.
While there is no authority to date on defaulting events other than death, the holdings in Financial Freedom Senior Funding Corp. v. Horrocks, 294 S.W.3d 749 (Tex. App.—Houston [14th Dist.] 2009, no pet.), and Powell imply that death is the only defaulting event that cannot be abandoned. While rare, defaults in transfer of title also follow the logic the courts applied in Horrocks and Powell and presumably would receive similar treatment. As to nonoccupancy and breach of obligations contained in the loan document defaults, the HECM loan documents additionally require secretary approval as a condition precedent to initiation of foreclosure proceedings. See section 31.5 in this chapter. Furthermore, notice of the maturing event is also required under the Texas Constitution. See Tex. Const. art. XVI, § 50(k)(10). See section 31.6. Following the logic applied in Horrocks and Powell, it is probable that defaults for nonoccupancy and breach of obligations contained in the loan documents will be treated as optional acceleration clauses since additional actions other than the default, itself, are needed. As such, these accelerations can also be abandoned.
All reverse mortgage foreclosures in Texas are subject to the provisions of Tex. Const. art. XVI, § 50(k), Texas Property Code chapter 51, and the loan agreement.
§ 31.8:1Quasi-Judicial Foreclosure
The Texas Constitution mandates that foreclosure of a reverse mortgage must include a court order if foreclosure is for grounds other than the death of all borrowers or transfer of title. See Tex. Const. art. XVI, § 50(k)(11). The court order requirement is constitutionally vested and cannot be waived by the parties. See Englander Co. v. Kennedy, 424 S.W.2d 305 (Tex. App.—Dallas 1968, writ ref’d n.r.e.).
§ 31.8:2Expedited Order Proceeding under Rule 736
Maturing events that require a court order to foreclose under Tex. Const. art. XVI, § 50(k)(11) include nonoccupancy of the property, as well as breach of an obligation specified in the loan documents. All maturing events that require secretary of HUD approval also require a court order to foreclose. See section 31.4 above. See form 31-1 in this chapter, Application for an Expedited Order Under Rule 736 on a Home Equity, Reverse Mortgage, or Home Equity Line of Credit Loan, as promulgated by the Texas Supreme Court. See also form 31-2, Affidavit in Support of Petitioner’s Application for an Expedited Order Under Rule 736, or, alternatively, the practitioner may use form 31-3, Declaration in Support of Petitioner’s Application for an Expedited Order Under Rule 736, both promulgated by the Texas Supreme Court.
§ 31.8:3Judicial Foreclosure under Rule 735
Rule 735 of the Texas Rules of Civil Procedure provides an alternative remedy to a party seeking to foreclose a reverse mortgage. However, in sharp contrast to rule 736, rule 735 states the party seeking foreclosure must obtain a judgment from a district court in a county where the real property is located for judicial foreclosure. This creates additional burdens and expense for lenders, as judicial foreclosures are more complex than standard nonjudicial foreclosures conducted by the trustee or substitute trustee. See chapter 20 in this manual for a discussion of the judicial foreclosure process and chapter 21 for a discussion of residential nonjudicial foreclosures.
§ 31.8:4Nonjudicial Foreclosure
Foreclosures conducted on the grounds set out in Tex. Const. art. XVI, § 50(k)(6)(A) or § 50(k)(6)(B) (death of all borrowers or selling or transfer of all title interest of the borrower) are performed under the power of sale contained in the deeds of trust securing the loan and must meet all the requirements of Texas Property Code chapter 51. See chapter 21 in this manual for the residential nonjudicial foreclosure process.
Under section 154.028 of the Texas Civil Practice and Remedies Code, a court, at its discretion, may conduct a hearing to determine whether to order mediation. This mediation hearing can only occur if a respondent files a response to a foreclosure application. See Tex. Civ. Prac. & Rem. Code § 154.028.
Alsup, J. Alton. “Texas’ New and Improved Reverse Mortgage,” 68 Tex. B.J. 1076 (Dec. 1995).