Adding child to title when reverse mortgage exists

Weigh tax consequences first

DEAR BENNY: My mother has a reverse mortgage on her home, taken out after my father died when as the survivor her name alone was on the title. The usual terms of the reverse mortgage apply, including the acceleration clause upon death or removal from the home.

If anyone else is added to the title via a quitclaim deed in a tenancy in common, what, if any, impact does that have on the loan terms? –KGR

DEAR KGR: Good question. Typically, when the borrower on a reverse mortgage dies, moves out, or the property is sold, the reverse mortgage comes due.

In your situation, if your mother wants to add you to the title, you will be subject to that reverse mortgage. Should your mother move out or die, the lender will call the entire balance due. I cannot see that lender objecting to adding you to the title, but you should tell the lender what you plan on doing.

However, this gets back to one of my favorite peeves: In most cases, I do not believe it makes good financial sense to put a child on title. Why? Unless the child actually buys into the house with cash (which would trigger a taxable event for the seller), the typical arrangement is that parents just add their children to the title. This is considered a gift. And the tax basis of the giftor becomes the tax basis of the giftee.

What does this really mean? Let’s say your mother’s tax basis is $100,000, but the house is now worth $400,000. If the mother gifts half of the house to you, your basis is $50,000. Unless you live in the house for two out of the five years before it is ultimately sold (in which case you could exclude up to $250,000 of any profit), you will have to pay capital gains tax.

On the other hand, if you inherit the house when it is valued at $400,000, your basis is "stepped up" to the $400,000. If you sell it at that price, there is no gain, and no tax to pay.

Talk with your financial advisers, especially because there is a reverse mortgage on the property.

DEAR BENNY: Every other year, I review and shop for homeowners insurance about three months before my anniversary date, which is Nov. 1. However, my lender has taken to paying whatever company I have two months early. Nobody can explain why.

In 2009, Farmers raised its rates, and Travelers was about 30 percent less, so I switched, but my lender took it upon itself to pay Farmers in September and made me ask Farmers to issue me a refund, which Farmers did promptly. I asked my lender to pay Travelers, which it did, and I signed over the refund check from Farmers to my escrow account, but my lender lost the check, and then had the audacity to raise my monthly escrow because it was too low, due to its mistake! No joke!

I had to ask Farmers to send me another check, which I deposited in my own bank account, and then sent another check to the lender.

In 2010, Farmers cost less than Travelers, so I switched, and had to get it done by September. In 2011, after a comparison, I decided to stay with Farmers, but it raised the rate 30 percent without notice. I was able, after many phone calls, to negotiate the rate down by $100, but Farmers submitted the bill directly to my lender and claimed the 30 percent raise was due to the replacement cost of my house going up that much.

In this economy, I can’t imagine anyone with half a brain rebuilding a 100-year-old house complete with a boiler system.

I spend much more time on the phone correcting these big companies’ mistakes than I do actually working. I believe they do this because they don’t expect people to look at their bills that closely, and they get away with it.

I believe both the mortgage and insurance companies are the problem, and nobody is addressing how they do business. I would refinance and go to another mortgage company, but I currently make less than $30,000 a year, and although I owe less that $70,000 on my home, am not underwater and have the savings to pay the mortgage off, no lender will even talk to me these days. –Robyn

DEAR ROBYN: Wow! What an experience! While these stories are upsetting to the writer, I welcome hearing the horror stories between consumers and lenders. Hopefully, some lenders will realize that consumers are human, and will ultimately change their tactics.

Although you had problems with both your lender (whose name I purposely omitted) and your insurance carrier, you are doing something that every homeowner should consider: shopping and comparing the annual cost of the hazard insurance that lenders require.

Don’t just blindly pay the renewal. Usually, the insurance company gives you advance notice of the renewal, including the new cost for the next year. With technology, you can easily go online to shop and compare. And most insurance companies are required to allow you to cancel your policy upon 30 days’ notice.

DEAR BENNY: In a recent column, you wrote that 10 states have laws that have been enacted that specifically prohibit a lender from suing for the deficiency. Is Illinois one of those states?

We have a situation in our family that falls into this category. The area is Chicago. What kind of attorney handles these situations? Any information that you might have or leads you may be able to give us would be greatly appreciated.

The original loan was a subprime loan that was taken out around 2005. The subprime lender did not foreclose on the property. The home has been demolished by the city of Chicago and the lender is going after the loan. –Phil

DEAR PHIL: Get yourself a lawyer immediately. The Chicago area has a lot of real estate attorneys, and if you don’t know anyone, contact the Chicago Bar Association for a referral.

I generally do not answer specific question about state law, as I practice law only in Maryland and the District of Columbia. But because you quoted me — and because this information can be found on the Web (deficiency judgments by state), the answer is that Illinois does not prohibit such actions.

For the benefit of my readers, a deficiency judgment is entered into by a judge. Let’s say the outstanding balance of your mortgage was $250,000, and the property was sold at a foreclosure sale for $200,000. The $50,000 difference — called a deficiency — can be collected by the lender in most states. All the lender had to do in the past was go to court and ask.

However, in recent years, with all the scandals involving robo-signing, and missing and forged mortgage documents, most judges are now carefully reviewing each and every mortgage related complaint.

You indicated that the city of Chicago demolished your house? Why? Was it condemned, in which case you may have been at fault? Or was it taken by the city for a public purpose, called "eminent domain"? If so, did the city pay for the taking, and did those funds go to the lender?

Perhaps I am reading between the lines, but I suspect that the lender received some payment from the city but it was not enough to pay off your loan.

That’s an interesting legal question that I have to research: If property is taken by eminent domain, but the existing loan was not paid off with the moneys from the city, does the lender have the right to go after the homeowner for the deficiency? My guess (not a legal opinion, however,) is yes.

But these are questions that your lawyer should address.

DEAR BENNY: I have heard the concept "business judgment rule." Can you explain? –Sam

DEAR SAM: It is primarily applicable to boards of directors of corporations as well as community associations. The courts have said: "We will not second guess a director — especially those who volunteer for no pay — even if they make a mistake. However, if the board is doing something nefarious, illegal or fraudulently, then of course we, the courts, will intervene."

This is a strong protection for community association directors. However, some states — even the District of Columbia — have specifically abolished that concept, and have substituted a "reasonableness test." Is the action taken by the board reasonable under the circumstances? If so, we won’t chastise or penalize the board.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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