Gap Filling Assignment Of Mortgage

Reverse mortgages and longevity insurance will be critical.

By Jane Bennett Clark, Senior Editor
From Kiplinger's Personal Finance, October 2013

Alicia Munnell is the director of the Center for Retirement Research at Boston College.

KIPLINGER'S: Why the big shortfall in retirement savings?
MUNNELL: People are living longer, so the retirement span has increased. They face rapidly rising health care costs, and given low interest rates, they need a bigger pile of money than they did in the past. At the same time, the full retirement age for Social Security has risen. Medicare premiums are deducted from Social Security benefits, and those premiums are going up. Plus, in a few years, the typical person will be paying taxes on a portion of their Social Security benefits. That's because the income thresholds that determine whether you pay taxes are not adjusted for inflation or the earnings growth that workers experience over time.

Do low interest rates contribute to the problem? Interest rates are not that big a deal for low-income people because they don't have anything to invest. As you go up the income scale, interest rates have an increasing effect; the income people get from their money is just smaller. For people who are taking out reverse mortgages and annuitizing the amount, lower interest rates have two effects: On one hand, they can borrow a bigger amount because of the way the loan is structured. But when they annuitize the money, lower rates produce less income.

What role do you think reverse mortgages should play? For most people, their house is their largest asset. And to date, all the evidence has shown that people really don't tap their home equity until the end of life. They're saving it in case they have a major health event. I think to have anything close to a secure retirement, they need some way to tap their home equity earlier. Moving to a less-expensive house could help, or they could get a reverse mortgage. [Editor's note: Munnell has invested in a reverse-mortgage company.]

How far are we from reverse mortgages becoming widely available? Miles. About 2% of those eligible for reverse mortgages take them. People feel they've spent their whole life paying off a mortgage, and the idea of getting in debt again is not very appealing.

How much income should you try to replace in retirement? The retirement-risk index we put out has calculations for different income groups and factors in whether you own a home or don't own a home, whether you're single or married. We give a range, but my rule of thumb is about 80% of preretirement income.

It's been argued lately that $1 million is not enough to maintain a comfortable standard of living in retirement. Is it enough? It's certainly enough for the average person. I think the point was that for anybody with any moderate amount of wealth, it doesn't provide a lot.

Does investment strategy make a big difference? Yes, if you're talking about younger people or higher-income people. But the average household has about $120,000 in retirement savings. It doesn't make sense to spend a lot of time worrying about how that $120,000 is invested. There are more important levers. One is how long you work. Another is controlling your expenditures as you're approaching retirement—or at least not kicking up your heels too much when you've paid off your mortgage and your kids are through college. Then you can assure yourself of a more stable standard of living.

Are most people who want to work longer able to? Even for healthy people, it certainly hasn't been easy in the past four or five years. Then you've got people who have either disabilities or health issues, or their skills are outdated, or their job has gone away. So it's not possible for everybody. But I'm convinced that for people who can, working longer is the best possible thing they can do to ensure a secure retirement.

What do you think of insurance-type products that speak to the fear of running out of money? I'm a great fan of longevity insurance, or advanced-life deferred annuities. You buy them at 65, and they start paying you money at 85. (For details on new types of deferred-income annuities, see Add an Annuity to Your Retirement-Income Mix.) I think they would be helpful because people are so fearful. There's a concern that people will use their retirement money to go off on a trip around the world. But I'm absolutely convinced that the greater risk is that they are going to be too cautious. So if we had something that assured people that if they lived to 85, this monthly income would kick in, not only would it provide a signal that people don't have to worry, but it would also tell them that they can spend their money now because they will have a new source of income later.

Are annuities an option for people with $120,000? It might make more sense to use that $120,000 to support yourself if you have to retire before, say, age 70, and postpone claiming your Social Security benefit (see Make Your Money Last). In effect, you're buying an annuity through Social Security, which is the cheapest annuity in town.

