Closing Thoughts by Jim Young
Sponsored by Andrews & Young, PC
March 18, 2015
HOME SOURCE www.theday.com
The last article I wrote for Home Source discussed reverse mortgages. After the article ran, I was provided with some information by a person in the reverse mortgage business pointing out that some relief now exists for a problem I alluded to in the article: how a spouse who is not a borrower on the reverse mortgage loan may be forced to leave the residence if he or she can’t pay the mortgage off at the death of the borrower spouse or once the borrower spouse no longer lives at the mortgaged property.
As I understand them, the rules for newly made reverse mortgage loans now allow a non-borrower spouse who has not reached the age of 62 as of the closing to remain in the home after the death of the borrower spouse if a) the survivor spouse was married to the borrower at the time of the loan closing, and the existence and identity of the younger spouse was disclosed to the lender in the application process, and b) after the death of the borrower spouse the survivor performs the obligations under the loan, generally things like paying the taxes and insurance and maintenance costs for the property, and c) they demonstrate that they are legally entitled to live in the property. This last one is another reason to have a good will.
Keep in mind that these rules apply to newly made loans, not to old ones, and no doubt will keep changing, so what I say here today might not be accurate tomorrow.
As a tradeoff for this right to continue to occupy the property, the maximum lifetime loan amount that can be obtained under the reverse mortgage loan will be reduced. This tradeoff seems reasonable, although after the death of the borrower spouse the non-borrower spouse can no longer draw on the loan. That may strike some readers as harsh, since the maximum available amount of the loan will have been reduced due to his or her younger age.
This loss of ability to continue to borrow might be a hardship to the surviving spouse if he or she was counting on the monthly loans to supplement their income, but this change does give some real relief to non-borrower spouses for new loans at the death of the borrower spouse, so this is good news.
What costs double in Groton, New London, and Norwich?
The answer: the conveyance tax that the owner of real property pays to the town upon sale of the property. This tax, with some limited exceptions, goes into the general fund of the town.
The conveyance tax in most Connecticut towns is one quarter of one percent. However, under state law, 18 towns have the power to double the municipal conveyance tax. In all or nearly all of them, including Groton, New London, and Norwich, town leaders voted to do that.
I remember when the proposal to double the tax came before the Groton Town Council and a number of people showed up to argue against it. They argued that it was inequitable, and if more revenue was needed it would be fairer to increase the mill rate. The councilors were not persuaded, and the increase in the conveyance tax was approved.
Bond for deed
I recently encountered a document I haven’t seen for quite some time: a bond for deed. This is a contract between a seller and buyer, where a buyer signs a promissory note agreeing to pay the purchase price over a period of years. Meanwhile, the seller agrees that after the buyer makes all the payments and performs all other obligations that may exist under the contract, a deed will then be recorded in the land records conveying title to the buyer.
Under such arrangements, the seller’s attorney sometimes holds the deed until the buyer fulfills the bond by paying the note. The attorney might also hold a release signed by the buyer at the closing on the sale. These documents may allow the seller’s attorney to record the release if the buyer defaults. The benefit of any payments made by the buyer, even if they were made over several years, could be wiped out upon the recording of the release.
These types of arrangements were more commonly seen in the 1980s when interest rates were high. They were sometimes used by the seller to avoid having to pay off his or her loan, which might have been at a low rate of interest. These types of transactions are also found where a buyer may not be able to qualify for a bank loan, or at any rate think they can’t qualify, so the seller provides the financing.
These contracts are fraught with dangers for an unsophisticated and unrepresented buyer. The documents may prohibit the buyer from recording any notice of the seller’s obligations under the contract in the land records, meaning that the title to the property would still reside in the seller free of any record claim of the buyer. The property might be sold by an unscrupulous seller, or mortgaged, or passed on to his or her heirs upon the seller’s death, or be attached by a creditor. The interest of the buyer might thereby be lost or put at very serious risk, leaving the buyer with the often impractical option of trying to sue the seller.
A seller could provide financing to a buyer by deeding the property to the buyer so they have record title and taking back a mortgage. In this way, the seller would be acting more like a traditional mortgage lender and would be required to go through a foreclosure process if the buyer were to default, which can, if resisted, lead to considerable delays and cost.
It is the desire of avoiding a potentially costly foreclosure process, I suspect, which motivates some sellers to utilize a bond for deed. But, again, the process leaves a buyer in a perilous position.