Default of Mortgage Loans Due to Death of a Borrower or Guarantor

While most people prefer not to think about it, the death of a borrower or guarantor on a mortgage loan has been known to occur and there can be significant consequences to the loan.

 

It is not uncommon, when an individual guarantees repayment of a loan, that the loan documents include a provision that the death of the guarantor results in a default of the loan. On commercial loans, lenders consider the involvement of a key owner/principal of a business borrower critical to the borrower’s ongoing ability to repay the loan. If that key owner/principal dies, the ability of the business borrower to continue operating at the same level and repay the loan is in doubt.  However, it is entirely possible that a suitable substitute guarantor is available; particularly if there are other principals in the business or relatives of the guarantors willing to step up and assume the guaranty.  If the guaranty doesn’t allow time for a suitable guarantor to be provided before the loan is defaulted, then that right needs to be negotiated into the loan documents. Most lenders will consider the inclusion of this provision and 90-120 days is the typical time frame negotiated for providing the new guarantor.

 

On the borrower side, it gets trickier.  If the borrower is an individual and that individual dies, the lender has a legitimate concern that the loan will not be repaid and may file an action to accelerate the balance due on the note and foreclose on the mortgage. Where it gets trickier is when the note includes both a husband and wife as co-borrowers or the note provides one borrower but the borrower’s spouse also signs the mortgage.  

 

Under Ohio law, it is not enough to establish that the note and mortgage were valid executed, the mortgage was properly recorded, the default occurred and the amount that is due to lender.  After determining that a default has occurred, the court must also address the equities of the situation to determinate if foreclosure is appropriate under the circumstances.

 

If the loan documents do not clearly define a payment default to include the death of a borrower, then the lender is pushing its luck to proceed with a foreclosure on that basis alone; particularly if timely payments are being made by the surviving spouse and that surviving spouse also signed the mortgage and is defined as a co-borrower under the mortgage. Just ask Third Federal Savings and Loan who lost its summary judgment and foreclosure order on appeal due to the default language in the note not clearly reflecting its default position and the trial court further failing to consider the equities of the situation. (see Third Fed. Sav. & Loan Assoc. of Cleveland v. Schlegel, 2013 Ohio 1978 (9^th Dist. Ct. of App., Summit County)).

 

Words mean things, and each side needs to review the language in the loan documentation to ensure it correctly reflects the intent of the parties and what will and will not trigger a default and the right of a lender to proceed with foreclosure of the property.

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