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Congratulations, you’ve inherited a disaster. After the untimely but unavoidable death of your last living parent, you’ve just inherited the family house, where you haven’t lived in many years. You are aware that the property has a mortgage loan. You have a lot of questions, which can be summed up as “What are my alternatives, how does this operate, and what should I do now?” This article’s main goal is to look at the legal and practical issues that arise when heirs try to deal with the mortgage loan and the mortgage loan servicer.
A Typical Situation
Mom inherited Dad’s interests in the family home after he passed away many years ago. Mom has passed away, and Daughter has inherited all of the family’s interests in the house, despite the fact that she hasn’t lived there in 20 years. Except for the mortgage loan on the family home, Mom was debt-free. Daughter is aware of the mortgage loan, which has a lien on the family house, but she knows little further and lacks specialist knowledge or experience with mortgage loans, deeds of trust, or other related matters. Cousin Sally is filling in for Daughter, who never wanted to be the executor.
A mortgage loan statement from Questionable Loan Servicing, LLC is discovered by the daughter. It appears that Mom had not paid the mortgage in the months leading up to her death; the loan statement shows the account as $5,000.00 late, with a total outstanding sum of $225,000.00. After a week, Daughter contacts Questionable Loan Servicing, LLC, which refuses to speak with her without Mom’s permission. The fact that Mom isn’t around to provide that authorization doesn’t appear to bother Questionable’s customer care employee as much as it should. However, there is some good news! Questionable will speak with the Executor about the mortgage loan status, options, and any other relevant issues, since Daughter claims she inherited the house. If the Executor provides certain formal documents, Questionable will speak with the Executor about the mortgage loan status, options, and any other relevant issues. “No, I’m not the Executor, but the attorney says I own the property and should be able to handle the mortgage loan.”
Questionable’s sincere and well-intentioned customer support person promises to investigate the problem and deliver written paperwork outlining whether or not Daughter will be able to handle the mortgage loan and gain access to the loan account. Daughter confirms her own mailing address and expresses her willingness to wait for the paperwork. Three weeks later, Daughter discovers five letters from Questionable, all addressed to the family’s address:
1. a letter to Mom informing her that she owes $232,500.00 and that the subject has been referred to an attorney to begin foreclosure proceedings;
2. a letter to Mom in which Questionable claims to be able to help with foreclosure avoidance possibilities;
3. a letter to Daughter stating that Questionable is unable to communicate with her until she obtains sufficient legal authority;
4. a letter to the Executor instructing him to give Questionable with Mom’s death certificate, a copy of the trust (but there was no trust! ), and the property deed identifying the new owner (but there is no such deed! ); and
5. a letter to Mom’s Estate reminding everyone that the loan contains a “due upon conveyance” clause, which means that if ownership of the home is transferred without the note-agreement, holder’s the loan might be accelerated and called payable in full.
Daughter, now thoroughly defeated, proceeds to bang her head against the nearest wall and considers cracking open another bottle of Mom’s scotch. What options does she have? What should she do in this situation? Will they ever communicate with her? Is it possible for them to foreclose? Is it necessary for her to refinance? Is she the rightful owner of the property? Can they bring a lawsuit against her for the unpaid mortgage? What a disaster.
Interaction of Heirs with the Mortgage Loan Servicer
It’s nearly impossible to find out anything if the mortgage loan servicer refuses to provide information and recognize you as the owner, or at the very least as an individual permitted to have access to the loan account, thus gaining access to the account is almost always the first step. The following is the most pertinent section of the Code of Federal Regulations regarding a mortgage loan servicer’s responsibilities in such situations:
(a) Policies and procedures that are reasonable. A servicer must maintain policies and processes that are reasonably designed to fulfill the goals outlined in this section’s paragraph.
(b) The goals. (1) Obtaining and disseminating timely and accurate data. The rules and processes specified by this section’s paragraph (a) must be reasonably designed to guarantee that the servicer is able to:
(c) Identify and communicate with the deceased borrower’s successor in interest regarding the property secured by the deceased borrower’s mortgage loan as soon as possible after receiving notification of the borrower’s death.
