Tax and Insurance Obligations and How to Handle Them

Tax and Insurance questions were one of the most interesting issues raised at the MBA Reverse Mortgage Conference in San Diego earlier this month. As the reverse mortgage product evolved, they are also two questions that are likely to be closely attended to.

A report by the Government Accountability Office (GAO) cited the phrase “Never lose your home” as a problem in reverse mortgage advertising because if a borrower does not pay the tax and insurance obligations on the home, the borrower can be foreclosed upon. Right now 2% of all reverse mortgages go into default due to so-called T&I issues. However when these issues were discussed at the MBA conference, it appeared that there were things that borrowers could easily do to avoid these potential problems. Many just did not know they could do so.

One is to set up a tax and insurance set-aside account. Doing so would take some of the reverse mortgage proceeds and set them aside to pay taxes and insurance on the home. This would assure that the borrower always has the money to pay for taxes and insurance and that they are paid automatically. It is one easy way for a borrower to handle the tax and insurance obligation. However, many borrowers currently do not take advantage of this option.

Another is that there are many tax exemptions for seniors. However, many seniors do not realize they are eligible. Seniors should inquire with their states and municipalities about property tax exemptions that they may be eligible for. While there is often a lot of red-tape surrounding these exemptions, they can save seniors significant amounts of money.

Tax and insurance obligations do not need to be reasons for a reverse mortgage to default. If borrowers are responsible and plan in advance, they can alleviate the obligations before they ever become a problem.

Caring for an Elderly Parent

A column in The New York Times today revealed that nearly 30% of adult children contribute to their parent’s care, on average spending $2,400/year. The expenses can cover everything from unpaid medical expenses to daily chores like stocking a refrigerator. The time and expense of caring for an aging parent can be a large stress on adult children– financial and emotionally. However, as the article notes, there are many sources that can help reduce the burden.

For some seniors who continue to live in their homes, a reverse mortgage can serve as a possible solution, providing another source of income to help pay for medical bills, adult day care, and the like. Another important point raised in The New York Times column is that there are a number of other resources available to assist seniors and their families, which are often inadvertantly overlooked. The column talks about the services that can be provided by a geriatric care manager, who can help assess a family’s needs and put the family in touch with the appropriate resources. Lawyers and geriatric care managers can also be a resource to help families navigate the complex red tape and bureacracys that sometimes surround senior programs.

One of the biggest takeaways I gathered from the article is that there are a variety of programs that seniors can qualify for, even if their income is over $100,000. Another is the importance of planning ahead. The article discusses, power of attorney, for example. As seniors and their families think about the future, issues like power of attorney, long term care insurance, and wills should be addressed sooner rather than later.

Selling the Property Tax Burden to Private Companies increases the Cost for Consumers; A Reverse Mortgage Can Help

Ontario, NY- home to some of the most expensive property taxes, as a percentage of the value of the home, in the nation.

An article in the New York Times today revealed that selling property taxes to third parties could cost consumers a lot of additional money, with the profiled company adding fees of 18% to property tax debts. Luckily, a reverse mortgage may be able to help seniors in this situation, as it is a common occurence for funds from a reverse mortgage to be used to repay tax debts. Furthermore, money from a reverse mortgage can be set aside into an escrow account to continue to pay property taxes, which must be kept current throughout the reverse mortgage.

Property taxes are an interesting issue because they vary so much by county. One of the highest property taxes, as a percentage of the property value, is in Orleans County in New York State, where property values come to 3.05% of the value of the property. But in St. James Parish Louisiana, property taxes are only 0.145% of the value of the home. That is over 2100% less than in New York. And it’s surprisingly easy for the property taxes on a home to be more than a senior’s fixed income–a situation that can sometimes be helped with a reverse mortgage.

Aging Population Presents New Challenges

A report released in June by the U.S. Census Bureau predicts that people aged 65 and over will soon outnumber children under 5 for the first time in history. Furthermore, the population aged 80 and over is expected to increase 233% between 2008 and 2040, a phenomenon never before seen. The population aged 65 and over meanwhile is expected to grow 160 %, compared to 33% for the total population of all ages. These predictions encompass global demographics- not just those of the United States.

An increasingly older population presents many new challenges. Health care and social security are just two of the programs under increased scrutiny. Economic models may need to change as individuals spend larger portions of their lives in retirement. An older population may lead to labor supply issues, with the question of how the younger population will be able to support all their elders.

