One more question

If the heir walks away as opposed to selling the home, does the IRS still have the ability to consider the cancelled debt as taxable income for the heir?

Thank you for the explanation. This is just another piece that probably has not been explained to the borrower that I feel SHOULD be explained to the borrow. I am all about NO surprises. So again, thank you!

“…helping the senior determine if it's a road worth traveling and will provided the required lifestyle improvement.”

While I appreciate the idealism expressed, this appears to be the function of a trusted financial advisor not that of a loan officer. Too many in our industry fail to define the line which should separate a loan officer from an advisor.

While I agree that originators may spend too much time on unnecessary technical issues, especially newer originators, that is more of the function of a true loan officer than you suggest. Loan officers who take the track you promote risk the conclusion of undue influence. As originators we are not independent nor are we unbiased advisors. If anything counselors come closer to the function you champion than the function that originators should be aspiring to achieve.

As an experienced independent financial advisor I would advise any client to find another loan officer if that statement had been presented in a meeting in which I was an advisor. In fact the first reverse mortgage I looked into was very close to the situation just described and we obtained another loan officer who was more interested in providing information than helping make determinations. This is not to say that the loan officer should stand idly by as the advisor reaches wrong conclusions; that should never happen.

Helping the advisor reach the proper conclusion should be part of what we do; that is exactly what the second originator did with me. On several points, he was right and on others, he did not understand the needs of the client as much as he thought; my client at my advice got the reverse mortgage from the second originator.

Some might say: “Well what if the person has no such advisor and needs that help.” This is the most dangerous situation of all. One should be very wary of being found acting both as originator and advisor. Be one or the other but not both. Even though we may not like it, this is one situation where the counselor should take on a greater role and responsibility.

HUD has absolutely nothing to do with the determination of the taxability of loan proceeds. That is domain of the Internal Revenue Service. HUD should not be saying whether a Form 1099-C should be issued or not unless it is in a joint communiqué with the IRS. There have been times where HUD staff have exceeded HUD authority and opined on this issue; some have since found to their detriment that such advice was errant at best.

Law requires that the HECM note and lien be nonrecourse. As a nonrecourse debt, Internal Revenue Code Regulation Section 1.1001-2(a)(1) is the controlling income tax gain/loss recognization authority on point. Form 1099-C is the form that lenders/servicers must use to comply with the lender reporting requirements of Internal Revenue Code Section 6050P and the related regulations.

Unlike the cancellation of recourse debt where ordinary income recognition and Internal Revenue Code Section 108 come into play, with nonrecourse, the amount of cancelled debt is generally treated as proceeds for the determination of gain or loss. If no transfer transaction is involved then the amount cancelled will usually be treated as if recourse. All of this can be very, very convoluted; that is why taxpayers involved in foreclosure should seek the advice of a competent, knowledgeable, and experience tax advisor.

Can you perhaps attribute this to a particular article or paragraph by chance? I called HUD and couldn't find out anything. Thanks!

However, if the home is worth less than the
RM debt, the IRS (or the Lender?) will send your Estate (Heirs?) a 1099-C,
declaring the difference Income to the Borrower”:

Aside from that and myriad “what-ifs” you could come up with, I think it's a good piece. Let's face it – there is no way to provide all of the information about a reverse, HECM or otherwise, in a short piece. What this does is provide a visual thought process and I find it appealing. Technicians be at ease; all of the required disclosures will still be provided.

Maybe too many good originators are spending too much time trying to impress potential customers with their knowledge of the technical aspects of the loan rather than helping the senior determine if it's a road worth traveling and will provided the required lifestyle improvement.

In case you are not aware of the situation, PenFed Credit Union does not charge borrowers monthly MIP. Admin generally described their HECM product in a RMD article dated August 31st, 2009, where he also linked loan comparison and amortization schedules.

You forced me to reread Chapter 1 of HUD Handbook 4235.1 where it clearly states that the borrower is charged the upfront MIP; however, the same statement is not made about the monthly MIP. PenFed charges all upfront costs except it charges no origination fee and it has no servicing fee set aside. PenFed has no accrued monthly MIP or monthly servicing fees. What is truly amazing is their accrued interest rate is very low.

In talking with one of their loan officers today, she made it clear that PenFed is still not charging or accruing monthly servicing fees (thus no servicing fee set aside), an origination fee, or monthly MIP. PenFed only offers this product to its members with homes in the general Washington, DC area.

So as to the upfront MIP, I stand corrected; all lenders seem to charge the full upfront MIP to borrowers. As to the monthly MIP at least one lender is not charging borrowers anything for it.