February 6, 2006
STATE LOANS OR REVERSE MORTGAGES TO LOW-INCOME SENIORS FOR PROPERTY TAX RELIEF: OTHER STATES AND OPTIONS FOR CONNECTICUT
By: Helga Niesz, Principal Analyst
You asked (1) whether other states make loans through reverse mortgages to senior citizens with limited incomes as a means of local property tax relief and (2) what the options are for doing this in Connecticut.
No states make loans specifically through actual reverse mortgages as a means of property tax relief, but at least 24 states offer seniors and sometimes disabled people tax relief through a similar but more limited approach called a "property tax deferral" (PTD) loan.
In an ordinary reverse mortgage, the borrower (who must be a senior citizen and have considerable equity in the home) receives monthly payments for life or a set number of years and does not have to pay the loan back or interest until he dies or sells the house. Then the loan is repaid out of the estate or the sale of the house. These loans are available from some banks and other private lenders and are generally federally guaranteed. Proceeds of loans from private lenders can be used for any purpose. States sometimes provide loans for more limited purposes, such as home repair for seniors, that also do not have to be paid back until
the home is sold or the owner dies. The Connecticut Housing Finance Authority (CHFA) provides reverse mortgages only to limited-income people who need long-term care, but does not strictly limit how money can be used.
A PTD loan generally provides annual advances only to pay the person's property taxes. In fact, usually the state reimburses the town or county directly for the amount of taxes the jurisdiction loses. No repayment is required for as long as the senior lives in the home, but the state puts a lien on the property and recoups the taxes when the home is sold or the owner dies. While a few states allow deferral of all property taxes in this way, most limit the amount that can be deferred to a set amount such as $2,500 or a percentage of the tax.
While Connecticut does not have a state PTD program, state statute allows towns to defer property taxes in this way within certain limits without any state reimbursement, and some have chosen to do so.
If the legislature decides to develop a state PTD program, it would have to determine how best to structure the program, who could be eligible, income limits, how much of the taxes could be deferred, and how to administer and fund the program. A recent Program Review and Investigations tax study discusses an option for such a state reimbursed program for anyone with substantial equity in their home, regardless of age, whose taxes are more than 5% of their income. Under this scenario, only the tax amounts that exceed 5% of the homeowner's income would be deferred, but other ways of structuring the program are also possible.
The term “reverse mortgage” refers to a loan made by a private lender or a government agency to an elderly person who is “house rich, but cash poor.” The loan is based on the equity in the home rather than the borrower's income as a source of repayment, and interest accumulates but does not have to be paid over the life of the loan. In a normal home equity loan, the consumer usually receives a lump sum and has to repay it through monthly payments over time. With a reverse mortgage, the consumer receives monthly payments (or a lump sum plus monthly payments) for a set number of years or life, depending on how the loan is structured, which he does not have to repay until he dies or the home is sold.
The U.S. Department of Housing and Urban Development (HUD) Web site (http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm) provides information on HUD-approved reverse mortgage lenders and counselors in each state.
AARP's reverse mortgage portal provides a gateway to considerable information on reverse mortgages: http://www.aarp.org/money/revmort/
PROPERTY TAX DEFERRAL (PTD) LOANS
Some state and local government agencies offer PTD loans, which consist of annual loan advances only for property taxes. The individual does not have to repay the deferred taxes as long as he lives in the home. The deferred property taxes become a lien against the home's value. With most programs, a homeowner must reapply each year to defer the next year's property tax bill. The state charges him interest on the amount of property taxes deferred, which accrues as part of the lien ont the property.
The annual loan advance generally cannot exceed the property tax bill for that year. Some programs limit the annual advance to a portion of the tax bill or a specific amount. Most limit the total amount the person can borrow over the life of a PTD loan. The interest rate is generally fixed and there are no origination fees or insurance premiums. In most cases, the person cannot have a PTD loan and a private reverse mortgage at the same time.
Some type of PTD program was available as of 2002 in parts or all of 24 states: Arizona, California, Colorado, Florida, Georgia, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, North Dakota, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming, according to a 2003 AARP report, “State Programs and Practices for Reducing Residential Property Taxes” by David Baer, available at
In some states, PTD is available on a uniform, statewide basis, but not in others. Most programs have a minimum age of 65 and limit incomes to qualify. An appendix to the report (enclosed) provides more details on eligibility, income caps, and deferral amounts.
