Amid Rising Taxes, Illinois Looks to Curb Reverse Mortgage Defaults

Using funds from a federal program that dates back more than half a decade, Illinois housing counseling agencies are beginning to help reverse mortgage borrowers pay property taxes, insurance fees, and maintenance costs — and avoid potential defaults in a state with climbing tax burdens.

As RMD reported last week, the Illinois Housing Development Authority is currently tapping money from the Hardest Hit Fund, a $7.6 billion Treasury Department initiative launched in 2010 to aid those affected by the housing downturn and subsequent recession, to keep seniors with Home Equity Conversion Mortgages in their homes as long as possible.

Illinois residents face taxing dilemmas 

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It’s a problem that’s particularly pressing in the Land of Lincoln, according to IHDA Hardest Hit Fund program director Peter Sellke. Faced with major pension-funding shortfalls for public employees such as teachers and police officers, the city of Chicago has increasingly turned to property tax hikes: As the Chicago Tribune reported at the end of last year, the owner of a $250,000 home in the city would see a $348 hike in property taxes in 2017, along with an additional $32 per year in increased water and sewer charges.

Those figures could mean the difference between a senior staying in his or her home, or facing a potentially difficult situation. Because the continued payment of property taxes and insurance premiums — as well as general upkeep and homeowners’ association fees, if applicable—are prerequisites for maintaining a reverse mortgage loan, small spikes in any of these costs could mean foreclosure.

“When you combine high taxes with home repairs and HOA fees, that can mean the home is unaffordable for the homeowner,” Sellke says.

Relief for those with “qualifying hardships”

The IHDA works with seven local housing counseling agencies throughout the state to disburse the funds, with seniors behind on their payments required to prove one of four “qualifying hardships.” Homeowners who have completely tapped their HECM lines of credit or received their last term payment qualify for access to the funds, along with those who have had to pay for home repairs in excess of $1,000 in a single year. Unexpected medical expenses of more than $1,000 in a year also count as a “qualifying hardship,” as well as a 15% reduction in income for any reason, such as the loss of a job or death of a spouse.

Once a homeowner qualifies, the IHDA will put up to $35,000 toward delinquent property taxes, insurance payments, or HOA fees. Should those costs not add up to the full $35,000, Sellke says the IHDA will work to establish a tax set-aside with the homeowner’s loan servicer to cover payments for up to the following two years, allowing the senior to avoid falling behind once again.

James Rudyk, the executive director of the Northwest Side Housing Center in Chicago, says his organization frequently works with clients in danger of delinquency, including both HECM borrowers and homeowners with forward mortgages.

“We find a lot of our clients are living paycheck to paycheck, have lost their savings, and are really one financial issue away from foreclosure,” Rudyk says.

Sellke says the program has enough funding for as many applicants as the IHDA can handle, with a goal of providing more than $10 million to 500 total homeowners. Since the initiative was announced at the beginning of this month, Rudyk says his organization has been booking two appointments about the program per week, and he anticipates further interest once more reverse-mortgage borrowers learn about the available funds.

What the industry can do 

When asked what the industry could do to help prevent tax-and-insurance defaults and other reverse mortgage issues, Sellke said that HECM lenders and brokers should make sure that they explain all of the options available to seniors, including home equity lines of credit or cash-out refinance loans — and to emphasize that term options have an expiration date.

“It seems obvious, but I don’t think people are prepared, after a 10-year term, to not have that source of income,” Sellke says.

Rudyk, meanwhile, emphasized the importance of good counsel for potential borrowers during the investigation and application process.

“Our role is to help play a third party that can help advocate for them and make sure they’re getting the best option for them,” he says.

Written by Alex Spanko