Assuming a mortgage of property acquired by death, divorce, or deed

Is happens pretty often that a spouse or child is left a property and the servicer refuses to discuss the loan with the new homeowner because they are not listed on the note. Servicers also often cause problems and object to the homeowner filing a Chapter 13 and curing the default through their Chapter 13 plan.

When someone is left a property from a parent or spouse either through death, divorce, or a deed, the homeowner then has all of the rights that the original borrower had, including the right to apply for a loan modification. However, having the right to do something and the servicer actually allowing you to do it can be very different things. It also gets a little tricky where you are advising your client to assuming a loan that they can only afford if a loan modification is given. To resolve this, a simultaneous assumption and modification can be done with two separate departments with the servicers.

Although many servicers try to refuse to recognize an assumption, they usually have no legal basis to do so. Contracts are freely assignable unless the contract is for personal services, the assignment is against public policy, or if the contract has a provision that forbids assignment. Therefore, unless a mortgage contract specifically forbids assignments, the servicers cannot prevent an assignment.

 Most mortgage contracts have a Due-on-sale Clause that allows the servicer to accelerate the loan upon transfer. However, the Garn-St. Germain Act of 1982 carves out several exceptions that prevent the servicer from exercising the Due-on-sale Clause. These include: “a transferby devise, descent, or operation of law on the dealth of a joint tenant or tenant by the entirety; [or]… a transfer to a relative resulting from the death of a borrower; [or]… a transfer where the spouse or children of the borrower become owner of the property; [or] a transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property….”.

Reverse mortgage have similar issues. If a property has a reverse mortgage and the spouse who was on the mortgage dies, the servicer usually declares the mortgage in default and forecloses on the property. However, contract reformation may be an option to delay default until the non-borrower spouse dies. Some bankruptcy courts have also allowed a spouse or children of the borrower to use a Chapter 13 plan to pay off the reverse mortgage balance.