Common misleading statements about the HECM
Yesterday I turned on our local AM station and was aghast at what I heard. “So you both make about $150,000 a year and your mortgage interest payments would be about $16,000 a year. With your combined income that would place you in a 40% tax bracket so your interest deductions would save you about $7,000 each year in taxes”. I was shocked. Here’s a ‘financial ‘expert’ with his own radio show misleading one of his faithful listeners who phoned in. The mistake is sadly a common one- oversimplification. A more accurate answer would have considered that caller’s standard deduction of $24,000 a year would make deducting home interest payments highly unlikely- unless they already had other significant itemized deductions.
This radio segment made me reflect upon some of the bad advice that I’ve heard given over by well-meaning originators over the years.
Often salespeople love to use simple anecdotes and solutions. No surprise as they often help close the sale. Here are just a few of the simple yet misleading explanations that have been touted for reverse mortgages:
- It generates monthly income
- It’s tax-free income
- You can live in your home for the rest of your life
- You can’t outlive the loan
- Your Lifetime Expectancy Set Aside will pay your property charges until you die
- The line of credit grows forever with no limitations
- You only need to have enough equity to qualify
- A HECM is a way to leverage your wealth
While the radio host failed to mention the impact higher standard deductions have on mortgage interest deductions, HECM originators must ensure they are providing accurate information in a meaningful context. To know the context you must do some fact-finding about their finances. Speaking of taxes, if your potential borrower is currently deducting mortgage interest payments, you had best inform them that they would no longer have that deduction with a reverse mortgage- that is until the interest is actually paid.
Regardless of our experience, it is always wise to reexamine the words we use when communicating with older homeowners, family members, and financial professionals. Are they accurate, confusing, or misleading? Will they create potential headaches in the future for the homeowner or our company? The answer truly depends upon the accuracy and clarity of your communications.
What misleading explanations of reverse mortgages are you seeing? Leave your comments below.
4 Comments
Let us deal with the very dumb myth. “FHA insurance makes a HECM nonrecource!” Really?
For those of you who still claim this, then what makes a proprietary reverse mortgage nonrecourse?
As to who generally insures proprietary reverse mortgages, it is the source of the funds unless there is an agreement shifting the insurer to the lender. With that said, didn’t RMS fold? Didn’t Live Well fold? So who can the borrower rely as to nonrecourse?
The real answer is that some choose to “stretch the truth” about FHA insurance but, in fact, that line of reasoning wih seniors is no better than the used cars salesman who tells you to ignore the contract and the signs everywhere saying that all cars are sold as is without guaranty or warranty.
So what is the truth? It is the mortgage docs that create nonrecourse.
For example, Item 11 of the FHA Model HECM ARM Mortgage document states the following:
“No Deficiency Judgments. Borrower shall have no personal liability for payment of the debt secured by this Security Instrument. Lender may enforce the debt only through sale of the Property. Lender shall not be permitted to obtain a deficiency judgment against Borrower if the Security Instrument is foreclosed. If this Security Instrument is assigned to the Secretary upon demand by the Secretary, Borrower shall not be liable for any difference between the mortgage insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment.”
Did you notice in that clear unambiguous statement of nonrecourse how many times FHA insurance is mentioned? It is illogical that we say that proprietary reverse mortgages are nonrecourse but FHA insurance makes a HECM nonrecourse. If that is the only way you can justify FHA insurance premiums, then God bless your sweet ignorant brain but, please, get some real education on what FHA insurance really does for HECM borrowers.
Can you name a situation which the borrower had to pay more than the 95% of the house value if they were upside down? After the loan is funded i believe near 100% of all loans are serviced by CeLink in Michigan. When Livewell shut down RMF purchased all the loans and the only thing that changed is the logo on the top left of their statement. The borrower still only calls into celink if they need to get info on their loan. The originating company shutting down doesn’t affect.
Reverse Guy,
What does your reply have to do with my comment? You are addressing HECMs. So let’s pretend your reply is on point.