The report also points out that an increasing share of the elderly population will be located in developing countries in the years to come. This could pose a new set of challenges. The developed health care and social service networks of Europe and the United States have not yet come to many parts of the developing world. With chronic noncommunicable diseases are now the major cause of death among older people in both the developing and nondeveloping world, the global health care system faces a new problem of treating diseases like cancer and heart disease throughout the globe-and dealing with the aging populations once they do.

It is unsurprising that the population is aging, and that, in the years after the baby boom, the elderly population will soon be a larger proportion of the world’s population. As birth rates decline, especially in the developed world, it is also logical that the older members of the population may outnumber the younger ones. But the challenges that come from these problems remain to be resolved.

Within the reverse mortgage program, it will be interesting to see if, over time the minimum age of the borrower is pushed back to reflect the longer lifespan. One wonders if the percent equity available from the home will decrease to yield a more sustainable program as people live longer. And one expects the program to grow as an increasing number of seniors become eligible for it.

Rethinking Accessibility and Aging in Place: Part 2

Another component to aging in place safely is safe driving. Many suburbs and rural areas are not easily navigatable without the ability to drive. This means that when seniors lose their mobility and/or ability to drive safely, many of them are forced to move out of their homes. Other times, seniors who choose to stay become a part of a “homebound elderly” population, which does not make aging easy.

In the last week or so, AAA has announced a number of resources to help senior drivers stay safe on the roads. Programs like Carfit help ensure that senior’s cars are safe so that they are less likely to be killed in a crash. Drivesharp, one of the newest AAA offerings, is a computer software program that strengthens the brain’s ability to process what drivers see, so that they can focus better, keep track of more on the road, and react faster when driving. Many of these problems are more likely to plague seniors, and improvements in visual processing decrease crash risk. Roadside Review and I Drive Safely’s Mature Drivers Course are two other examples of programs targetted towards helping senior drivers improve their skills and abilities so that they can stay on the road longer, prolonging their ability to remain in their home.

For more information, visit www.aaa.com or www.aaaseniors.com.

Rethinking Accessibility and Aging in Place

A kitchen in a universally accessible home.

Aging in place is a goal of many seniors, for good reason. A reverse mortgage is one product that can help seniors remain in their homes, but if mobility concerns are an issue in a house that is not senior-friendly, aging in place can still be difficult. Now, some recent developments have come together nicely to make aging in place a little easier:

Suffolk County in Long Island, NY recently ammended its housing code to state that any affordable housing built with county funds must incorporate accessible design. Such design concepts include no-step entryways, 36 inch doorways and passageways, and an area in showers for grab bars. Other mentioned features include homes with elevators already built-in and doors that open with levers, not knobs.

While accessible design can help people of all ages in cases of accident, disability, or injury, it is an especially important issue within the senior community. If a property is built in a universally accessible manner, it is less likely that a senior would be unable to live there as they get older. According to Judy Pannullo, Executive Director of the Suffolk Community Council, it costs only $700 more to build a house with universal design principals, though the cost of renovating an existing home to conform can be much higher.

Finally, programs such as the HECM for Purchase program make it easier for seniors to purchase new homes, including those that might be more accessible than their previous homes. The HECM for Purchase program allows seniors to buy a new home providing only a down payment and paying for the rest using the home’s existing equity. As a result, they have no mortgage payments during their time in the home.

New Concept for Senior Housing

Fox Hill outside Bethesda, MD

A new concept for senior housing was profiled in the New York Times today. The article focused on Fox Hill, a new senior housing complex outside Bethesda, MD. Rather than only allowing seniors to rent rooms on a monthly payment or requiring them to pay a high entrance fee which is partially refunded when they either pass away or move out, Fox Hill allows seniors to own their homes. Yet they still receive many of the same benefits that come with living in a senior home, including communal meals, social activities, and access to health care. In home care is available at an additional fee, and assisted-living units are also within the same building, enabling couples to live close to one another while one requires more assistance.

Fox Hill, developed by Sunrise Senior Living, has had trouble filling all the condos. However, the concept seems interesting, especially because it appears that, assuming the condos are FHA approved, the HECM for Purchase program might enable borrowers to use a reverse mortgage to purchase their condos. The article also surmises that the number of seniors in all types of housing has slipped nearly 2 percentage points thus far this year, as seniors struggle to sell their homes. It wonders whether the concept will gain more traction once the market rebounds.

The concept seems valuable, especially when one considers the large numbers of seniors congregating in locations such as South Florida and Phoenix. There is something to be said for being a part of a community of one’s peers, and many seniors in those areas also own their homes. While the properties in Fox Hill are expensive, ranging from around $500,000 to just over $1 million, there are seniors who are willing to pay that much for a new home. And while, as the article notes, some seniors do not care whether or not they own their home, others note that they like that they are accumulating equity.

