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Cameron v. Ewing

HNT-L-449-07 (N.J. Super. Law Div. 2011) (Unpublished)

MORTGAGES; REVERSE MORTGAGES; LIENS — A reverse mortgage is not the property of the borrower and money received by a borrower under a reverse mortgage is not income, but merely a transfer of assets such that a judgment lien holder cannot force the bank to make payments and cannot garnish those payments when actually made.

An injured party in an automobile accident obtained a consent judgment against a senior citizen in the amount of $400,000. The senior was uninsured at the time of the accident, leaving his personal assets as the only source for payment of the judgment.

Prior to the accident, the senior had entered into a reverse mortgage under which a lender was making monthly payments to him. The lender refused to release the proceeds to the senior absent a written authorization from the senior. In light of this refusal, the injured party filed a motion to enforce litigant’s rights.

The injured party alleged that the proceeds of the reverse mortgage were a debt due to the senior and were subject to garnishment. Alternatively, the injured party argued that the proceeds of the reverse mortgage should be garnished from the senior once he received them, and should be treated as if the senior had sold his house and purchased an annuity. The lender argued that the proceeds of the reverse mortgage were no different than any other debt, and could not be considered property subject to garnishment by a judgment creditor.

The Court held that a reverse mortgage is not an income stream, but rather a debt secured by the borrower’s home. It found that, under federal law which governs how reverse mortgage costs are calculated, a reverse mortgage is a loan meant to profit a bank, and not simply the freeing up of a borrower’s home equity into an income stream. Under the relevant terms, a bank retains the right of appreciation of the equity, that there are other costs such as interest, all of which are characteristic of the servicing of a debt. The Court also found a reverse mortgage cannot be likened to an annuity because borrowers are not purchased an asset. Rather, they are subjecting an asset, a home, to a loan which drains value from it. Additionally, a reverse mortgage belongs to a lender, while an annuity is the property of an annuitant who has invested in the annuity and is merely receiving back its proceeds.

The Court ruled that the injured party was not entitled to the proceeds once the senior received them, for the proceeds were a loan and not income, and thus were not subject to garnishment. In this matter, the proceeds from the reverse mortgage were transferred to the senior in monthly installments and the source of repayment – the equity in the senior’s home plus other charges – was readily identifiable. The Court said that the proceeds were subject to repayment in the event of death, transfer or if the senior ceased living in his current home. As such, the proceeds could not be classified as income subject to an order to compel payment.

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