How can people prepare to pay the bill for long-term care, if necessary? I think we need catastrophic long-term-care insurance—something that would make you responsible for the first year of expenses, after which the policy would kick in. That way you would know what you were on the hook for.

You've said that the U.S. needs a new mandatory tier of retirement accounts. Can you talk about that? Our retirement system is simply too small. Social Security is going to replace less, and what people have in their 401(k) accounts is inadequate. So we need an additional tier, initiated by the federal government but managed by the private sector, that would replace about 20% of preretirement earnings. This would be mandatory, in addition to the voluntary 401(k) system. Contributions would come out of the employee's income and be part of the total compensation package.

What's your take on 401(k) fees? They are a major issue. If you pay an extra 100 basis points [one percentage point] over a 40-year career, it reduces your pile at retirement by about 20%, so that's a big deal. Boston College recently closed one of its investment choices—which had annual expenses of 43 basis points—to new contributions and replaced it with a similar fund that has annual expenses of seven basis points. That has to be in response to somebody telling them that they're not doing a good job.

In Bank of America v. Alvarado, BER-F-47941-08 (January 7, 2011), Alvarado obtained a mortgage loan from Washington Mutual in 2006. After the loan was closed, Washington Mutual lost the note. It made an Affidavit of Lost Note dated July 14, 2006. Ownership of the mortgage loan, which included the Affidavit of Lost Note, was subsequently assigned to LaSalle Bank, as a trustee of a pool of mortgage loans. LaSalle Bank was then acquired in a merger by Bank of America. When the loan defaulted in 2008, Bank of America commenced a foreclosure action.

Alvarado defended the foreclosure action on the basis that Bank of America could not rely on the Affidavit of Lost Note because it was not the party who lost the note. Under §3-309 of the 1995 Uniform Commercial Code, a party  in “possession of an instrument is entitled to enforce the instrument if the person was in possession of the instrument and entitled to enforce it when the loss of possession occurred . . .” Under a 2002 revision to 3-309, possession of the note at the time of its loss is not required; however, New Jersey had not adopted the 2002 revision.

The court examined cases interpreting the 1995 version of §3-309, the majority of which held that possession of the note and the right to enforce it must both be present at the time the note was lost before one is permitted to enforce it. The court refused to apply this rule, noting that it would mean no one can enforce the mortgage obligation, leading to an “inequitable” windfall to the defendant mortgagor.

Instead, the court noted that because the 1995 version of §3-309 is silent as to the assignment of rights under a promissory note that has been lost, it may rely on the common law doctrines of assignment and unjust enrichment under the “gap-filler” provision of §1-103. Under New Jersey common law, a person is unjustly enriched when she “receives a benefit and it would be inequitable to permit that person to retain the benefit without paying fair compensation or consideration for it.” In that instance, a court may fashion an equitable remedy.

New Jersey’s common law doctrine of equitable assignment, the court reasoned, “is sufficiently broad to permit assignment of the right to enforce a lost note.” The court would not construe §3-309 as preempting the common law doctrine, noting that “[e]ven if a higher court determined that common law assignment were preempted by the Code, the equitable remedy of unjust enrichment would still compel the result reached here.”

A copy of the decision is available here: BOA v. Alvarado_110111[1]

Donald Maurice

Donald Maurice provides counsel to the financial services industry, successfully litigating matters in the state and federal courts in individual and class actions. He has successfully argued before the Third, Fourth and Eighth Circuit U.S. Courts of Appeals, and has represented the financial services industry before several courts including as counsel for amicus curiae before the United States Supreme Court. He counsels clients in regulatory actions before the CFPB, and other federal and state regulators and in the development and testing of debt collection compliance systems. Don is peer-rated AV by Martindale-Hubbell, the worldwide guide to lawyers. In addition to being a frequent speaker and author on consumer financial services law, he serves as outside counsel to RMA International, on the governing Board of Regents of the American College of Consumer Financial Services Lawyers and on the Governing Committee of the Conference on Consumer Finance Law. From 2014 to 2017, he chaired the ABA's Bankruptcy and Debt Collection Subcommittee.

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