Does a Shareholder Need Approval From Their Co-Op Board To Get a Reverse Mortgage?
Written by Celia Young, Brick Underground
Featuring Partner Marc J. Luxemburg, Gallet Dreyer & Berkey, LLP
QUESTION: Does a shareholder need approval from their co-op board to get a reverse mortgage? If so, what are typical stipulations for approval?
ANSWER: In most cases, shareholders do have to ask their co-op board for permission to get a reverse mortgage, a type of loan aimed at seniors who want to tap the equity in their property. The process for receiving board approval for a reverse mortgage is very similar to when a shareholder refinances an existing loan, our experts say.
Reverse mortgages only became available for co-op shareholders in May last year and are still fairly uncommon, says Andrew Freedland, a partner at law firm Herrick Feinstein. Shareholders 62 and older who use their co-op as their primary residence can benefit from the extra income, but shareholders should be aware that a reverse mortgage adds to their existing loans and means their apartment will likely become their bank’s property when the shareholder dies, and not go to their heirs.
A co-op’s right to approve a resident’s debt is spelled out in the building’s proprietary lease. In rare cases, a board may not have the ability to veto a reverse mortgage, says Marc Luxemburg, an attorney of counsel at Gallet Dreyer & Berkey. But generally, those who want to take out a reverse mortgage will have to approach their co-op board, Freedland says.
“They do need approval from the board and it's really the same process as if you were getting a standard mortgage,” Freedland says. “It’s treated the same way.”
The application process may take some time depending on how prepared your board is for the request. It’s unlikely your board has established a procedure on how to evaluate reverse mortgages because they are so new, says Marc Landis, managing partner at law firm Phillips Nizer.
“Boards are often conservative in dealing with new products, so there is a learning curve involved,” Landis says.
A shareholder will likely submit documents listing their finances, any other debts they hold, and their monthly maintenance fees, so the board can determine whether they can carry the loan, Freedland says. But a reverse mortgage won’t raise your carrying costs, making it more attractive to boards concerned about collecting monthly maintenance fees, Landis says.
Your board could also establish a policy on the allowed loan-to-value ratio, which measures the amount of the mortgage compared with the appraised value of your property. Because there are no payments on a reverse mortgage, the amount you owe will grow over time as interest compounds, Freedland says.
That’s why most lenders won’t allow shareholders to borrow more than a 60 percent loan-to-value ratio, meaning that you can’t borrow more than 60 percent of the value of your apartment, Landis says.
If your board approves the reverse mortgage, they’ll enter into a recognition agreement with the lender—essentially a document that lays the groundwork for how both parties will handle the loan, says Andreas Christou, an attorney at Woods Lonergan. That document helps protect the co-op’s right to secure any missing maintenance fees before the bank collects, Landis says.
Landis helped a board unanimously approve a reverse mortgage with a 50 percent loan-to-value ratio this year. He said the process went swimmingly.
“We had a frank conversation about what it means for the co-op to have a shareholder who has a reverse mortgage and the answer is that it doesn't put the co-op at any particular risk,” Landis says.