Academic journal article Cityscape

HECM and Property Tax Relief for Seniors

Academic journal article Cityscape

HECM and Property Tax Relief for Seniors

Article excerpt


According to the 2014 actuarial review, an estimated 12 percent of active Home Equity Conversion Mortgage (HECM) loans were in technical default for the nonpayment of taxes and insurance (Integrated Financial Engineering, 2014). By contrast, CoreLogic, Inc., estimates the national tax delinquency rate to be 2.6 percent among properties with mortgages (Cannon, 2015). Recent research found the property tax amount and tax burden (property taxes/income) to be highly predictive of severe property tax and insurance default among HECM participants (Moulton, Haurin, and Shi, 2015).

The most common reasons that taxpayers cited for property tax delinquency were declining property value1 or lack of money (Alm et al., 2016, 2014; Conrad and DeBoer, 1988; Lake and Fitzgerald, 1979). Because HECM borrowers extract equity up front, declining property values should not affect the decision to become delinquent. Instead, HECM borrowers may be unable to pay their tax bill on time due to liquidity constraints. Liquidity-constrained taxpayers generally would like to pay the delinquent balance at a later date. These taxpayers are, in effect, borrowing from the local government if the interest charged by the local government on delinquent tax bills is lower than the taxpayers' personal borrowing costs.2

Given the relatively high rate of property tax delinquency for HECM properties relative to properties with a mortgage, an important question to examine is whether HECM borrowers participate in property tax relief programs at the same rate as otherwise similar properties. These programs may be particularly important among HECM borrowers for several reasons. Under the HECM program, senior citizens extract the equity from their homes while maintaining ownership. The Federal Housing Administration (FHA) has an age requirement of 62 years of age or older to be eligible for a HECM loan. Eligible borrowers also must own the home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan. Two important requirements for HECM participation directly affect property tax bills and property tax delinquency To be more specific, the homeowner must continue making payments on property taxes, and she or he must live in the home. The occupancy and age requirements qualify HECM participants for many property tax relief programs offered by local governments, which can significantly reduce tax liabilities and the likelihood of tax default.

One concern is that some HECM participants who take reverse mortgages at age 62 never apply for property tax exemptions that they later qualify for at age 65. Under FHA rules, homeowners must receive counseling to learn about the program before they obtain a loan. An important step in the counseling process is that HECM participants understand they must continue making payments on property taxes. It is not clear, however, to what extent any followup occurs with borrowers to validate that all tax relief programs are applied to their tax bill.

Another concern is that, even when HECM participants become delinquent, state and local governments provide an array of programs to senior citizens that reduce the cost of property tax delinquency and keep seniors in their homes. Unless these programs are used, however, a foreclosed property with a tax lien can be very costly to taxpayers who cover the losses when the sale proceeds of a HECM property are less than the loan balance issued by lenders.

In this article, we examine property tax relief programs for the 50 U.S. states and summarize programs that are particularly targeted toward seniors. We find that such programs provide significant tax breaks for many elderly homeowners. One plausible approach to reducing the likelihood of tax default is to ensure that HECM homeowners are counseled on all tax relief programs, with annual reviews validating that they are receiving these benefits.

Summary of Property Tax Relief Programs

Property taxes represent the largest source of own revenue for local governments. …

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