Reverse mortgage lenders received a significant victory in Florida’s Third District Court of Appeal last week when the court issued its decision in OneWest Bank, FSB v. Palmero. After previously ruling in Smith v. Reverse Mortgage Solutions, Inc. and Edwards v. Reverse Mortgage Solutions, Inc. that the surviving spouses of borrowers who had taken out reverse mortgage loans also qualified as “borrowers” under the terms of the mortgage and thus had the right to remain in the property after the death of a spouse, the court changed course in Palmero, outlining the conditions under which a lender could prove that “borrower” meant only the person who actually “borrowed” the money.

In Palmero, the lender brought a foreclosure action against Luisa Palmero, claiming that her deceased husband Roberto had taken out a reverse mortgage and that his death triggered the lender’s right to accelerate the mortgage debt and commence foreclosure proceedings. The mortgage granting the security interest to the lender defined the borrower as “Roberto Palmero, a married man reserving a life estate unto himself with the ramainderman [sic] to Luisa Palmero, Idania Palmero, a single woman and Rene Palmero, a single man.” Mr. and Mrs. Palmero executed the mortgage on separate signature lines underneath the statement “BY SIGNING BELOW, Borrower accepts and agrees to the terms contained in this Security Instrument and in any rider(s) executed by Borrower and recorded with it.” However, only Mr. Palmero signed the promissory note evidencing the payment obligation associated with the reverse mortgage.

Further, only Mr. Palmero was named as the borrower in the loan application and loan agreement. Mrs. Palmero executed a “non-borrower spouse ownership interest certification” in which she certified that “should [her] spouse predecease [her] . . . and unless another means of repayment [was] obtained, the home where [she] reside[s] may need to be sold to repay Reverse Mortgage debt incurred by [her] spouse” and that “[i]f the home where [she] reside[s] [was] required to be resold,” Mrs. Palmero agreed that she understood “that [she] may be required to move from [her] residence.” After trial, the circuit court granted judgment in favor of Mrs. Palmero, concluding that (1) she was not a “borrower” under the terms of the mortgage and thus Mr. Palmero’s death triggered acceleration of the loan, but (2) that federal law prevented the lender from foreclosing on the property while Mrs. Palmero, the non-borrowing spouse, remained alive.

On appeal, a majority of the panel of the Third District Court of Appeal affirmed the circuit court’s holding that Mrs. Palmero was not a “borrower,” but reversed the judgment in favor of Mrs. Palmero by rejecting the argument that federal law precluded foreclosure. In holding that the circuit court properly determined that Mrs. Palmero was not a “borrower,” the court held that it was required to read all of the documents executed at the origination of the reverse mortgage together. The court determined that reading the definition of “borrower” in the mortgage, along with the loan application executed by Mr. Palmero, the note executed by Mr. Palmero, and the non-borrower spouse certification executed by Mrs. Palmero, made it clear that Mrs. Palmero was not a “borrower” under the reverse mortgage. The court recognized its prior holdings in Smith and Edwards in which it held that a foreclosing entity failed to demonstrate that it was entitled to foreclose against the surviving spouse on a reverse mortgage, but distinguished those cases based on the evidence of the contemporaneously signed documents that made it clear that Mrs. Palmero was not a “borrower.”

The court further held that federal law did not preclude the lender’s foreclosure. The court first held that Mrs. Palmero had failed to raise at trial the defense that federal law precluded the foreclosure, and thus the defense had been waived. The court also rejected the argument on the merits, finding that federal law did not require Mrs. Palmero to be a “borrower” in order for the reverse mortgage to be insurable by the federal government.

Going forward, Palmero stands as a significant cut against the broad interpretation of Smith and Edwards that many Florida trial courts had adopted in order to hold that a surviving spouse had the legal right to remain in property secured by a reverse mortgage after the borrower’s death. Palmero demonstrates that a lender may demonstrate that the surviving spouse is not a “borrower” under the mortgage by introducing the other documents executed at the time the loan is originated—most significantly, the non-borrower spouse ownership interest certification, in which the non-borrowing spouse expressly recognized the fact that the borrower’s death would allow the lender to accelerate the loan and proceed to foreclosure.