In Kansas mortgage foreclosure actions, and as in most judicial foreclosure states, the borrower is afforded an opportunity to redeem a foreclosed property after the foreclosure sale has occurred. Redemption of a foreclosed property is controlled in Kansas by K.S.A. § 60-2414. K.S.A § 60-2414 sets forth, amongst other things, how the property is redeemed, who can redeem, and how long a party has to redeem a foreclosed property. K.S.A. § 60-2414 provides the defendant owner may redeem any real property sold under execution, special execution or order of sale, at any time within 12 months from the day of the sale, for the amount paid by the current holder of the certificate of purchase. See K.S.A. § 60-2414(a). However, under certain circumstances, the redemption period is shortened to three months. In the event a default occurs in the conditions of the mortgage or instrument of the most senior lien foreclosed before one-third of the original indebtedness secured by the mortgage or lien has been paid, the court shall order a redemption period of three months. K.S.A. § 60-2414(m)(emphasis added).
A key to determining the appropriate redemption period length is determining what the original indebtedness is. For a traditional mortgage, after the mortgage has been executed, all funds are taken out at once to pay for the property, thereby making the original indebtedness the total indebtedness for purposes of the Kansas redemption statute. Therefore, calculating the redemption period for traditional mortgages is straight-forward. At the time of default, the lenders attorney can simply divide the unpaid principal balance by the total indebtedness of the mortgage to determine whether the redemption period is three months or 12 months. Using the formula above, if the ending percentage is greater than two-thirds or 66.67%, then the redemption period is three months. If the percentage is less than 66.67%, the redemption period is 12 months.
For reverse mortgages, the same redemption rules apply, but calculating the redemption period is not as straight forward. In a reverse mortgage transaction, the borrower mortgages their property to the lender for a total mortgage amount, like a traditional mortgage. However, instead of the lender paying all funds at once to the buy the property, the lender will either provide a lump sum amount to the borrower for the borrower to use how they see fit, or the borrower will draw funds from the lender over time not to exceed the total mortgage amount. Stated another way, a typical reverse mortgage borrower mortgages their property to the lender in exchange for the lender providing advances to the borrower, allowing the borrower to live off the equity in their home while continuing to live there. Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 130, 425 P.3d 617, 619, 2018 WL 3320933 (Kan. Ct. App. July 6, 2018). Typically, the lender will continue to provide monthly advances or allow monthly draws by the borrower until the total mortgage amount is reached or until the borrower defaults. For most reverse mortgages, a borrower defaults if the borrower fails to pay taxes/insurance or if the borrower dies. In most reverse mortgage situations, the reverse mortgage borrower will continue receiving equity advances or continue making monthly draws without repayment of the indebtedness, thereby essentially guaranteeing a three-month redemption period. However, if the reverse mortgage borrower does repay some of the indebtedness, the question remains how the original indebtedness is determined for purposes of calculating the redemption period.
The Kansas Court of Appeals recently clarified the original indebtedness issue in Reverse Mortg. Sols., Inc. v. Goldwyn, 56 Kan. App. 2d 129, 425 P.3d 617, 2018 WL 3320933. In Goldwyn, the reverse mortgage borrower took out a mortgage with a total indebtedness of $262,500.00. Goldwyn, 56 Kan. App. 2d at 130, 425 P.3d at 619. When the borrower died, Goldwyn became the property owner, and shortly thereafter, the lender declared the entire sum of all advances due. Id. To determine the redemption period, the court examined the language provided in K.S.A. § 60-2414(m). Instead of looking at the amount repaid on total indebtedness of the mortgage ($262,500.00), the court looked at the amount repaid of the first advance amount. As stated by the Court of Appeals, the mortgage amount does not determine the original indebtedness: a mortgage secures the loan but there’s no indebtedness until some money is taken under the loan. Goldwyn, 56 Kan. App. 2d at 136, 425 P.3d at 622. The Court of Appeals further clarified that while [the borrower] took additional advances from October 2007 through November 2010, those amounts would represent part of her total indebtedness but not her original indebtedness. Id. As shown by the facts of the case, the borrower did not repay any of the sums she received from the lender. Id. Therefore, the Court of Appeals determined that the redemption period was three months under K.S.A. § 60-2414(m). Id.
In Goldwyn, The Kansas Court of Appeals goes on to suggest that the Kansas legislature may want to consider a different approach regarding redemption periods and reverse mortgage transactions, and it’s hard not to agree with the Kansas Court of Appeals. The Kansas legislature may want to consider providing a permanent 12-month redemption period for reverse mortgages considering all reverse mortgage borrowers are elderly as required by federal law (the youngest borrower shall be 62 years of age or older at the time of loan closing. 24 CFR 206.33). As the redemption statute currently stands, the shortened redemption period puts a tremendous amount of pressure for borrowers to obtain funds to payoff or reinstate the loan, and if that cannot occur, then the borrowers are forced to find new accommodations. If the Kansas legislature does not address the issue of redemption periods for reverse mortgages, lenders may want to consider agreeing to, or providing, extensions of the redemption period on their own.
- Posted by Veronica Medrano
- On September 4, 2019