Reverse Mortgages Soon Legal For Co-Ops in New York
A law recently enacted, and effective June 29, 2022, will permit “reverse mortgages” for cooperatives in New York State. Unlike a traditional mortgage, a “reverse mortgage” does not require that the borrower repay the loan monthly, but rather there is no repayment of the loan until the borrower dies or moves out of the property. Interestingly, though reverse mortgages have been around for many years, these loans are not currently legal in New York for cooperative apartments.
The new law provides that co-op reverse mortgages will be available to persons 62 years of age and older. If the apartment is owned as joint tenants or tenants by the entirety (i.e. by spouses), the youngest must be at least 62 years of age.
The proceeds of the loan may be paid to the borrower as follows (or in any combination of the following): (1) a lump sum payment; (2) equal monthly payments to the borrower, either for a fixed term or until the loan becomes due and payable; or (3) payable as requested by the borrower (similar to a line of credit). The interest may be a fixed rate or a variable rate; and interest accrues and is added to the balance of the loan, and paid when due.
Regardless of the loan proceeds payout option chosen, the loan becomes due only when the borrower dies, sells the cooperative apartment, no longer uses the cooperative apartment as his/her primary residence, fails to occupy the apartment for longer than 12 consecutive months due to physical or mental illness, or there is some default under the loan (such as defaulting in the payment of the monthly maintenance due the cooperative corporation).
The lender may not sue the borrower (nor its estate) under the note, or attach any property or asset of the borrower (other than the co-op apartment), as the loan is non-recourse (i.e. if the loan becomes due, the lender can only seek payment from the sale of the cooperative apartment).
The law provides that a reverse mortgage on a cooperative apartment is subject to the prior approval of the Board. Many proprietary leases already provide that the Board must approve any loan which uses the stock and lease as collateral.
One of the objections to reverse mortgages in New York has been predatory lending practices that take advantage of elderly persons. The new law has many built-in protections, and the State will also be establishing regulations for lenders to protect the borrowers. One protection included in the law is that the lender must ask the borrower if they want to designate a third-party contact to whom the lender must give notices (or otherwise contact). This is extremely important, as a close relative should be contacted in case the cooperative owner should have to enter a nursing home or a hospital.
In addition, there are certain closing costs in obtaining a reverse mortgage, and the law permits the amount to be paid from the loan proceeds. Therefore, a shareholder may not need to pay out-of-pocket to create a reverse mortgage, which is favorable for those shareholders who are on a tight fixed income. However, closing costs may vary, and therefore it is something to consider when comparing lenders.
While the foregoing is great news for cooperative shareholders, it should be noted that the Federal Housing Association (FHA) still does not permit reverse mortgages for cooperatives. Many loans offered by lenders are FHA loans and are guaranteed by FHA, and thus much safer for the lender. As a result of this, many lenders will not offer reverse mortgages. Nevertheless, there will undoubtedly be many private lenders and banks that will offer reverse mortgages for cooperatives when the law becomes effective, and we await the opportunity to assess the types of reverse mortgages that will be offered.