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Reverse Mortgages – New Regulations Afford
Additional Protections to Non-Borrowing Spouses
“Are you 62 or older? Do you own your home? Do you want to receive a large lump sum and not have to pay it back so long as you live in your home? Apply today for a reverse mortgage. Call us for your free consultation and receive a free calculator as well.”
Far too often this is the tune of many a commercial for reverse mortgages advertised on print and non-print media. The Federal Housing Authority (FHA) insures the most common type of reverse mortgages which it calls Home Equity Conversion Mortgage (HECM). The reverse mortgage, as a financial tool is nothing new. It has been around a long time, and it can be very beneficial if used properly. Generally speaking, to obtain the mortgage you must be 62 years old or older, own the home which will be subject to the mortgage, and occupy it as a principal residence as well. The loan won’t have to be paid back until you die, move or sell the home. Simple right? Yes, except for this - what happens when you die, and your spouse, who was not on the loan documents as a borrower, is now surprised to find out that foreclosure has been initiated by the lender, and that he or she might be evicted?
A case which arose in the year 2011 - Bennett v. Donovan, and which addressed exactly the question above, resulted in a judicial decision that will affect the reverse mortgage industry and thousands of reverse mortgage customers. In Bennett, the plaintiff was a recent widower who lived in his home since 1975. After his wife took out a reverse mortgage, she passed away (a mere one month later). This triggered the loan to become accelerated or “due and payable” and Mr. Bennett was facing foreclosure. Since he was not on the loan documents, no additional protection was afforded to him. Prior to the recent decision in the Bennett case, the reverse mortgage lending environment was such that prospective borrower-spouses with an age disparity were often suggested to convey the property to the older spouse, so that the maximum amount of financing could be obtained. This meant that the non-borrowing spouse or “NBS” would now be without title and not even mentioned on the mortgage documents. When the borrowing spouse died, the NBS was to be foreclosed upon and often times to their utter surprise.
On September 30, 2013 the U.S. District Court for the District of Columbia ruled in the Bennett case stating that the Housing and Urban Development (HUD) violated federal law by not affording any protection to the surviving NBS. As a direct result of this case the HUD has implemented new guidelines to afford some protection to the surviving NBS of a reverse mortgage holder. These regulations which are listed in HUD’s Mortgage Letter 2014-07, will take effect for loans originated after August 04, 2014.
Note that as of the time of this writing: For loans dated prior to August 04, 2014, the HUD claims an inability to alter existing contracts of law. That is the topic of a different case, Plunkett v. Donovan, currently pending before the U.S. Federal District Court for the District of Columbia.
Under the newly promulgated rules, a NBS, can now remain in the residence subject to the reverse mortgage so long as the following two-step analysis is satisfied.
First, in the event that the NBS survives the mortgagor, in order to be eligible for a deferral of the mortgage payment and acceleration the NBS must:
1) Establish a legal ownership of the property within 90 days of the death of the mortgagor (deed, lease, court order, etc.)
2) Continue to fulfill obligations of the mortgagor (pay taxes, mortgage insurance premiums and hazard insurance) under the mortgage.
Secondly, the NBS must have the following attributes to be eligible to benefit from the deferral of payments on the loan, after the mortgagors death:
1) The NBS was the spouse of a HECM mortgagor at the time the loan closed, and for the remainder of the mortgagor’s life.
2)
The NBS was disclosed to the lender as a NBS.
3)
The NBS has occupied and will continue to occupy the premises as a Principal Residence.
If the above criteria are met, the lender may not seek repayment in full of the loan until the end of the deferment period. The deferment period will continue so long as the NBS is alive and continues to meet the requirements set out above. While the NBS might benefit from deferral (in that the NBS doesn’t have to make immediate repayment of the loan), the non-assumable nature of the HECM loan, prevents the NBS from receiving any unused portion of the mortgage as a disbursement. Furthermore, while in deferral, (1) the mortgage will continue to accrue interest; (2) mortgage insurance premiums will continue to be remitted; (3) servicing fees may be collected by the lender from the mortgagor.
