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MortgagePoint ยป Your Trusted Source for Mortgage Banking and Servicing News 42 March 2024 F E A T U R E S T O R Y I n July 2023, the Appellate Court of Maryland held, as a matter of first impression, that a reverse mortgage foreclosure sale did not extinguish a servicer's right to insurance proceeds. The decision came in the case of Celink v. Estate of William R. Pyle. Case Background I n the case (Pyle), a fire destroyed a home subject to a reverse mortgage deed of trust, which then became due and payable as a result of the borrower's demise. On behalf of the secured party, the servicer foreclosed and purchased the property at foreclosure for less than the balance due on the loan. A dispute arose over how proceeds from a fire in- surance policy on the property should be allocated between the borrower's estate and the secured party. Provisions of the Deed of Trust A provision of the Deed of Trust provided that the borrower was re- quired to maintain fire insurance on any improvement located on the property. This provision also stipulated that if there is a loss, and restoration or repair of the property was not economically feasible, the policy proceeds were to be applied to the balance due on the note, with any excess to be paid "to the entity legally entitled thereto." A second provision of the Deed of Trust provided that the debt can only be enforced through the sale of the property and prohibited the secured party from obtaining a deficiency judgment in the event of foreclosure. Disputes Over Proceeds A t the foreclosure auction, the trustees purchased the property for $175,000, which was $208,108.25 less than the balance due on the loan and the costs of sale. After the foreclosure sale, the insurer of the property issued a check for the proceeds of the insurance policy in the amount of $287,531.47. The check was pay- able jointly to the borrower's estate and the servicer. The borrower's estate filed a civil action seeking a declaration that the insurance proceeds were payable to it. Legal Precedents and Principles T he loss before foreclosure rule in Maryland is outlined in Thomas Adm'rs v. Vonkapff's Ex'rs. The mortgage at issue in that case stated that the borrower would maintain fire insurance on all of the improvements on the secured prop- erty and that, in the event of a loss, policy proceeds shall be immediately applied to the rebuilding so that the lender shall in case of loss by fire, be benefitted by such insurance, or participate in the benefit thereof, to the extent of his aforesaid lien. Court's Analysis and Decision T he Court recognized that, under the literal terms of the mortgage, the insurance proceeds were to be used to repair or rebuild the damaged improve- ments. The Court concluded that (1) a covenant in a mortgage requiring the borrower to provide fire insurance for the secured property was for the benefit of the lender and its assignees, (2) any claim by the borrower or his successors-in-in- terest to the policy proceeds was "subject to the [lender's] equity," (3) the lender had the right to enforce its interest, and (4) the lender's right to do so stemmed NAVIGATING HAZARD INSURANCE PROCEEDS: LENDER RIGHTS IN REVERSE MORTGAGE FORECLOSURES Attorneys Jim Milano and Alyssa Szymczyk discuss the intricate dance between property loss and foreclosure when unforeseen circumstances occur. B y J I M M I L A N O & A L Y S S A S Z Y M C Z Y K J I M M I L A N O is a recognized leader in U.S. reverse mortgage law, a member of McGlinchey Stafford's Financial Services and Real Estate practice groups, and a Board Member of the National Reverse Mortgage Lenders Association (NRMLA). A LY S S A S Z Y M C Z Y K is an Associate with McGlinchey Stafford and represents banks, mortgage lenders and servicers, debt collectors, and other financial institutions in litigation in state and federal courts.