Seniors Over 65 Least Affected by the Recession

more seniors are in the workforce

According to a poll released by the Pew Research Center today, Americans over the age of 65 are suffering the least during the recession. Fewer seniors reported trouble making rent or mortgage payments or being forced to cut back on household expenses. In addition, only 7 percent reported trouble finding health care (a third of the percentage of younger adults), and only 23 percent reported losing more than 20 percent of their investments last year, well below the numbers of those younger.

Finally, the number of seniors with jobs increased by 3.9 percent. While the rise in the number of seniors in the workforce may indicate that some were forced back to work, at least they were able to find jobs. In fact, in the current economic climate, the younger the worker is, the least likely they are to be laid off.

Some analysts appear unsurprised that seniors have fared well. Their lifestyles are often already scaled back, and their investments are generally more conservative than their younger counterparts. Nonetheless, it is good news.

Helping Seniors Avoid Foreclosure

Lisa Madigan, Illinois Attorney General

At the NRMLA conference in Chicago, one of the speakers was Brenda Grauer, who works for the Office of the Illinois Attorney General. During her presentation, I learned that the government is available as a resource for seniors trying to avoid foreclosure.

As previously discussed, generally in order for a reverse mortgage to be used to help a senior avoid foreclosure, the borrower needs to get a short pay from the bank. The short pay reduces the amout the senior owes the bank, which can then be paid off through the reverse mortgage. But banks are often reluctant to grant short pays.

Ms. Grauer explained how the Attorney General’s office is working with many lenders to try and help seniors (and others) receive short pays so that they can stay in their homes. The office is getting stays on orders of foreclosure, and, as of when she spoke, none of the people they were working with had lost their homes. It seems that the Attorney General’s office is therefore a good place to go for seniors in search of resources or aid in avoiding foreclosures. While all states have different resources available, it is a worthwhile call to make with nothing to lose and much to gain.

The number for the Homeowner’s Helpline of the Office of the Attorney General in Illinois is 1-866-544-7151.

New Cross Selling Restrictions Hurt Lenders and Borrowers?

Senator McCaskill in DC

At first, I was inclined to be in favor of the new “cross selling” restrictions. However, after learning more about them, I have changed my view.

One of the most popular and well-publicized examples of reverse mortgage fraud comes from lenders selling a senior a reverse mortgage, then convincing them to use the proceeds to buy an annuity or long term care insurance. This practice is known as “cross selling.” The annuity could perform poorly, the money could be invested for the gain of the broker, or the terms of the insurance could be highly unfavorable. And in many of these cases, seniors could be taken advantage of.

Hence the new series of “cross selling” restrictions that are passing through state legislatures and the federal government. The federal government’s restriction, in the McCaskill amendment to the Housing & Economic Recovery Act of 2008, is arguably the most stringent one. The amendment states that the mortgagee “shall not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity;” This language can be extended to include tellers and savings accounts, let alone all insurance products and 401(k)s. There is an “or,” however, which states that the mortgagee can do the above if they prove to the Secretary that the mortgagee maintains firewalls and safeguards to ensure that the originator has no incentives to provide the mortgagor with any other financial product and that the mortgagor does not need to purchase any other product as a condition of the reverse mortgage. This means that, provided that it can be proven adequately that safeguards are present, other financial products may be able to be sold by mortgagee.

The principle of the law is correct. Clearly it is important to protect seniors from fraud. Cross selling can prove disadvantageous for seniors, especially when the mortgagee is being compensated for the other products–something the senior may or may not be aware of.

However, there are other instances where cross selling may be advantageous. A senior may wish to place the money in a savings account or open up a credit card with the bank behind their reverse mortgage. They may decide to purchase a long term care insurance plan. These products can be favorable, and seniors should be able to purchase them.

The current law means that reverse mortgage lenders can only discuss a reverse mortgage with their client. If the client asks them about other options, they are not permitted to answer. Many seniors have long-term relationships with their banks or financial advisors. These seniors should not be forced to go to a variety of sources, leaving the person whom they trust and have a long-standing relationship with, just because they are considering a reverse mortgage. Such a policy has a potential to cause more harm than good.

Seniors have the right to evaluate all their options. Hopefully HUD’s interpretation of the McCaskill ammendment will still enable seniors to discuss alternatives to a reverse mortgage with their financial advisors and/or discuss options for what to do with the money, if they wish to do so. Cross selling could be prevented by a more narrow law. But the McCaskill ammendment takes it too far.