Oregon’s New Reverse Mortgage Tax Deferral Law May Slow Originations

A new law signed by Oregon’s governor in July has the potential to create a conflict with the Department of Housing and Urban Development (HUD) over a home’s property taxes and slow originations statewide according to one local loan officer, while representatives of Oregon’s state government contend that this isn’t necessarily the case.

Late last month, Oregon Governor Kate Brown signed bill H.B. 2587 into law which allows an individual whose residence is in the state’s tax deferral program to adopt a reverse mortgage that has at least 40 percent equity interest in their home at the time of filing his or her claim. The deferral program allows certain disabled people or senior citizens that meet certain qualifications to borrow money from the state at a 6 percent interest rate to pay their local property taxes.

That money can then be repaid either when the property is sold, or can be recuperated from the estate of the borrower, should he or she pass away. While intent on opening up more options for Oregon seniors, one experienced Oregon loan officer told RMD that he believes it could have the opposite effect on originations.

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A potentially untouchable new borrower pool

“Current reverse mortgage lending practices require any tax deferral to be brought current before a loan will be made,” says Curtis Lawrence, senior lending specialist with Landmark Professional Mortgage Company in Portland, Oregon. “Also, due to current financial assessment requirements, some borrowers will be required to set up a Life Expectancy Set Aside (LESA) for future payment of property taxes.”

This means that in spite of the law’s aim to open up more tax deferral program participants to the reverse mortgage market, those specific people may still have limited options, Lawrence says.

“For these and other considerations it is my view that few, if any new reverse mortgage loans will be made to homeowners in the tax deferral program, despite the new Oregon legislation,” Lawrence tells RMD.

One of the core issues in play is that there is renewed potential for greater scrutiny from HUD and the Federal Housing Administration (FHA), particularly if a state tax deferral program poses any danger whatsoever to the health of the Mutual Mortgage Insurance (MMI) Fund.

“HUD will certainly be looking to establish priority on any home that it acquires,” says Lawrence. “In cases where the reverse mortgage was made before any state tax deferral was allowed, [that] should be the responsibility of the state department of revenue. HUD will always be aggressively trying to protect the Mutual Mortgage Insurance Fund, which includes property tax deferral issues.”

This ultimately means that the federal agencies will provide little, if any latitude toward borrowers that are in the state’s tax deferral program, Lawrence says.

“Reverse mortgage borrowers are required to acknowledge that they are responsible to keep homeowners’ insurance paid current, property taxes paid current, and to keep the property satisfactorily maintained,” Lawrence says. “Based on the current government situation I don’t see any leeway from the HUD/FHA front.”

Representatives from HUD did not respond to a request for comment.

A matter of due-diligence

Any potential conflict that could arise between the state of Oregon and the federal government over this new law and the addition of reverse mortgage borrowers who are in the state tax deferral program would depend on the order in which different liens are placed on the property. This is according to a spokesperson from the Oregon Department of Revenue, referred to RMD by the state government’s public information office.

“I wouldn’t characterize it as a conflict, but if the FHA/HUD lien had been placed against a property that was already encumbered by a recorded deferral lien, the deferral lien would have priority over the FHA/HUD lien,” the spokesperson says. “In such case, FHA/HUD could still foreclose their lien if needed, but the Department of Revenue (DOR) lien would survive. It works the same as if another lender had a prior mortgage that was not paid off when a second mortgage was recorded.”

At the end of the day, a conflict between FHA/HUD and the state government can be avoided if the agencies made sure the property was free of prior liens before the endorsement of the relevant reverse mortgages, says the spokesperson.

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  • The state will also need to get into the title insurance business. Can’t see an insurer writing a policy with a deferred tax lien on the property.

    I suppose Oregon could set up a loan loss reserve fund like California did to offset lender losses from the PACE/HERO program. Kind of a Master LESA…

  • ML2017-05 updated the rules for loan eligibility for MOE assignment to HUD. It includes these restrictions for tax deferrals:
     Any tax deferral program in which a HECM borrower may have
    participated:
     does not adversely affect the lien priority during the life of the HECM or
    at the time of any future foreclosure action, and
     does not result in a requirement that HUD pay the HECM borrower’s
    deferred taxes upon his or her death, or any other maturity event.

    The Oregon DOR spokesperson states that a new HECM would be subordinate to an existing tax deferral lien — but such a HECM would never be endorsed since HUD requires first lien priority.

    If Oregon, like Massachusetts, allows their tax deferral (whether pre-existing or subsequent) to be subordinated to a HECM, then the question becomes: would a foreclosure extinguish the Oregon tax lien (if not, then HUD would have to pay the deferred taxes in order to obtain clear title — and this is prohibited above). Massachusetts foreclosures do not extinguish tax liens.

    What lender would originate a non-assignable loan with an Oregon tax deferral, unless it perhaps judged that there was sufficient equity in the property to mitigate the risk of holding that loan to maturity?

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