In this context, “successor in interest” is defined as “the spouse, child, or heir of a dead borrower or other party with an interest in the property” by the Consumer Financial Protection Bureau (the “CFPB”). The CFPB has explicitly stated that the existence of and compliance with such policies and procedures in circumstances involving transfer of ownership due to death is crucial to “decrease the incidence of avoidable defaults and foreclosures.”
The same CFPB bulletin gives practical examples of what the loan servicer should do to stay in compliance, giving successors in interest like Daughter insight into what they can do on the opposite side of the equation. In summary, Daughter should produce a copy of the death certificate, any and all paperwork proving her status as the heir / new owner (no, a deed in her name should not exist in North Carolina), and even copies of the CFR and CFPB articles listed herein.
Daughter must be persistent, patient (to a degree), keep solid records, and ensure that the loan servicer’s various divisions are communicating effectively with each other and with external parties (such as any substitute trustee and/or law firm hired to handle a foreclosure of the family property). Daughter should consider filing a complaint with the Consumer Financial Protection Bureau (CFPB) and possibly the North Carolina Commissioner of Banks if the loan servicer fails to comply efficiently. The bureaucratic hurdles are frequently formidably Byzantine, and I can personally attest to some of the horror stories about dealing with loan servicers.
Is it necessary for the Heir to be “Approved” by the Creditor as the new Owner in order to avoid foreclosure?
Most individuals are unaware that mortgage loan agreements and/or deeds of trust frequently include a “due upon conveyance” clause (sometimes known as a “due on sale” clause, but this is an incomplete definition). In essence, these contractual clauses allow the creditor to call the mortgage loan due if the linked real property is transferred to someone else without the creditor’s authorization. Such clauses exist for good and understandable reasons. These conditions, on the other hand, are not enforceable in the case of a residential property if the conveyance happened owing to the death of the former owner and the subsequent conveyance was to a relative. In our instance, the creditor cannot call the loan due and/or seize on the property simply because Daughter is now the owner, notwithstanding the fact that the creditor has not approved her ownership.
The heirs’ ownership of the property does not need to be approved by the mortgage loan creditor or anybody else in relation to the loan or the deed of trust, regardless of any due on conveyance clause. The rights to possess real estate and pass it down to future generations are extremely well protected.
Is the Heir Required to Pay the Mortgage Loan?
In this example, Daughter may wonder if she has suddenly been compelled to pay the home loan simply by becoming the owner. The answer is no, but if the loan isn’t paid according to the contractual loan conditions, the creditor can accelerate the payment and foreclose via deed of trust, just as if Mom were still alive and the owner. Unfortunately, most mortgage loan agreements do not include a “grace period” that allows for missed payments at times of uncertainty and transition, such as a borrower’s death.
The bad news is that if Daughter wants to keep the house, the loan must be paid. If the loan is not paid as planned, the creditor cannot pursue Daughter personally for money or other damages unless she has expressly decided to become personally accountable for the loan.
One somewhat unrelated point to consider is that the Daughter may be a respondent in a foreclosure action, and if a foreclosure occurs, it is at least likely that her credit report will indicate a “foreclosure” (perhaps wrongly / unlawfully).
Is it possible for the heir to refinance or modify the loan? Is it possible for the heir to sell or otherwise dispose of the property?
Although most people mistakenly believe that refinancing just means modifying the loan, a refinance is, in fact, a completely new loan, even if it is with the same lender. A modification, on the other hand, is a change to the current loan terms. When it comes to inherited properties, refinances are viewed significantly differently than modifications.
The mortgage debt is delinquent in our instance, and a foreclosure action appears to be in the works. The right of a daughter to refinance the family home is unaffected by the fact that the mortgage debt is past due, and it is unaffected even if a foreclosure case is pending. She has the option to refinance the property by applying for a new loan that will pay off the present loan and cancel the deed of trust. Daughter would presumably be the borrower on this new loan, and the fact that she inherited the property would be irrelevant.
