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Tax deferral program is at risk

The Oregon House has approved a two-year extension for elderly and disabled homeowners who were kicked out of a property tax deferral program as a result of changes approved in 2011. The reprieve is welcome, and the state evidently can afford to provide it because of savings achieved since the program's rules were tightened. But unless property values begin rising again, the fundamental problem is unresolved: Some owners don't have enough equity in their homes to cover deferred taxes and other obligations.

The deferral program, created 50 years ago, is in effect a self-financing loan fund. Older and disabled Oregonians are allowed to put off paying their property taxes until their homes are sold after they die or move. Taxes, with interest, come due at that time, and are paid from the owners' equity in their homes. The state keeps counties whole by paying property taxes during the deferral period, recouping its money when homes are sold.

Last year the Legislature discovered that the program was running in the red and tightened criteria for participation. Most significantly, homeowners with reverse mortgages were excluded. Reverse mortgages are a lot like the deferral program, but they're offered by banks and other lending institutions: Homeowners get money now in return for an equal portion of their equity later.

As long as home values continued rising at a fast clip, a big potential problem went unnoticed: A homeowner who had both a reverse mortgage and a tax deferral might not have enough equity to pay both.

Due to the stricter rules, participation in the tax deferral program declined by more than half. About 1,700 homeowners with reverse mortgages were cut off, and many found themselves unable to pay property tax bills that came due in November. The drop in participation, however, pushed the tax deferral program back into the black, allowing the Legislature to grant reverse mortgage-holders a two-year reprieve without dipping into other funds. It's a huge relief for hundreds of Oregonians who faced the threat of losing their homes.

Yet the problem of debt exceeding equity still remains. Indeed, as real estate values continue to decline and as the amount of deferred taxes continues to grow, it's getting worse.

Barring a turnaround in home prices, the state will eventually have to decide whether to stop deferring taxes for homeowners without enough equity to meet their obligations, or begin paying the program's costs with general funds. If the Legislature intends to consider a subsidy for elderly and disabled homeowners, it will need to decide who qualifies and where the money comes from. A switch from a self-financing tax deferral program to a housing subsidy would have many implications that would need to be examined.

It's not just homeowners who won a reprieve. The state has won one as well. How long it lasts depends on factors beyond the state's control.