Unable to use the embedded player? Listen here.
In a recent Mortgage Orb column, Michael Whiting addresses the importance of paying property charges on a reverse mortgage and how they can be kept current.
Other Stories:
Social Security Recipients Could Get Their Biggest Raise Since 1981
Debt after Death
Share:
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.
2 Comments
Since the podcast deals with three topics and my comments deal with two of them, I have created two distinct comments.
Having read the MortgageOrb.com article posted on 9/8/2022 and written by Mike (Michael) Whiting, several things came to light.
First, near the start of the article Michael Whiting is described as a “senior vice president for tax services firm LERETA.”
Second, the article is attempting to market LERETA’s’s tax services to reverse mortgage lenders/servicers/subservicers. As Mike says best: “There are only a handful of reverse mortgage servicers and subservicers, so my advice is to work with a tax service provider that really understands the nuances involved.” The last paragraph of the article is where Mike really focuses on his firm’s (i.e., LERETA’s) tax services to lenders/servicers/subservicers. The article is more advertisement than advertorial.
Third, when Mike refers to a reverse mortgage portfolio, he is not referring to the reverse mortgage that a reverse mortgage borrower is obligated for but rather the reverse mortgages that a lender, third party servicer, or subservicer must oversee.
Fourth, Mike argues that a LESA cannot be adjusted for increased property taxes yet he ignores the increase adjustment within the LESA calculation itself. HUD correctly addresses this issue on Page 76 of the HECM FINANCIAL ASSESSMENT AND PROPERTY CHARGE GUIDE REVISED as of JULY 13, 2016 when the Guide authors state the following: “The PC÷12 is multiplied by 1.2 to take into account expected increases in property taxes and hazard and flood insurance over the life expectancy of the youngest mortgagor.” In plain English what they are saying is that the calculation takes into consideration increases in property taxes and insurance by increasing the projected cash flow needed to fund the LESA by 20%. See the LESA calculation below:
(1.2 x PC ÷12) × {(1 +c)m+1 ‒ (1 +c)} ÷ {c × (1 +c )m}
What Mike does not argue is whether a 20% increase is sufficient. That is a different topic for a different time but let us just say that 20% seems to be more of a “political” number than one derived from extensive computations of historical data.
Fifth, Mike says that the LESA is intended to only cover property charge payments through age 87. Yet if one looks at Appendix 1 which displays the TALC life expectancies on Pages 80 and 81 of the Guide, one will quickly realize that the life expectancy generally changes with the age of the youngest borrower at closing and can require that the LESA be computed to age 103 if the youngest borrower was 100 at closing.
Finally there are so many conceptual errors, there is too little time to address them all so the following sentence will be the only illustration on this matter. The LESA is NOT based on the life expectancy of the reverse mortgage as Mike claims it is. The average life of a HECM at termination is about nine years. A LESA is based on the life expectancy of the youngest borrower.
This comment covers the part titled debt after death.
Under current US state laws, debt in excess of estate/trust assets rarely survives beyond the death of a decedent. This could be true by option of the lender even when there are sufficient assets to attach. In my own father’s case, as soon as Bank of America was aware of my father’s death, they terminated a VISA Card with a balance due of over $18,000 at no cost to his estate/trust; however, there was a 2022 Form 1099-C issued in that amount. That amount represented payment by the credit card company for 24 hour in-home care giving charges for a little over one month.
Could the bank charge card division have tried to collect the $18,000 in charges? You bet since the net estate of my father exceeded $18,000 by many times. Why Bank of America who called me stated that it would not legally pursue the balance due was that the cost in possible bad publicity (reputation risk) just was not worth that amount of money. The company specifically requested that the balance due not be paid. Of course, over the years, Bank of American made many times that amount from the banking activities of my parents.
Unpaid debt of the decedent incurred before death is not collectible against heirs but is collectible to the extent that assets of the decedent survived death. If the total debts exceed the value of assets available for payment of such debts then the amount of payment due a creditor is based on the pecking order established by law.
As noted by Shannon, certain assets are exempt from the rights of creditors to collect what was owed by a decedent as of the time of death.
When necessary, heirs can disclaim their interests in an estate/trust. My father did this in regard to one-half of my uncle’s net estate/trust for possible estate tax issues related to his own estate. The underlying issues are beyond the scope of this comment.
Because of the complexities of state laws in regard to the debts of decedents following their deaths, heirs need to consult a competent and skilled estate attorney(s) who is also knowledgeable in the probate laws of the state(s) where the decedent was considered to have legally resided at the time of death. As the adage goes: “The lawyer who represents himself has a fool for a client.” In this case the words “consults mainly with” could replace “represents.”
In rare cases, the total liabilities of the estate plus legal fees for representing the estate/trusts and the heirs can be charged to the heirs even when the current value of the estate’s assets are lower than the total debts of both the estate/trusts and those the heirs incurred in defending their interests at the time of terminating the estate/trust. Such was the case with an uncle by marriage who was a qualified and legal heir to the Howard Hughes’s estate/trusts but had less than a 2% interest in the estate/trusts. After adding up the liabilities net of the assets, his legal counsel told him to disclaim his interests in the estate/trust which he did. Much of the problems that estate faced were multiple national and state jurisdictions claiming that Howard Hughes was technically a resident in their jurisdictions in the year of death. My uncle who passed away about 20 years ago had no regrets for his disclaimer.