Yes, Daughter can try to negotiate a modification of the debt Mom had on the home. Almost every time Daughter requests a loan modification, the creditor will demand that she directly become an obligor on the loan in exchange for favorable modification terms. Normally, we would state that the creditor would need her to “assume” the loan, but wording matters in this case, as explained in the next section.
Whether the loan is current or not, the property can be sold, but the loan must be paid off as part of the transaction (barring some other agreement). Daughter also has the authority to enter into other sorts of agreements, such as a discounted payoff (“DPO”) of the loan, which allows her to possess the property free and clear, or a deedin-lieu (“DIL”) of foreclosure, which gives the mortgage loan creditor ownership of the property. In some cases, Daughter may not bother negotiating a DIL because the primary benefit of that resolution over a foreclosure is that the creditor’s right to seek damages from the borrower is usually waived, which Daughter would not have to worry about as long as she had not formally agreed to become personally obligated on the loan.
Of course, any real estate-related transaction that an heir considers must examine whether there is a possibility that the real property would be dragged into the estate and liquidated to pay creditors other than the mortgage loan creditor. In our hypothetical circumstance, Mom has no other creditors, thus Daughter is unconcerned about the situation.
Should the Heir Agree to Take Personal Responsibility for the Mortgage Loan?
Clearly, what someone in Daughter’s circumstance “should” do is contingent on a variety of conditions. Assume Daughter wishes to retain ownership of the family house. If she can reinstate the loan directly, usually by paying the full reinstatement fee quoted by the servicer, she will avoid having to contemplate a modification and the personal obligation on the loan, which would very certainly be necessary. She would then enjoy the benefits of home ownership while avoiding some of the drawbacks of a mortgage debt.
If Daughter needs to alter the loan and the creditor agrees to do so without requiring her to become personally liable for the debt, that’s excellent — but it’s unlikely. In exchange for that alteration, the creditor will almost definitely demand her to become personally liable.
Hoard Law has worked on cases where the creditor refused to consent to a loan modification until the successor agreed to become personally liable. “If Daughter formally agrees to become personally obligated on the debt, we will then *consider* a modification,” the loan servicer said. We would almost never advise a client to become personally liable for a loan unless the loan came with a guaranteed outcome that met the client’s objectives and needs.
Is it necessary for the creditor to assess the heir’s ability to repay the loan?
In general, mortgage lenders must assess someone’s capacity to repay (“ATR”) the loan when deciding whether to allow that person to assume the loan, similar to how a loan application would be assessed when requesting a loan to purchase real estate. The CFPB has explicitly distinguished an heir becoming obliged on the mortgage loan from an assumption of the debt by someone in a different scenario, because many new owner heirs have typically failed such evaluations, and at least some sections of the federal government intended to change that. The ATR rule does not apply to heirs who inherit real property after the death of the former owner and then seek to modify a loan.
The ATR rule need not be considered or serve as an obstacle if Daughter wanted to modify the loan and Questionable Loan Servicing, LLC (acting on behalf of the loan note-holder) wanted her to become obligated as a borrower on the loan in exchange for modified loan terms and the loan being considered back in good standing. For the purposes of the ATR rule, Daughter would not be “assuming” the debt, even though what she would be doing looks, sounds, and smells like an assumption and would be regarded one in practically any other situation.
Heirs’ Best Practices (and their Representatives)
When working with mortgage loan servicers and other creditor-side institutions, heirs should be forceful and persistent rather than passively waiting for the servicer to steer them ahead. The better-positioned the heir is to make judgments, the more information the heir can acquire regarding the condition of the mortgage loan and related options, and the faster the heir may obtain this information. If the heir can’t afford the debt (even if amended or refinanced) and/or doesn’t want to keep the property, it might be preferable to sell it “now” – before making payments toward the loan or, at the very least, before a default takes away at any equity.