Taxes & Insurance Issues Continue for Reverse Mortgages

Underscoring the confusion that continues to surround tax and insurance issue with reverse mortgages is the recent case of a Michigan couple who found themselves in default due to unpaid property taxes and no property insurance in place.

Despite later obtaining insurance, the couple’s default had produced a demand from the lender, Financial Freedom, for repayment of the loan balance, amounting to $30,000. Though the lender offered to take monthly installments of $2,800, that sum was beyond the couple’s means.

After a third-party intervened, Financial Freedom reduced the monthly repayment to $750 for property taxes owed, with the proviso that the homeowners stay current on future taxes owed and agree to maintain property insurance.

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A company spokesman said there is “no real data on [the frequency] of these situations,” adding that such arrears scenarios automatically trigger default notifications and “then there are discussions to figure out something that will work out for the borrower.” Further complicating matters, he noted, is that “tax collectors are a big player in this. They have to be asked for some relief [as well].” Financial Freedom, he reported, currently is working on new reverse mortgage educational pieces with a section that talks about tax defaults and best practices – an apparent effort to reduce and/or head off similar occurrences in the future.

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade, currently specializing in the reverse mortgage sector. He can be reached at nmorse@morsecommunications.com

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  • OK, I give up. Why is this so different than defaults for real estate taxes by seniors with 30 year fixed rate fully amortized loans? This issue drove the MBA task force so crazy that their state model bill RECOMMENDS having three year set asides for taxes and insurance. Why?

  • The “taxes and insurance” issue is a bit bewildering to me. All the homeowners I've assisted with getting their Reverses understood they were responsible for keeping those paid, and nobody had a problem with it.

    But I have this story too … about 3 years ago I received a HECM-HECM refinance request and visited with the homeowner to talk about his objectives. He was in his 90's, brought in $900.00 in Social Security per month, and was out of money and couldn't afford the basics anymore. He didn't have his current MortgageStatement, so I called his Lender, Financial Freedom, so he could request his payoff amount. I learned two things in that conversation. 1. His loan was frozen, because somebody else already requested a payoff, and 2. He was 5 years behind on his property taxes, and Financial Freedom had been paying them for him.

    He didn't know why his loan was frozen, because I was the only one hes contacted regarding a refinance. So it was investigated and we found out it was a previous neighbor of his who was a Realtor, and she took him out for lunch and bought him a bunch of margarita's, and got him to sign some papers. The interesting thing is he couldn't read, so he didn't know what he was signing, and it was after the alcohol. So his neighbor was in the process of committing fraud and trying to steal his home from him, and was caught.

    The Financial Freedom representative talked with him for a while about that, and also his tax situation. He told them, and me later, that not only did he not understand he wasn't responsible for paying his property taxes, but he also didn't know that Financial Freedom had been paying them for him.

    He didn't have enough equity for the refinance – in fact his equity was almost gone. I spent a while with him, explaining what was going on and why I wasn't able to do his refinance, and it was heart breaking. He took me into his house and showed me the two Purple Hearts he received when he was in World War I, and said “I've been offered $1,000.00 apiece for those, so now I guess I'm going to have to sell them”.

    I thought to myself “Thank God Financial Freedom is taking care of his property taxes – because he wouldn't be able to make it by himself otherwise”

  • I had a similar situation where Financial Freedom was paying the delinquent tax bills for the client and adding the amount to the principle balance. They sent no notification to the home owner, other than the monthly statement to address these payments and the it went unnoticed for three years. It only came to light when she wanted to refi. My issue was, because of no notice, the homeowner didn't know there was a problem. In her city seniors with limited income can qualify for tax exempt status, which she had with her forward mtg., but because FF was “paying” her tax bill she was getting a tax statement from the city showing her taxes were zero leading her to beleive she still had her tax free status. Once we got the payoff she owed over $10,000+ extra for taxes & interest that could have been avoided with a simple phone call to the client or her nearest relative. Also, the disclosures say the senior is responsibile to keep these items paid….WHY does the lender think they can just pay for them and add the payments to the principle amount!

  • If
    these were forward mortgages it would be no big deal. Every time legislators
    get involved and associations we get these odd ball ideas like pay 3 year taxes in advance. This kind of do good thinking just makes it rougher for the seniors. I tell every senior I deal with you must pay the taxes and insurance every year no exceptions. I haven't had any trouble with them. They understand. My advice is just let it be people have to be responsible for their actions.

