How Does a Reverse Mortgage Impact Your Recovery in an Eminent Domain Case?
Eminent domain is the inherent right or power of the government to “take” private property for public use. Notwithstanding that substantial power, the government may not take property for public use without paying the property owner “just compensation.” (Emphasis added). Generally speaking, the fair market value of the property taken, plus any damages to any remaining property constitute the measure of just compensation. An interesting issue arises when the government uses its eminent domain power to take property that is subject to a reverse mortgage.
In a typical eminent domain case where there is a traditional mortgage on the property, because the property owner’s equity increases as they make mortgage payments, the amount of compensation awarded to the property owner should usually be sufficient to pay off the mortgage and leave the owner with funds adequate to make a down payment on a new home. However, where property values decline it is possible that properties will have “underwater” mortgages, meaning that the outstanding amount owed under the mortgage may exceed the value of the home. That situation can lead to a difficult circumstance if the property is taken by eminent domain because the owner may need to find extra funds to pay off the mortgage, over and above the payment of just compensation, and may be responsible for a deficiency, even though it had no intention of selling the property but has the property involuntarily taken. This dynamic occurred quite often in our last recession, leading government officials to consider using eminent domain to “take” underwater mortgages in an effort to keep people in their homes and stave off foreclosures. We previously covered this topic on our blog at that time:
- Should Governments Use Eminent Domain to Acquire Underwater Mortgages?
- Underwater Mortgage Plan: Will it Sink or Swim?
- New Jersey Dipping Its Toes Into Underwater Mortgage Pool?
Similar concerns may exist in matters where eminent domain is used to take property that has a “reverse” mortgage in place. A reverse mortgage is a type of home loan that is typically available to seniors who are 62 and older. An eligible homeowner who has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments. Instead, the entire loan balance, up to a limit, becomes due and payable when the borrower dies, moves out permanently, or sells the home. A homeowner’s equity, therefore, decreases in reverse mortgages, potentially leaving little more than what is needed to repay the loan and not enough for a new home, even if “fair market value” is received for the property.
Federal regulations require lenders to structure the transaction so that the loan amount won’t exceed the home’s value. Even if it does (through a drop in the home’s market value or if the borrower lives longer than expected), the borrower or borrower’s estate won’t be held responsible for paying the lender the difference thanks to the program’s mortgage insurance. In sum, reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.
Disadvantages of a Reverse Mortgage – A Summary
When someone’s property is taken by eminent domain, the best-case scenario is one where a homeowner can replace their property using the government’s payment. Indeed, the goal of the eminent domain process guaranteed by the Constitution is to make the owner whole for his or her loss. However, when a reverse mortgage is involved, the owner’s equity has been reduced by the amount borrowed plus interest and other repayment costs. As a result, the owner may end up receiving insufficient funds to replace the home which has been taken because of the lien interest held by the mortgage lender. In such cases, the equity and the government payout combined may not be enough to buy a replacement home. Although it is very difficult to stop the government from exercising its power of eminent domain, consulting experienced counsel can provide you with the guidance necessary to maximize your potential recovery. McKirdy, Riskin, Olson & DellaPelle, P.C. has a proven track record of staunchly defending its clients’ property rights. Please do not hesitate to call our office for a free consultation.
