Written by Laurie MacNaughton, as originally published in The Reverse Review.

The call seemed like an outlier: The elder law attorney said her widowed, wheelchair-bound client had lost her home due to foreclosure of a HECM after the homeowner failed to pay property taxes. Weird thing was, the homeowner had a full property tax waiver.

A conference call with the homeowner, the attorney, the servicer and me proved worthless, as the servicer could only report there were not enough funds in the homeowner’s HECM line of credit to pay back taxes. The fact that there was a full tax waiver seemed lost on the servicer.

But then came three more calls regarding a foreclosure, all within a couple of weeks. All borrowers involved had had property tax waivers.

I called the county treasurer’s office: Had anything in the tax code changed regarding property tax waivers for senior homeowners?

Bingo.

A few months earlier tax waivers for the elderly had been changed to tax deferrals—and that’s a big deal.

Here’s why: The Code of Federal Regulations (CFR) reference addressing tax deferrals reads:

The mortgagor shall not participate in a real estate tax deferral program or permit any liens to be recorded against the property, unless such liens are subordinate to the insured mortgage and any second mortgage held by the Secretary (24 C.F.R. PART 206, § 206.27 (B)(3)) [Emphasis added].

Tax deferrals are also addressed in the HUD Handbook:

The mortgagor is prohibited from participating in any real estate tax deferral program unless the lien created by this program is subordinate to the insured mortgage held by the mortgagee (HUD Handbook, 4330.1, chapter 13, section 12) [Emphasis added]. 

Quick refresher on the difference between senior citizen tax waivers and tax deferrals: A tax waiver basically absolves homeowners of their property tax burden. Many counties have a graduated scale whereby age-eligible, income-qualified homeowners receive either a reduction in taxes or a full tax waiver. In effect, the county permanently forgoes this revenue.

A tax deferral, on the other hand, absolves homeowners of their property tax burden during the time they reside in the home. However, when the last homeowner vacates the property, the full amount of the back taxes is due—and in some states, due with interest.

Due to federal guidelines on deferrals, if a HECM holder’s tax waiver is turned into a deferral, the homeowner is subject to a clawback of the full amount of back taxes. If they cannot come up with the clawback and their property taxes report late, their HECM is in default.

A real-life example is in order here. I live in an area where property taxes can be staggering. At a recent public hearing, an elderly reverse mortgage holder told me she must pay her back-tax liability due to a deferral issue. She has had a HECM for nine years, and her property taxes are $8,400 per year, which comes to a $75,600 payback. Furthermore, she has to pay future property taxes out of pocket. She simply does not have the money.

It’s easy to jump to conclusions here. Why did this homeowner buy such a pricey home? But here’s the deal: She did not buy more home than she can pay for. She bought her home in 1966 for $27,000. Now that same home carries a price tag of some $900,000. She’s done nothing wrong. It’s simply longevity that placed her taxes out of reach. She was successfully aging in place until the waiver issue popped up. Now her only option is to sell and relocate—or face losing her home.

Virginia elder law attorney Veronica E. Williams cites an example of her own:

“My client, a participant in a senior homeowner tax relief program, has a reverse mortgage. Per county requirement, my client filed his annual application for tax relief and it was accepted.

My client’s reverse mortgage servicer became aware of the fact he now has tax deferral status due to a municipal change from tax waivers to tax deferrals. As a result, the servicer advised that the homeowner had to withdraw his application for tax relief. When my client withdrew the application, all deferred taxes became due and payable. The reverse mortgage servicer then notified him he had to pay all back real estate taxes.”

The story gets worse. Williams continues:

“My client advised the servicer he was unable to pay the taxes all at once because he was on a fixed income. The servicer offered to put the homeowner on an affordable installment plan, and he agreed to the terms of the plan. However, the servicer also advised that HUD would have to approve the payment plan.

Regrettably, HUD did not approve the payment plan. This lack of approval was not based upon any fault on the part of my client, but instead was based upon the fact my client's reverse mortgage didn’t contain funds enough to pay the back taxes. 

The reverse mortgage servicer paid my client’s real estate taxes and then sent notice he would be subject to foreclosure and eviction if he did not reimburse them for paying back real estate taxes.”

Again, this homeowner did nothing wrong. The rules changed and he would have lost his home had he not died earlier this month.

And here’s the thing: It’s the reverse mortgage that stands to get the blame for this tragic situation. Few people outside the reverse mortgage industry know to look beyond the HECM to see the underlying issues. It creates fodder for yet another sensationalistic “HECMs are the devil” story.

From a county or municipality viewpoint, the tax issues are understandable. County boards concede the point that payment of property taxes can be a crushing burden in the retirement years. However, many counties are facing declining revenues, have yet to recover financially from the recession and are cash-starved. For this reason, they feel they cannot forfeit taxes outright, and instead recover back taxes after the property has been vacated by the senior homeowner.

But here the math becomes complex. If seniors who were successfully aging in place and on track to being self-sufficient through the end of life suddenly lose their homes, solutions can potentially carry a price tag that far exceeds the tax revenue the county recovered. For instance, is there affordable housing sufficient to accommodate the newly displaced senior? And does the county want to foot the bill for homeowners who cannot qualify for reverse mortgages in the future due to property tax deferral policies?

One additional twist here bears mentioning: If the senior homeowner had Medicaid home-based care (also called an EDCD Waiver), and now has no home in which to receive care, are there enough Medicaid-approved nursing home beds to house these Medicaid recipients?

Medicaid is a cooperative between states and the federal government. If counties inadvertently cause a Medicaid crisis, they don’t foot the bill; rather, the burden falls to the state and federal governments.

No county would dare say, “We are a senior-unfriendly community, and our goal is to disenfranchise the neediest of our older homeowners.” And yet, this can be precisely one unintended consequence if counties move forward with tax deferrals in a manner that does not take HECM guidelines into account.

There are examples of states successfully addressing the waiver/deferral issue. NRMLA Executive Vice President Steve Irwin says California, Oregon, Massachusetts and New Hampshire record tax liens subordinate to HECMs, thus fulfilling both the CFR and HUD Handbook requirements. According to Irwin, Oregon is taking this a step further, namely, it is working on legislation that accommodates the tax subordination mandate.

The takeaway for those of us in the reverse mortgage industry is the following: Be informed, be aware and be ready to act in the event that talk of property tax deferrals begins to surface in your counties of influence. As author Eckhart Tolle says, “Awareness is the greatest agent for change.”

‘Tis indeed, my friend, ‘tis indeed.