Understanding What Can’t Be Reversed in a Reverse Mortgage

By Mike Whiting, Senior Vice President

As baby boomers age – with an increasing number saying they want to age at home – and home appreciation continues to bolster home equity values, experts predict a growing interest in reverse mortgages. According to a new Freddie Mac survey, 66% of baby boomers, who hold the majority of real estate wealth in the U.S., say they expect to age in place.

One of the main goals of a reverse mortgage is to help senior homeowners convert part of their home equity into an income supplement. For more than 30 years, the Home Equity Conversion Mortgage (HECM) has been the primary vehicle in the market. Insured by the FHA, there are currently more than 500,000 HECM loans outstanding. In 2021, lenders produced a record number of HECMs, coming in at $23.8 billion – a 34% increase from 2020 – and 2022 is on track to potentially see higher volume levels.

Customers with reverse mortgages no longer have to make mortgage payments, but the taxes must still be paid, and ensuring there is enough money allocated to pay those taxes, over several decades or more, is key to protect both the customer and the servicer. If taxes or insurance remain unpaid the customer could face foreclosure, which means that with a reverse mortgage, perhaps even more so than with a “forward mortgage,” timely and accurate payment of taxes is critically important.

As with most financial offerings, the difference is in the details, and while reverse mortgages are similar to forward mortgages, there are some key differences – namely with property tax set up and payments – that should be managed by a tax service provider well-versed in best practices and potential pitfalls. LERETA has a specialized 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 both customers and servicers are protected for the long haul. 

 

Setting Up Taxes for Reverse Mortgages

Reverse mortgage loans can be set up as either LESA accounts or non-escrow accounts. A Life Expectancy Set Aside (LESA) account is designed to set aside funds at origination to pay anticipated taxes and homeowners’ insurance over the life of the loan. While LESA accounts at first appear to be similar to escrow accounts, there are important differences that require a more rigorous calculation during set-up.

LESA accounts are designed to cover tax and insurance payments for the expected life of the loan – or the customer’s anticipated life expectancy. For example, if a LESA account is calculated assuming the customer would only need to pay bills until they are 87 and the customer remains in the home until they reach 96 years of age, the LESA account could be permanently impacted or depleted unnecessarily, causing the LESA to run out of money before the end of the loan. This would then, at age 87, put the burden of paying the taxes on the customer.

Unlike a regular escrow account, LESA account reserves cannot be adjusted or replenished after the loan has closed. As a result, internal staff or external tax providers need to get the calculation right the first time.

If you’re currently managing, or plan to manage, a reverse mortgage portfolio, make sure you have the resources in place to effectively and accurately manage the property taxes. LERETA reverse mortgage clients benefit from the same advanced technology, experienced tax experts, real-time tax data and delinquency information, and enhanced customer service as forward mortgage clients.

For aging Americans, many of whom don’t have enough savings, but do have significant home equity, the attractiveness of a reverse mortgage to supplement retirement income will continue to grow. And as it does, more and more mortgage companies will consider offering reverse mortgages and, as a result, must determine how best to service them. The ability to rely on an experienced specialty tax servicer like LERETA will allow mortgage companies the freedom to aggressively grow their reverse mortgage business, giving more older Americans access to their much-needed equity.     

To learn more about tax services for reverse mortgages, contact Mike directly at mwhiting@lereta.com.