Oregon reverse mortgage borrowers made headlines recently when they were suddenly cut from a tax deferral program many had been enrolled in for several years or more.
Previously, reverse mortgage borrowers in Oregon were eligible for the state’s senior property tax deferral program—a program that allows people over the age of 65 to defer their property taxes over time while accumulating interest on the deferred tax that is payable upon the senior’s departure from the home.
But due to recent changes implemented by the state legislature, reverse mortgage borrowers, including those who were currently enrolled in the program, lost eligibility due to the fact that they were liquidating their home equity over time.
“The deferral program recovers its funds from the sale of properties leaving the program,” the state government wrote of the program changes. “If there is no equity left in a home, there may be no way to pay back the deferred taxes. This leaves the program with fewer funds to help other seniors in need.”
For that reason, Oregon banned reverse mortgage borrowers from deferring taxes. For more than 1,700 borrowers who had been enrolled in the state’s program, suddenly their fate will depend on pleas that the legislature will reverse its change and reinstate the borrowers—still to be decided.
Here’s the problem: a reverse mortgage requires the first lien on a property—in other words, there can be no outstanding liens in place to take precedence over the reverse mortgage. But property tax deferral programs typically require first claim to sale of the property in order to pay the taxes back when the senior leaves the home.
California, which previously offered a tax deferral option to seniors statewide cut its program in February 2009. (A recent bill passed in California will begin allowing counties to form their own tax deferral programs beginning on January 1, 2012.) But the lion’s share of tax deferral programs do not allow for reverse mortgage borrower eligibility.
In one rare case, Massachusetts, reverse mortgage borrowers can defer their taxes and simultaneously hold a reverse mortgage, with lender approval. When the home is sold or the borrower passes away, the deferred tax and reverse mortgage, plus interest are due. In a thriving economy, the state has a good chance of recouping its investment on both the deferred tax (plus interest) and on the reverse mortgage, which is insured by the Federal Housing Administration, protecting lenders and borrowers from losses, should property values decrease.
However, the state does not recommend obtaining a reverse mortgage and enrolling in a tax deferral program concurrently.
“Generally, seniors are encouraged to consider a tax deferral in lieu of a reverse mortgage, not in addition to,” a Massachusetts Division of Banks spokesman says.
Many states do continue to offer tax deferral programs for seniors who fall below a certain income threshold, or who are disabled. It’s best to check state-by-state to obtain the specific requirements.
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