Mike Whiting: For reverse mortgages, timely and accurate payment of property taxes is critically important
PERSON OF THE WEEK: Reverse mortgages are expected to increase in the coming years, which means mortgage managers and the sub-departments that manage these products are likely to see more of them in their reverse portfolios.
One of the various pitfalls that reverse mortgages can sometimes present to mortgage managers is not tracking property taxes in a timely and accurate manner. And as Mike Whiting, senior vice president of tax services firm LERETA, tells MortgageOrbtimely and accurate payment of property taxes is even more important with reverse mortgages than with term products.
Q: The industry anticipates an increase in reverse mortgages. What should lenders/servicers focus on as they prepare to respond to growing interest?
Whiting: It is true that reverse mortgages will increase, some say significantly, as people age and want to take advantage of the equity they have acquired to supplement their retirement income without having to move. According to a new survey by Freddie Mac, 66% of baby boomers, who hold the majority of the housing wealth in the United States, say they expect to age in place.
There are key differences between reverse mortgages and traditional “term mortgages” – particularly with the set-up and property tax payments – that need very specific attention to pay attention to. Customers with reverse mortgages no longer have to make mortgage payments, but taxes still need to be paid, and ensure there is enough money allocated to pay those taxes, over several decades or more, is essential to protect both the customer and the repairer. Depending on how they are set up, reverse mortgages can be less flexible, so if taxes or insurance are not paid, the customer could face foreclosure.
With a reverse mortgage, perhaps even more so than with a term mortgage, the timely and accurate payment of taxes is of crucial importance. For those currently managing or considering managing a reverse mortgage portfolio, they need to ensure they have the resources to manage property taxes efficiently and accurately. There are only a handful of reverse mortgage managers and sub-services, so my advice is to work with a tax services provider that really understands the nuances involved.
Q: What are the options for opening a reverse mortgage account to ensure the funds don’t run out over the life of the loan?
Whiting: From a tax perspective, reverse mortgages can be set up in two ways: as a non-escrow account or as a LESA account. A set aside life expectancy account (LESA) is designed to allocate funds originally to pay estimated taxes and home insurance for the term of the loan. Although LESA may seem similar to escrow accounts, there are important differences that require more careful calculation when setting up.
LESA accounts are designed to cover tax and insurance payments over the expected life of the loan – or the expected life expectancy of the client. For example, if a LESA account is calculated assuming that the customer would only need to pay their bills until age 87 and that the customer stays in the house until age 96, the LESA account could be permanently affected or depleted, resulting in a cash out before the end of the loan. This would then amount, at age 87, to placing the burden of paying taxes on the customer.
Q: Can a loan be changed from a non-escrow account to a LESA account after it is set up? Likewise, if it appears that funds are running out in a LESA account, can they be adjusted?
Whiting: Once a loan is set up as a non-escrow account or LESA account, it cannot be edited. This is the irreversible part of reverse mortgages. Also, unlike a regular escrow account, the reserves in the LESA account cannot be adjusted or replenished after the loan is closed. Once the amounts are fixed, there is no possibility of increasing them to cover higher tax and insurance payments, or longer life expectancies. Therefore, internal staff or external tax providers must ensure that the calculation is correct from the outset, otherwise there will be major headaches for both the repairer and the owner.
As with most financial deals, the difference is in the details, and the tax set up for reverse mortgages is no exception. Ideally, it should be handled by a tax service provider familiar with best practices and potential pitfalls. Our company has a specialist reverse mortgage tax group that understands the nuances of reverse mortgages and how to set up and manage tax payments to reduce the risk of default, so clients and managers are protected long-term.