By Jim Micali, COO
Wise Ben Franklin said, “Nothing is certain except death and taxes.” If good ole Ben were alive today, he might amend that and say, “Nothing is certain except death, taxes, and the fact that a significant percentage of property taxes will be due at the end of each year, creating crunch time for tax payments.” And he would be right. Approximately 50% of property tax payments are due in Q4, and about 30% of those are due on 12/31. With such a volume of property tax payments due in the fourth quarter, there’s almost no way for mortgage servicers to avoid the crunch. But having said that, there are some practical steps that can be taken to minimize the crunch and its impact.
Here are five tips that servicers can employ to ensure their tax planning/tax payment procedures are as ready as they can be for tax season.
Tax Tip #1: Recognize that late releases will occur and be prepared to adjust accordingly.
In addition to a significant percentage of property taxes being due in Q4, it’s becoming increasingly common for taxing agencies to release their property tax bills late, or very close to the due date. It is also common for these agencies to adjust their due dates and release tax bills even later, which can cause confusion for both servicers and borrowers. For the most part, the delays can be tracked back to assessor workloads and the staffing challenges that agencies have been grappling with since COVID. They are doing their best with reduced resources to release tax amounts, post tax payments timely, process returns and refunds, and identify outstanding delinquencies.
As a result, the Q4 crunch isn’t likely to change, but what can change is the way servicers respond to it. Working with a tax provider like LERETA offers servicers a streamlined and efficient way to manage their taxes and avoid the anxiety of late releases. At LERETA, for example, we work all year long to prepare for Q4 and are equipped to handle the changing timelines. We share this information with our clients and counsel against duplicating our efforts with outreach to agencies that have late releases. This only adds to the volume of in-bound calls to agencies and can further slow their response. We have the information needed, and we’ll make sure the payments happen.
Tax Tip #2: Don’t assume tax payment information stays the same.
It may be basic, but one of the most important rules in managing property tax payments: ensure the taxing authority and payment information are up to date. Tax collectors can change frequently, and other process adjustments can affect whether payments are rejected. Tax collectors in some counties in Pennsylvania, for instance, change each year. (In fact, LERETA worked with Pennsylvania’s statewide tax collectors to create a website where they can post all their changes with collectors’ names, addresses and other pertinent information.) Even the slightest change can cause payment issues if servicers are working with outdated information, and one should never assume that the process for last year is the same for this year. Every year before tax season, LERETA contacts more than 24,000 agencies to confirm critical information such as who to pay, remittance address, preferred payment methods (wires, ACH, check) and correct payment due dates. Revalidating this crucial information is key in reducing errors. We estimate that about 4% of taxing agencies experience changes that would affect tax payments, and while 4% doesn’t sound like a lot, it could represent more nearly 1,000 agencies annually so that 4% can have a big impact on servicers, depending on their geographic footprint.
Tax Tip #3: Review the loan portfolio for exceptions.
It’s extremely useful to review loans that had exceptions the prior year that would impact the escrow tax cycle in advance of Q4. This allows time to address the exceptions without having to do so during the crunch. Two of the most common exceptions are mismatches between the parcel IDs and due dates. We recommend scrubbing the portfolio for any parcel issues, exceptions, and escrow/non-escrow flags. LERETA conducts seven different types of pre-cycle portfolio tax audits to ensure the tax lines and related data are correct before the tax cycle begins. We look for aberrant conditions that don’t make sense, for example, old due dates, mismatched parcel IDs and mismatched owner names. If a payment is applied to the wrong parcel, it then requires a refund which can get messy. So it’s important to identify and clean these things up ahead of time.
Tax Tip #4: Pay attention to preferred year-end agencies.
Some states have payment due dates in January or February, and while this may seem to alleviate the 4Q crunch, it often creates anxiety with homeowners who want their tax payments made before the end of the year. It also creates a lot of back and forth between the homeowners and their servicers. At LERETA, we identify these preferred year-end agencies and work with servicers to accommodate and ensure all early payments requested by homeowners are sent by 12/31. Ignoring these preferred year-end agencies will only cause headaches when November and December roll around and borrowers are scrambling to make something happen.
Tax Tip #5: Consider proactive borrower communications to head-off confusion.
You’d be surprised how many homeowners who escrow their taxes still make their own payments when they receive a tax bill. For obvious reasons, this causes a lot of unnecessary frustration, rework and refunds that could be avoided with positive, proactive communications direct to the borrower. In many jurisdictions, taxing agencies send bills regardless of escrow status so it’s understandable why a homeowner might be confused. And when they are, they get busy on the phone, calling both servicers and tax authorities to find out what they should do. We recommend servicers send out communications prior to Q4 letting borrowers know that if their taxes are escrowed, that they should not pay a tax bill, if they receive one. And if they do receive a bill, they should just ignore it and not call their servicer or the tax authority.
The Q4 tax crunch may be inevitable, but the stress and headaches that come with it aren’t if you work with a reliable partner like LERETA. For more information contact us at sales@LERETA.com.
