As the population ages—20% of the U.S. population will be age 65 or older by 2030—more and more seniors are turning to reverse mortgages to supplement retirement income. A reverse mortgage is a home loan that allows older homeowners—usually age 62 or older—to borrow against the accrued equity in their homes and defer payment of the loan until they die, sell, or move. Getting a reverse mortgage at age 62 can be very risky, because there is an increased likelihood that younger borrowers will outlive their loan funds. Yet the CFPB found that reverse mortgage borrowers are increasingly younger. Borrowers age 62-69 more than doubled between 1990 and 2011. As of late 2012, about 58,000 reverse mortgages —nearly 1 in 10—were in default.
In June of 2015, The Consumer Financial Protection Bureau (CFPB) Office for Older Americans released a study that shows elderly homeowners are being erroneously convinced to take out reverse mortgages based on misleading advertising. Their focus groups were confused about whether reverse mortgages were indeed loans. They believed that the loans were related to a government program and allowed participants to stay in their homes “as long as they want.” According to a consumer in one focus group, “When it’s a former Congressman endorsing it, it makes it sound like a good idea.” The study made it clear that the CFPB is concerned about the marketing efforts surrounding reverse mortgages and their effect on the elderly, and that companies offering financial products and services to such consumers should thoroughly assess their business and advertising practices and work to minimize the risk of consumer confusion, thereby reducing the risk of CFPB scrutiny.
CFPB scrutiny is just one side of the story that concerns credit grantors and debt collectors alike.
As more and more seniors rely on reverse mortgage loans for living expenses and find themselves unable to pay their bills, creditors and other debt collectors are asking, “Can we take funds from reverse mortgage (RM) distribution payments?”
Because a RM is a loan, borrowers do not own their homes anymore. They have “pre-sold” them to the RM company. Therefore, under most circumstances, a creditor cannot garnish or place a lien on the money loaned to the consumer. A creditor that has been awarded a judgment for the claim they made against another debt the borrower owes (credit card, personal loan, etc.) cannot apply for a garnishment or bank levy if the source to the funds are from:
- Federal Benefits (Social Security, Federal Retirement Income, Civil Service Retirement)
- Unemployment Income
- Disability Income
- Alimony or Child Support
- Various other NON-EARNED INCOME sources including RM income
What about funds from the RM deposited in a bank account?
If the borrower co-mingles funds from the RM or the other sources listed above with the income they may be getting from a full or part-time job (W2 Income), then a creditor may be able to get at those funds, unless the source of all the funds can be documented. Savvy seniors will open a separate bank account for the earned income.
Can a Personal Injury plaintiff garnish reverse-mortgage payments?
In March of 2012, a NJ court decided that a defendant’s reverse-mortgage payments could be garnished to satisfy a personal injury judgment. “[T]he mortgagee’s obligation to make monthly payments to the defendant, the judgment debtor, is properly construed to be a ‘debt’ against which the plaintiffs, the judgment creditors, may obtain an order directing execution and garnishment,” concluded the New Jersey Appellate Division in Cameron v. Ewing.*
The trial court determined that Ewing’s reverse-mortgage payments were beyond the reach of the judgment creditors and denied the Camerons’ motion to compel Wells Fargo to comply with a writ of execution. The New Jersey Appellate Division on Thursday reversed the trial court’s decision, concluding that the monthly reverse-mortgage payments due from Wells Fargo were properly deemed debts owed Ewing. But the court explained that “the nonassignability rule does not extend so far that it shields from execution and garnishment payments from a source the judgment debtor created. “We are unaware of any federal or state law or regulation that expressly limits assignment or execution against the payments under a Home Equity Conversion Mortgage, nor have the parties cited one to us.” Instead, the court likened a reverse mortgage to a line of credit, for which there is some authority for allowing execution.*
If you have an example of reverse mortgage payments being garnished or levied to satisfy a judgment, we and our readers would like to hear from you! Please enter a comment below or contact NL at firstname.lastname@example.org.