By Shelley Lucas
Vice President Tax Operations
Hard to Identify Lower Liens Can Cause Loss of First Lien Position and Collateral Risk
Today, it’s hard enough for servicers and tax servicers to keep up with the 23,000 taxing authorities across the U.S., which is why the additional thousands of taxing agencies and districts flying under the radar often get overlooked. And that’s when little bills can become big problems for both borrowers and their servicers.
What are these additional agencies? They are special districts that make assessments for services, like water, fire, solid waste, recycling, sewer, trash, garbage, etc. In many states these charges are not added to the standard property tax assessments. They are billed separately and are the responsibility of the homeowner to pay them on time. Generally, if the delinquency persists for more than 12 months, the assessment goes into default.
These specialty, “lower lien” assessments as they are generally called, can overtime escalate and move into first lien position on the property and eventually trigger a tax lien sale. Simply put, not paying a $200 water district tax assessment can start a process where the borrower’s home can be taken and sold and expose the servicer to significant collateral risk.
We’re sure you’ve probably seen ads where you can buy delinquent tax liens. It’s an investment opportunity that promises a return of anywhere between 6 and 36% where the investor buys up bulk amounts of delinquent lower liens, and by paying off the outstanding amount, can end up owning the property literally kicking out the homeowner no matter how long they have been in the home. This can occur even if the borrower has stayed current on their principal, interest, general property taxes and insurance payments. The servicer, in many cases, can do nothing about it.
Sadly, this scenario occurs more frequently that one would expect. In fact, some observers estimate more than $9 billion worth of properties go into foreclosure annually due to delinquent property taxes and lower lien default.
To help servicers protect their collateral and their borrowers against lower lien risk, we initiated a project to identify as many of these lower lien tax agencies as possible. We then asked these agencies to share their data contained in a survey of more than 100 questions. Today we are using this data to offer a new service option that can alert a servicer of the lower lien assessments.
With this added insight, a second escrow account can be established so that impacted properties can avoid a disastrous outcome. The servicer can then communicate to the affected property owners who can then choose to pay the lower lien themselves or have it included in their monthly escrow payments.
LERETA takes pride in reducing hidden exposure in the property tax service arena. We’ve been doing it for more than 35 years, it is a part of the LERETA difference we deliver to our customers.