A HECM borrower CANNOT payoff the unpaid principal balance for 95% of the appraised value of the collateral as payment in full. Where do you find that? Please cite the written authority for that conclusion. That is nonsense. Only those who obtain their property ownership interests in the collateral due solely through the death of the last surviving borrower on the HECM have the right to pay off the debt for the lesser of the unpaid principal balance or 95% of the appraised value of the collateral at the time of death.
Does it matter where Celink is located? It normally serves as the subservicer.
Are you saying that RMF purchased proprietary reverse mortgages from Live Well. Please cite your source on that one.
YouI really have no idea what I stated in my comment. So let me make this very simple. FHA insurance does NOT make a HECM nonrecourse, period.
Under the new income law at least four areas of itemized deductions have been harshly dealt with. First what are commonly called the SALT deductions have a cap of just $10,000. Home equity indebtedness interest has been eliminated. The interest on home acquisition indebtedness is now limited to interest on $750,000 of such debt for up to two residences, the principal residence and one other residence of the taxpayer. Then all miscellaneous deductions have been eliminated.
The changes listed affect the calendar years 2018 through 2025 (inclusively) and generally revert to the pre-2018 law on 1/1/2026.Yet it is very much more technical than that but I am providing providing general information not trying to create tax experts out of reverse mortgage originators.
Tax law completely ignores mortgage law; thus it has its own peculiar definition for home equity indebtedness. This the definition of income tax law under 26 USC 163(h)(3)(C):
“(C) Home equity indebtedness
(i) In generalThe term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—
(I) the fair market value of such qualified residence, reduced by
(II) the amount of acquisition indebtedness with respect to such residence.
(ii) Limitation
The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).”
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Here is the tax definition of home acquisition indebtedness at 26 USC 163(h)(3)(B):
“(B) Acquisition indebtedness
(i) In general
The term “acquisition indebtedness” means any indebtedness which—
(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
(II) is secured by such residence.
Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of
the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed
the amount of the refinanced indebtedness.
(ii) $1,000,000 limitation
The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).
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Since the tax law will revert to the law as of 12/31/2017 as of 1/1/2026, the law quoted above reads as it did on 12/31/2017 but here in part (in order to avoid substantial technicalities) are the changes as instituted by 26 USC 163(h)(3)(F):
“(F) Special rules for taxable years 2018 through 2025
(i) In general
In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—
(I) Disallowance of home equity indebtedness interest
Subparagraph (A)(ii) shall not apply.
(II) Limitation on acquisition indebtedness
Subparagraph (B)(ii) shall be applied by substituting “$750,000 ($375,000)” for “$1,000,000 ($500,000).”
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All human taxpayers are subject to the regular income tax regime or the alternative minimum tax (AMT) regime, whichever regime produces the greater income tax liability. Since most taxpayers are taxed under the regular income tax regime, I will skip any discussion of the AMT other than to say that now that we are reaching out to wealthier seniors, we will find more AMT taxpayers than ever before. Both the Standard Deduction and itemized deductions are different under the AMT and thus the income tax issue discussion changes and sometimes changes dramatically.
Among the actual and competent income tax advisers who are connected to this industry there is much controversy as to how much of the paid HECM interest deduction shown on IRS Form 1098 is deductible. Attorney Barry Sacks has issued a paper on the subject even though he sees one part slightly differently at this point of time. His position now reflects my own even though the position taken in the paper has real merit and that difference has little relevance in the forward mortgage industry. But in most cases, it is clear that the interest paid as shown on IRS Form 1098 is not deductible in full, based substantially on the tax rules quoted above but other rules apply as well. But that discussion must stop here.
So let us look at what was stated in the vlog. In looking at the value of the (HECM) home mortgage interest deduction, the process is far more difficult than just comparing the size of the HECM interest deduction to the Standard Deduction, no matter what its size. We have to look at the total itemized deductions versus the Standard Deduction but then again, we also have to look at the change in the income tax liability with or without the HECM interest deduction. In some cases if the tax liability does not change much, paying the HECM interest in a latter year may prove to be a better decision. DO NOT PLAY TAX ADVISOR.
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