New guidelines have been promulgated by the Consumer Financial Protection Bureau (“CFPB”) to make it easier to modify or assume an existing mortgage on a decedent’s home. The goals of these guidelines are to reduce unnecessary foreclosures on homes after a borrower dies and to promote home retention.
The death of a family member may bring a plethora of emotions, as well as an inheritance, and, sometimes debt, in the form of a mortgage to repay. While the decedent’s estate is being settled many questions arise as to who is responsible for paying the mortgage, both before and after settlement of the estate.
Executors of estates have fiduciary duties including identifying the estate’s assets and the estate’s liabilities which may include bills such as insurance, outstanding real property taxes, and mortgage payments. It is not uncommon for a decedent’s real estate to be sold and the sales proceeds used to pay off the liabilities of the estate including the mortgage. However, a sale could take many months or years and, during this period, mortgage payments and taxes can continue to accrue and accumulate. Foreclosure may be a real threat to preserving the value of the estate’s property. These are common problems an executor must solve as part of his or her fiduciary duty.
If a beneficiary under a Will is given real property that is subject to a mortgage, New York law states that the mortgage is debt that is so tied to real property that it is presumed that the property passes to the beneficiary subject to the mortgage. The answer to the question of “who pays?” generally depends upon a careful reading of the deceased relative’s Will. For instance, the Will could state that the beneficiary is to receive the home, free and clear, which may require the executor to sell other estate assets to pay off the mortgage. However, the whole question of who is responsible could ultimately be moot if the executor determines that the decedent had mortgage insurance that will cancel the unpaid balance on a mortgage.
Additionally, if it has been established that there is an outstanding mortgage, federal law requires the mortgage be allowed to remain in effect when it passes from one person to another because of a death. This negates any due-on-sale or due-on-transfer clause in the mortgage. Executors are routinely advised by counsel that they should contact the lender, inform them that the borrower has died and they are executor of the estate, and ask them to determine the loan’s status. This is where frustration and aggravation traditionally begins.
The new guidelines of the CFPB were adopted in response to the struggles experienced by some surviving spouses, children, or other successors in interest in attempting to communicate with mortgage servicers.
“ The CFPB has received reports of servicers either outright refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either do not exist (e.g., probate court documents for an estate that is not required to go through probate) or are not reasonably available. These practices often prevent a successor in interest from pursuing assumption of the mortgage loan and, if applicable, loss mitigation options—potentially resulting in the avoidable loss of the home. In applying the [new rules], the CFPB seeks to reduce the number of unnecessary defaults and foreclosures, including those following the death of a borrower.[i]”
Beginning January 10, 2014, mortgage servicers must have policies and procedures in place designed to ensure that, upon notice of the death of a borrower, the mortgage servicer or bank promptly identifies and facilitates communication with a “successor in interest” of the deceased borrower with respect to the property that secures the deceased borrower’s mortgage loan. A successor in interest is defined as the spouse, child, or heir of a deceased borrower or other party with an interest in the property. The new requirements are not applicable to reverse mortgages, however.
In order to foster better communication between mortgage servicers and successors in interest, the CFPB set forth examples of procedures to follow. These include…
(A) Promptly providing to any party claiming to be a successor in interest a list of all documents or other evidence the servicer requires, which should be reasonable in light of the laws of the relevant jurisdiction, for the party to establish (1) the death of the borrower and (2) the identity and legal interest of the successor in interest. Such documents might include, for example, a death certificate, an executed will, or a court order determining a succession to real property.
(B) Upon notification of the death of a borrower, promptly identifying and evaluating any issues that the servicer must consider in reviewing the rights and obligations of successors in interest with respect to the property and mortgage loan, including, for example:
(1) Receipt of acceptable proof of the successor in interest’s identity and legal interest in the property.
(2) Standing of the mortgage loan as current or delinquent.
(3) Eligibility of the successor in interest to continue making payments on the mortgage loan.
(4) Whether a trial modification or other loss mitigation option was in place at the time of the borrower’s death.
(5) Whether there is a pending or planned foreclosure proceeding.
(6) Eligibility of the successor in interest for loss mitigation options.
(7) Eligibility of the successor in interest to assume the mortgage loan, with or without a simultaneous loan modification or other loss mitigation option.
(C) Promptly providing successors in interest with information about the above issues, including any servicer prerequisites for the successor in interest to: continue payment on the mortgage loan, assume the mortgage loan, and, where appropriate, qualify for available loss mitigation options.
(D) Promptly providing successors in interest with any documents, forms, or other materials the servicer requires for the successor in interest to continue making payments and to apply and be evaluated for an assumption and, where appropriate, loss mitigation options.
(E) Upon receipt from the successor in interest of required documents, forms or other materials, promptly evaluating the successor in interest for and, where appropriate, implementing options set forth above.
(F) Providing employees with information and training regarding the effect of laws …. and other requirements on the servicer’s obligations following the death of a borrower, and complying with those laws and requirements, including:
(1) Servicing guidelines, such as those published by Fannie Mae and Freddie Mac,
(2) The Garn-St. Germain Act of 1982, which imposes certain limits on the application of due-on-sale clauses when real property is transferred as a result of the death of a borrower, and
(3) Federal or State law restricting the disclosure of the deceased borrower’s non-public personal information.[ii]
“In addition to the above, servicers should consider whether best practices with regard to their policies and procedures regarding successors in interest would include the following:
(A) Upon notification of the death of a borrower, promptly evaluating whether to postpone or withdraw any pending or planned foreclosure proceeding to provide a successor in interest with reasonable time to establish ownership rights and pursue assumption and, if applicable, loss mitigation options.
(B) Promptly providing a successor in interest with information about the possible consequences of assuming the mortgage loan, such as any costs and the fact that a later loss mitigation option is not guaranteed if the successor in interest assumes the loan without a loss mitigation option already in place or arranged to commence simultaneous with the assumption.[iii]
It is hoped that the new guidelines will make it easier for executors and other beneficiaries to remain in their homes by enabling more open and meaningful communications with lenders that presumably will lead to continued loan payments, loan modifications or other similar measures to resolve outstanding debts on a decedent’s real property interests.
[i] Consumer Financial Protection BureauBulletin 2013-12, October 15, 2013, titled “Implementation Guidance for Certain Mortgage Servicing Rules.”