Typically, it’s not property taxes – which are most often escrowed and included with monthly mortgage payments – that pose the biggest headaches for lenders and servicers, but rather special-lien tax assessments that can be hard to identify and even harder to manage. Special-lien taxing agencies generate assessments for things like water, sewer, trash, solid waste, garbage, and other services that are often not included with regular property taxes. These tax bills are generated separately, and the homeowner is responsible for paying them.
Despite their lower position on the title chain, and in some cases, their relatively minimal amounts, if they aren’t paid on time or at all, the result can be detrimental to the lender and homeowner. Depending on the jurisdiction, a small water bill that isn’t paid for 12 or more months can eventually move to first-lien position, potentially resulting in a tax lien sale.
What makes these special-lien taxes so troublesome is that each state, each city and, in fact, each neighborhood can be different. Not only is it a complicated web of various taxing jurisdictions and agencies, it is also ever-changing as new laws and ordinances come into effect.
Here are three questions lenders can ask their tax service providers to ensure these specialty liens are identified, communicated and managed properly to reduce default risk.
1. Does the tax service have a process for identifying and updating special taxing agencies?
At LERETA, we’ve developed a detailed, multi-pronged process for identifying taxing agencies using automation and GIS technology combined with human intelligence. We use GIS technology, for instance, to overlay parcel maps with boundaries for taxing agencies to instantly identify all properties that are potentially impacted. This analysis, along with other automated tools, can significantly reduce exposure for all parties.
But we also recognize that automation must be combined with human interaction in order to capture all relevant information, given the changing dynamics of these taxing agencies. We counterbalance our automated systems with expert staff who review published updates and, on a regular basis, actually talk to jurisdictions for fact finding: to understand what has changed, whether they now offer digital file exchange and what process they use to handle nonpayment, among other updates. We also look for agencies within one part of a state and proactively assess whether there are similar ones in other parts of the state that may have been overlooked in the past. It’s a constant state of digging and due diligence using a multi-prong approach to uncover potentially hidden agencies that would otherwise be missed by relying solely on automated procedures. Details matter at LERETA, and going the extra mile to focus on the details lets us provide the full spectrum of information that lenders need to mitigate default risk.
2. Is the tax servicer equipped to determine which tax agencies present actual financial risk and which do not?
Identifying special liens is the first critical step. But just as important is part two of the equation: understanding which agencies can take a higher lien position, and therefore, pose a legitimate financial risk to the borrower and/or the ultimate investor…and which do not. We review the regulatory and statutory guidelines by state, as well as specifically where and how they apply by jurisdiction to determine if the local agency has a right to put a lien on a property. If it doesn’t, then the lender doesn’t need to worry about that particular agency, and we tell them that.
3. Does the tax service have the ability to track and report on non-escrowed tax assessments?
It doesn’t do much good to simply know about specific special liens, including which ones pose actual financial risk, if there isn’t tracking and reporting on payment status. Once LERETA has confirmed a special lien, the parcel can be tagged with an alert notifying the mortgage servicer of any delinquencies, regardless of whether an escrow account is set up. In some cases, a separate escrow account can be set up so that the servicer knows the amount necessary to cover the tax or assessment, when it is due and can notify and bill the homeowner accurately.
When escrow can’t be set up, we provide after-the-fact payment status reporting and delinquency-only reporting, depending on the lender’s guidance. When homeowners are expected to pay certain tax bills, tracking and reporting their payment activity allows lenders to stay on top of and rectify delinquencies before they become big headaches.
Taxes are a business of exceptions, and the thousands of specialty taxing agencies are nothing but exceptions that require detailed attention. To learn more about how LERETA can help manage the intricate details of special liens, contact sales@LERETA.com.