Acceleration: Acceleration clauses allow banks to require a homeowner to repay all or part of a mortgage loan if certain terms are not met.
Acceleration clauses, which are often found in mortgage contracts, are provisions that allow banks to demand full or partial payment of the balance, or additional collateral under certain circumstances, such as delinquency, bankruptcy, nonpayment of taxes on mortgaged property, or the violation of loan agreements.
Example: A homeowner who is delinquent in their payments or breaches an acceleration clause in their contract can be required by the bank to pay the balance on their loan.
Acceleration Clauses: The Fine Print in a Mortgage Contract
Contracts contain clauses that afford certain rights to the signees. In the case of mortgages, one of the most common clauses is an acceleration clause, which allows the bank to demand the repayment of the loan balance.
The acceleration clause, which is invoked when certain conditions are not met, also requires the homeowner to pay the interest accrued since the clause was invoked, though they are exempt from paying the interest that would have accrued over the life of the loan.
Generally, an acceleration clause is invoked when payments are missed. In these cases, the bank is required to notify the homeowner of the delinquency and allow them to rectify the situation. However, if the homeowner is incapable of paying the outstanding debt, the bank may initiate foreclosure proceedings in order to sell the property and recoup the amount they are owed.
In one case, a husband and wife signed a reverse mortgage. After the husband died in 2009, the bank initiated foreclosure proceedings claiming that he was the sole homeowner and his death activated the acceleration clause in the mortgage.
The wife responded that the conditions precedent to acceleration and foreclosure had not been met. After an initial ruling in the bank’s favor, the wife appealed, arguing that she was a co-homeowner under the mortgage contract and that acceleration didn’t adhere to the federal statute governing insurability of reverse mortgages. Under this statute, the wife stated that the mortgage could not enter foreclosure until she died or moved.
The court, which eventually ruled in the wife’s favor, decided that there was no cause for acceleration, noting that in a mortgage foreclosure action, the plaintiff must prove the occurrence of all conditions precedent. The court also stated that since the husband’s death was the only basis for acceleration and the wife was a homeowner under the mortgage, then a condition precedent to acceleration had not occurred and the foreclosure was without merit.
The court concluded that as a matter of law the wife was a homeowner under the reverse mortgage contract and that the bank was compelled to establish as a condition precedent to acceleration that she had died, or moved.