Following are some examples of state websites concerning these programs:
Oregon Property Tax Deferral Program website
RELEVANT CONNECTICUT STATUTES
Current CHFA Reverse Annuity Mortgage Program for Long-term Care Needs in Connecticut
CHFA's Reverse Annuity Mortgage (RAM) program makes loans to help lower-income elderly homeowners with chronic health problems who have medical or long-term care needs such as home health care. Unlike a regular mortgage, the RAM is not repaid until the owner dies or the house is sold. The borrower receives monthly payments for five or 10 years. After that, interest continues to accrue at 7% a year. To be eligible, borrowers must be at least 70 years old, and their annual household income cannot exceed $76,100. It appears that people could use some of these RAM proceeds to pay their taxes, but if they are already participating in a local PTD loan, they will not be eligible for the CHFA loan.
Local Option Tax Relief Programs
CGS § 12-129n allows, but does not require, towns to provide property tax relief to seniors over 65 and disabled people. It lets the town set maximum income limits for this tax relief. Thus, towns may provide additional relief to homeowners already receiving tax relief under the required state-reimbursed Circuit Breaker program as well as relief to those who do not meet that program's income criteria.
The total value of tax relief a homeowner can receive under this and the state-reimbursed circuit breaker or elderly tax freeze programs cannot exceed his annual tax. The town must put a lien on the property if the amount of tax relief is more than 75% of the tax owed, and the law places several other restrictions on local programs. Unlike under some other tax relief statutes, the state does not reimburse towns for lost taxes under these “local option” programs. The law limits the overall amount of tax relief towns can provide to no more than 10% of the total value of real property in the town in each given year.
Branford, Fairfield, Guilford, Haddam, and Norwalk offer such relief, but we were not able to obtain a complete list of programs. Norwalk, for instance, has offered a tax deferral program since 2001 with an income limit of $45,000 for single or married seniors and disabled people (brochure enclosed). There are about six people on the program. Tax deferral programs have been proposed in a number of other towns.
CGS § 12-124a also currently gives municipalities an option, upon approval of their legislative bodies, to abate the taxes due in any tax year for the primary residence of anyone whose property taxes could be more than 8% of their total income, regardless of the person's age. If a town chooses to do this, the taxpayer must agree to repay the amount at a later date with 6% interest and to have the town put a lien on the property so it can recoup the amount if the owner dies or sells the house. This statute also provides no state reimbursement for the amounts abated.
Any proposal for a state-reimbursed tax deferral loan program would have to consider: (1) whether it would apply only to seniors, seniors and disabled people, or all people who need this type of help; (2) income eligibility limits; (3) limits on total deferred amounts compared to the home's value over the life of the loan; (4) whether all or only part of the taxes due would be deferred; and (5) how best to structure, administer, and fund such a program.
The Program Review and Investigations Committee staff, in its 2006 tax study report develops an option for creating a state-sponsored property tax deferral program. This option would cover not just seniors and disabled people but anyone whose taxes exceed a certain percentage of their income, for instance 5%. The program, as envisioned, would defer the amount of the annual tax that exceeds 5% of the taxpayer's income and cap the total deferred amount at 85% of the property's assessed value. The state would reimburse the town for the deferred amount, put a lien on the property, and collect the deferred amount plus interest when the property is sold or the owner dies. The committee has not yet approved this idea for legislation. The full report and a digest of key findings are available on Program Review's website at: http://www.cga.ct.gov/2005/pridata/Studies/pdf/CT_Tax_System_Digest.PDF
http://www.cga.ct.gov/2005/pridata/Studies/pdf/CT_Tax_System_F&R.PDF(see p. 33-35 of the full report)
The Program Review study does not discuss the program's administration, but it could be administered by:
1. the Office of Policy and Management (OPM) by adding it (possibly in the form of a revolving fund) to the several senior and disabled property tax relief grant programs that OPM already administers and for which the state reimburses towns;
2. housing it with CHFA''s RAM program for people who need long-term care either as a separate revolving fund or by broadening the qualifications for these RAMs to include people who may not need long-term care but do not have enough money to pay their property taxes; or
3. making it one of the purposes of the newly established Housing Trust Fund, which will be administered by the Department of Economic and Community Development. (PA 05-50 created a Housing Trust Fund and authorized the State Bond Commission to capitalize it by issuing up to $100 million in bonds, with $20 million effective each July 1, from 2005 to 2009. The fund's current purpose is to expand affordable housing opportunities for low- and moderate-income people.)