The process by which a HECM loan is obtained and closed, will also go through some significant revisions. Going forward all lenders will require the prospective borrowers to identify their marital status and certify the same by way of a signed affidavit at the inception of the loan. Additionally, at closing , by way of a certification affidavit, the mortgagor and the NBS will certify their married status and receive disclosures pertaining to HECM and marriage status. The affidavit certifying marital status, will be required to be submitted annually. Lastly, each HECM loan requires that the borrower attend and complete loan counseling prior to being approved for a loan. The loan counselors will now be required explain and discuss in detail the implications of marital status with the borrower and NBS.
The new regulations have created the need for revised model loan documents for FHA mortgages. The sample loan documents are available from our office upon request.
Taxpayer’s Intent a Significant Factor in Calculating Transfer Tax and Mortgage Recording Tax Issues Affecting Multiple Condominium Unit Transactions
With the current inventory of New York City multi-bedroom condominium units dramatically outpaced by the high demand for these properties, it’s not surprising that many prospective purchasers are interested in purchasing adjacent condominium units with the hopes of combining them either before or after their purchase. Foremost on the minds of many consumers are issues of building plans and condo board approval, but perhaps less contemplated are those relating to transfer taxes and mortgage recording tax. This review of some recent tax rulings and advisory opinions discusses the role taxpayer intent plays in calculating and paying NYC real property transfer tax and mortgage recording tax on transactions involving multiple condominium units.
A brief review of the tax structure is a good starting point for this discussion. Both NYC real property tax and NYC mortgage recording tax employ tax rates that are dependent upon the type of property being transferred or mortgaged and the amount of consideration. The NYC transfer tax rate for one, two, or three family houses and individual residential condominium or cooperative units is 1% when the consideration is $500,000 or less and 1.425% when the consideration is greater than $500,000. All other properties are subject to a higher tax rate of 1.425% when the consideration is $500,000 or less and 2.625% when the consideration is greater than $500,000. (It should be noted that NYS transfer tax imposes a single tax rate of $2.00 for every $500 of consideration regardless of the type of use, and therefore does not present a similar issue.)
The combined NYS and NYC mortgage recording tax rate on a mortgage securing less than $500,000 is $2.05 for each $100 dollars of principal debt. If the mortgage is $500,000 or greater than the tax rate is $2.175 for each $100 dollars of principal debt for one, two, or three family houses and individual residential condominiums and $2.80 for each $100 dollars of principal debt for all other types of properties.
The issue then for parties to transactions involving multiple condominium units is whether all of the units being sold and/or encumbered are deemed an individual residential condominium unit for purposes of NYC transfer tax and/or mortgage recording tax, as opposed to a transfer of multiple units, or “bulk transfer” and therefore subject to higher tax rates. The taxing authorities have indicated that the higher tax rates do not apply when multiple units have been previously combined as evidenced by (1) the issuance of a NYC Department of Building’s Letter of Completion; (2) the reallocation of a single tax lot covering both units; or (3) an amended certificate of occupancy. When the units have not been previously combined, the resolution is less straight forward. In such situations, the taxing authorities are in agreement that a given transaction must be decided on a case by case basis. That said, these cases do share common concepts that provide significant guidance in dealing with these types of transactions. Here now are summaries of three recent tax rulings and advisory opinions.
NYC City Department of Finance Letter Ruling: FLR 13-4953
In this NYC Dept. of Finance ruling made on March 28, 2014, the purchaser sought to purchase from a condominium sponsor two separate condominium units. Although the sponsor denied the purchasers request to combine the units prior to closing, the sponsor permitted provisions to be added to the contract of sale in which the sponsor (1) acknowledged the purchaser’s intent to combine the units post-closing; (2) approved the proposed combination of the units; (3) agreed that the closings of the units would occur simultaneously and (4) allowed the separate contracts of sale to be cross defaulted, thereby allowing the purchaser to receive a return of its down payment for both transactions in the event that the sponsor defaulted on one of the contracts. Prior to closing, the purchasers retained an architect to prepare building plans to combine the units. The purchasers chose to report the transaction as a bulk transfer and paid the higher NYC transfer tax rate. Following closing, purchasers obtained condo board and building department approval to combine the units. The units were combined by removing a common wall between them and the removal of one of the kitchens. Thereafter the purchasers petitioned for, and received, a ruling that the transfer of the two units constituted a transfer of an individual residential condominium unit and was therefore subject to the lower RPT tax rate of 1.425%.
