Reverse mortgages have, until recently, been available only to owners of one to four family homes and condominium apartments. Shareholders in co-ops, however, were unable to take advantage of reverse mortgages as they did not own a real property interest that could serve as collateral for the loan.
The law was recently changed in New York to allow owners of shares in a co-op to obtain reverse mortgages. As such, it is important for co-op boards of directors to understand the rules regulating co-op reverse mortgages.
Legal changes
The new law permitting reverse mortgages to be secured by shares or membership interest in a co-op will take effect on May 30, 2022. Co-op boards should be aware of the following:
- The reverse mortgage can be secured by either shares or membership in a cooperative apartment.
- If the reverse mortgage is secured by a co-op apartment, it must be approved by the co-op’s board of directors.
- The minimum age for a reverse mortgage secured by a co-op apartment is 62 (the minimum age in the context of real property ownership is 60).
- The cooperative apartment unit must be the shareholder’s primary residence.
- Maturity events (which are the events that will trigger the loan amount being due) are broad in the context of co-op reverse mortgages. These include failure to use the apartment as the shareholder’s primary residence for reasons other than death, the shareholder’s failure to occupy the apartment for at least twelve consecutive months, and in the event an obligation of the shareholder under the loan note is not met. The latter requirement may include failure to pay monthly maintenance and assessments to the co-op, failure to maintain the apartment, and failure to pay insurance premiums.
- A lender cannot foreclose without complying with all the provisions of the new law and a lender’s failure to strictly comply serves as a “complete defense” to the foreclosure.
Even though the co-op has a priority lien for the monthly maintenance, co-op boards should nevertheless carefully consider a shareholder’s request for permission to obtain a reverse mortgage. Such careful scrutiny is particularly important if the shareholder is unable to afford the monthly maintenance for the apartment without the benefit of the loan proceeds. If such shareholder through poor financial management squanders the loan proceeds and is unable to pay the maintenance, the co-op may find itself in the difficult position of having to foreclose on a senior citizen who now has little if any equity in the apartment. Without significant equity in the apartment, the shareholder will have difficulty securing alternate living arrangements.
While the ability for co-op shareholders to obtain reverse mortgages is welcome news for some, we recommend that boards discuss the potential risks with experienced counsel before approving any request.