  • @jerrytomlin
    Here's some insight:
    – The borrower should have been notified of the delinquency by both the lender and the taxing jurisdiction. You are right that the statements would show a $0 balance owing but the servicer should be in contact with the borrower monthly.
    – If the lender does not pay the taxes, there is more to lose. Taxing authority goes to sale and the next thing you know, the lender is out the entire loan balance and the borrower is evicted. By paying the taxes, the borrower is put on a repayment plan with the hopes of making the lender whole and still has a place to live. Now whether the borrower can make the payments and also pay the following year's taxes is a big question.

  • In the life insurance business, there is a often check off box that gives the recipient of monies the option of having federal income taxes deducted from the amount they receive. It is voluntary, but many people use it especially if they don't have W-2 income. I would think this might be a good option to pay for property taxes and real estate taxes (if it isn't already being offered).

  • A notice if large font and bright red letters on each monthly reverse mortgage statement from the lender to the effect, “REMEMBER – YOU ARE RESPONSIBLE FOR PAYING YOUR PROPERTY TAX AND INSURANCE!” would, in my opinion, go further toward addressing this problem than anything I've heard to date.

  • We were told at the NRMLA Annual Conference two years ago that no reverse mortgage lender could put a reverse mortgage into a foreclosure status or a due-on-demand notice for unpaid property taxes or homeowners insurance without HUD approval. We were also told at the same time that HUD had never allowed such a lender action.

    Does this article contradict that policy or has HUD started approving such requests?

  • Ifrn these were forward mortgages it would be no big deal. Every time legislatorsrnget involved and associations we get these odd ball ideas like pay 3 year taxes in advance. This kind of do good thinking just makes it rougher for the seniors. I tell every senior I deal with you must pay the taxes and insurance every year no exceptions. I haven’t had any trouble with them. They understand. My advice is just let it be people have to be responsible for their actions.

  • @jerrytomlinrnHere’s some insight:rn- The borrower should have been notified of the delinquency by both the lender and the taxing jurisdiction. You are right that the statements would show a $0 balance owing but the servicer should be in contact with the borrower monthly.rn- If the lender does not pay the taxes, there is more to lose. Taxing authority goes to sale and the next thing you know, the lender is out the entire loan balance and the borrower is evicted. By paying the taxes, the borrower is put on a repayment plan with the hopes of making the lender whole and still has a place to live. Now whether the borrower can make the payments and also pay the following year’s taxes is a big question.

  • The stories and experiences are interesting and help explain some of the concern. However, property tax laws differ between the states and even sometimes between taxing jurisdictions within states.

    But fundamentally none of the above answers the question as to why this is such a big issue that some call it a dirty little secret and the MBA recommends that all laws on reverse mortgages require lenders to set up a three year set aside for taxes and insurance for all new reverse mortgages and only reverse mortgages.

    It was hoped that some of those who were on the MBA task force committee, members of the NRMLA Servicing Committee or the staff at the MBA or NRMLA would have responded. It seems this problem is so sensitive that no one feels they can answer this question.

  • In the life insurance business, there is a often check off box that gives the recipient of monies the option of having federal income taxes deducted from the amount they receive. It is voluntary, but many people use it especially if they don’t have W-2 income. I would think this might be a good option to pay for property taxes and real estate taxes (if it isn’t already being offered).

  • It does seem odd that there have not been any authoritative responses to the basic question The Cynic brings.

    Last week in testimony before Congress, Mr. David G. Kittle, CMB, Chairman of the Mortgage Bankers Association used the word “sensitive” to describe this issue. Yet he never described why this is so peculiarly sensitive when it comes to reverse mortgages. Maybe the sensitivity of this issue in regard to reverse mortgages is obvious to some. It certainly is not to many of us.

    Here is what Mr. Kittle stated: “In an effort to be proactive in this area, MBA convened an executive level task force last year that created a reverse mortgage model bill for states. This model bill would protect both consumers and lenders…. We also tackle the sensitive issue of borrowers not paying their taxes and insurance by recommending a mandatory three-year escrow account for all reverse borrowers. This would ensure that no borrower would have his/her home foreclosed on for three years due to unpaid taxes or insurance.” This testimony was given on October 8, 2009 before the House Financial Services Subcommittee on Housing and Community Hearing on ‘The Future of the Federal Housing Administration’s Capital Reserves: Assumptions Predictions and Implications for Homebuyers.”