NYS Department of Taxation and Finance Advisory Opinion: TSB-A-13(3)R
This advisory opinion pertains to the calculation of NYS and NYC mortgage recording tax for two condominium units. In this case, the purchaser already owned a residential condominium unit and sought to purchase an adjacent unit. The condominium board of managers refused to allow the purchaser to modify or alter the adjacent unit until they acquired title to the adjacent unit. Prior to closing, the purchaser (1) consulted architects to obtain building plans for the combination; (2) consulted contractors on the project; and (3) submitted an application with the condo’s managing agent to combine the units, which set forth timelines for commencement and completion of the work. At the closing, the purchaser opted to pay the higher mortgage tax rate on its purchase money mortgage which was consolidated with the existing mortgage encumbering the other unit. Within about a month after the closing, the purchaser received the condominium’s consent to combine the units, and obtained building department permit for the project. The work was commenced immediately and completed in a month’s time.
In granting the purchaser’s request to have the lower mortgage tax rate applied to its mortgage, the Department found that the facts and circumstances demonstrated a “clear intent to combine the two adjacent units into one primary residence.”
NYS Department of Taxation and Finance Advisory Opinion: TSB-A-14(1)R
In this advisory opinion, the Department considered a request to have the lower mortgage recording tax rate applied to a purchase money mortgage covering three adjacent condominium units. Once again, a physical combination of the adjacent units was made impossible by the condominium. The contract of sale shows a single purchase price and a single down payment for all three units. Notwithstanding the restriction on modifications to the units prior to transfer of title, the contract requires the seller to obtain from the building department a temporary certificate of occupancy covering the three units.
In advance of closing, the purchaser obtained (1) architectural prints showing the proposed combination of the three units; and (2) written contractor estimates for the project. Unlike the previously discussed advisory opinion, the petitioner-purchaser here sought the Department’s opinion prior to closing, thus avoiding an application for a post-closing refund. To support its application for the advisory opinion, the purchaser stated that they would bear the sole cost of combining the units following the transfer of title. The purchaser also stated that it intended to obtain a new certificate of occupancy that showed a combination of the three condominium units. Finally the purchaser represented to the Department its intent to obtain an amendment to the declaration of condominium combining the units reflecting one percentage of common elements covering the three units.
Based on these facts and circumstance, the Department found that the petitioner had evinced a “clear intent, prior to closing, to combine the three adjacent units into one primary residence.” Accordingly, the Department held that the lower mortgage tax rate of 2.175% would apply to this transaction. The Department cautioned that the failure to actually combine the units post-closing would result in the underpayment of mortgage tax.
It is important to note that these rulings and opinions are issued at the request of the petitioner and are limited to the facts provided by the petitioner. As such they are binding on the tax departments only with respect to the person or entity to whom it is issued and only if the person or entity has fully and accurately disclosed all relevant facts.
NYS Dept. of Taxation and Finance Issues Tax Bulletin on Guaranty Mortgages covering Credit Line Mortgages
In its tax bulletin TB-MR-570, issued on January 6, 2014, the Department issued its position on mortgage tax on mortgages given by guarantors covering a credit line mortgage.
To begin, it’s worth noting that a credit line mortgage that secures a principal amount of less than $3 million dollars, and that encumbers property improved by one to six family dwelling are benefitted by some measure of mortgage recording tax exemption under Tax Law 253-b. Once the mortgage tax is paid on the full amount of these types of credit line mortgages, the Tax Law exempts from mortgage recording tax any advances or re-advances made pursuant to the credit line agreement.
The tax bulletin makes clear that the exemption provided under Tax Law 253-b does not extend to a mortgage of a guarantee that secures a credit line mortgage. In this instance, the guarantee is a security for debt owed by the mortgagor under a credit line mortgage. This obligation is separate from the obligation of the mortgagor of the credit line. As such, the only mortgage entitled to the benefits of section 253-b of the Tax Law is the credit line, and not the mortgage covering the guarantee.
Thus, when a mortgage is made to secure a guarantee, and the guarantee is pledged as security for debt secured under a credit line mortgage, mortgage tax must be paid on the maximum amount secured by the guarantee. Once the credit line is advanced up to, or beyond, the amount secured by the guarantee, any further re-advances evidenced by the recording of an instrument are now subject to payment of additional mortgage tax.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. (keng@prestitle.com) or Anthony Chiellino at (achiellino@prestitle.com) or (212)651-1200.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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