Tax Type
Recordation Tax
Description
Supplemental Writings; Home Equity Conversion Mortgage
Topic
Exemptions
Date Issued
11-09-1992
November 9, 1992
Re: Request for Ruling: Recordation Tax
Dear***************
This will reply to your letter of December 23, 1991 in which you request a ruling on the application of the recordation tax to home equity conversion mortgages, also referred to as reverse mortgages.
FACTS
A home equity conversion mortgage (HECM) is a special type of mortgage that enables elderly homeowners to borrow against the value of their home. The loan transaction involves the recording of two documents - a credit line deed of trust to the lending institution and a credit line deed of trust to the government agency backing the loan. Both deeds of trust are for the same amount.
A HECM loan, like a traditional long-term forward mortgage, is secured by a first lien on the borrower's home. However, with a HECM loan, disbursements are paid to the borrower in monthly installments or through a line of credit, rather than in a lump sum at closing, and repayment of both principal and interest is deferred for as long as the borrower continues to live in the home.
The U.S. Department of Housing and Urban Development (HUD) provides two types of insurance for HECM loans:
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- HUD insures the lender against the risk that the loan balance will grow to exceed the value of the home. The lender may assign the loan to HUD once the loan balance, including accrued interest and mortgage insurance premium equals the maximum loan insurance claim amount.
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- HUD also insures the borrower that all disbursements will be made. In the event the lender defaults in making loan disbursements to a borrower, then HUD will make the disbursements on the lender's behalf based on the original terms of the loan. Payments made by HUD to a borrower are secured by a HUD-held second lien on the home.
- HUD also insures the borrower that all disbursements will be made. In the event the lender defaults in making loan disbursements to a borrower, then HUD will make the disbursements on the lender's behalf based on the original terms of the loan. Payments made by HUD to a borrower are secured by a HUD-held second lien on the home.
You request a ruling as to the application of the recordation tax. Specifically, you ask what, if any, exemption would the filing party be entitled to for the deed of trust to the government agency.
RULING
The recordation tax is based on the privilege of being allowed to avail oneself of the benefits and advantages of the registration laws of the state. Generally, the recording of a document is taxable unless there is a specific exemption provided by statute. Under Virginia law, there is an exemption for the recording of a document that is supplemental to another recorded and taxed document.
Under Va. Code §58.1-803(c), recordation tax on a supplemental deed of trust is due only on the portion of the obligation secured which is in addition to the amount of the existing debt secured by a deed of trust on which tax has been paid.
The Code of Virginia does not define "supplemental." The ordinary meaning of the term is "that which is added to a thing to complete it." Black's Law Dictionary 1290 (5th Ed. 1979). Measured by this definition, the second deed of trust appears to be supplemental to the first deed of trust. Part of the HECM transaction involves HUD insuring the borrower that all disbursements will be made based on the original terms of the loan. In order to protect HUD, a second lien is provided in the agreement. The second deed of trust is added to the first to complete it, and its purpose is to secure the payment of the amount contracted for in the first deed of trust. Because the second deed of trust to BUD is supplemental to the first deed of trust, it is exempt from the recordation tax under Va. Code §58.1-809 to the extent that it covers the same loan amount as the first deed of trust, and provided that recordation taxes have been paid in full on the first deed of trust.
If you have any questions regarding this matter, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5993F
Rulings of the Tax Commissioner