    You can read the testimony in full at the following link. His specific statements on HECMs begin in the middle of Page 9.

    http://www.mbaa.org/files/News/InternalResource

    After reading the specific testimony of Mr. Kittle, I hope some will be emboldened to address the “sensivity” of this issue.

  • A notice if large font and bright red letters on each monthly reverse mortgage statement from the lender to the effect, “REMEMBER – YOU ARE RESPONSIBLE FOR PAYING YOUR PROPERTY TAX AND INSURANCE!” would, in my opinion, go further toward addressing this problem than anything I’ve heard to date.

  • We were told at the NRMLA Annual Conference two years ago that no reverse mortgage lender could put a reverse mortgage into a foreclosure status or a due-on-demand notice for unpaid property taxes or homeowners insurance without HUD approval. We were also told at the same time that HUD had never allowed such a lender action.rnrnDoes this article contradict that policy or has HUD started approving such requests?rnrnrnrn

  • If they begin to require a three year tax and insurance escrow, what happens to those with mortgage balances? Let's say my customer's net principal limit (after servicing and fees) is $150K, and the mortgage payoff is $150K, does this customer no longer qualify without bringing cash to closing? That would be disasterous for a product that has recently had it's principal limits slashed.

    • Mr. Neumeyer,

      That is my understanding. If the indicated set aside is $7,000 using your example, the principal limit would only be $143,000 leaving your customer $7,000 short.

      The model bill creates this requirement even if the borrower can demonstrate the financial ability to easily meet the annual cash requirements.

  • The stories and experiences are interesting and help explain some of the concern. However, property tax laws differ between the states and even sometimes between taxing jurisdictions within states. rnrnBut fundamentally none of the above answers the question as to why this is such a big issue that some call it a dirty little secret and the MBA recommends that all laws on reverse mortgages require lenders to set up a three year set aside for taxes and insurance for all new reverse mortgages and only reverse mortgages. rnrnIt was hoped that some of those who were on the MBA task force committee, members of the NRMLA Servicing Committee or the staff at the MBA or NRMLA would have responded. It seems this problem is so sensitive that no one feels they can answer this question.

  • It does seem odd that there have not been any authoritative responses to the basic question The_Cynic brings. rnrnLast week in testimony before Congress, Mr. David G. Kittle, CMB, Chairman of the Mortgage Bankers Association used the word u201csensitiveu201d to describe this issue. Yet he never described why this is so peculiarly sensitive when it comes to reverse mortgages. Maybe the sensitivity of this issue in regard to reverse mortgages is obvious to some. It certainly is not to many of us. rnrnHere is what Mr. Kittle stated: u201cIn an effort to be proactive in this area, MBA convened an executive level task force last year that created a reverse mortgage model bill for states. This model bill would protect both consumers and lendersu2026. We also tackle the sensitive issue of borrowers not paying their taxes and insurance by recommending a mandatory three-year escrow account for all reverse borrowers. This would ensure that no borrower would have his/her home foreclosed on for three years due to unpaid taxes or insurance.u201d This testimony was given on October 8, 2009 before the House Financial Services Subcommittee on Housing and Community Hearing on u2018The Future of the Federal Housing Administrationu2019s Capital Reserves: Assumptions Predictions and Implications for Homebuyers.u201d rnrnYou can read the testimony in full at the following link. His specific statements on HECMs begin in the middle of Page 9.rnrnhttp://www.mbaa.org/files/News/InternalResource/70592_FullTestimony.PDFrnrnAfter reading the specific testimony of Mr. Kittle, I hope some will be emboldened to address the “sensitivity” of this issue.

  • If they begin to require a three year tax and insurance escrow, what happens to those with mortgage balances? Let’s say my customer’s net principal limit (after servicing and fees) is $150K, and the mortgage payoff is $150K, does this customer no longer qualify without bringing cash to closing? That would be disasterous for a product that has recently had it’s principal limits slashed.

  • Mr. Neumeyer,rnrnThat is my understanding. If the indicated set aside is $7,000 using your example, the principal limit would only be $143,000 leaving your customer $7,000 short.rnrnThe model bill creates this requirement even if the borrower can demonstrate the financial ability to easily meet the annual cash requirements. rnrnrn

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