Avoiding the dangers of property tax deferrals.
Unlike with an exemption, property taxes in a deferral situation continue to accrue along with interest (but cannot be foreclosed upon). Because the tax lien takes priority over the mortgage lien, a situation could occur where the value of the asset is diminished significantly due to the unpaid taxes. The interest normally accrues on the entire unpaid balance, which after several years can be a substantial amount.
Under ideal conditions, paying down the mortgage debt coupled with an increase in property value offsets this risk. However, a downturn in the economy, loan modifications, service transfers, loss of the deferral status and other less-than-ideal scenarios can lead to payment shock for the borrower and potential losses for the lender.
The loss of a deferral status may require a large tax liability to be repaid at once and could lead to tax foreclosure, wiping out the mortgage lien status entirely.
Servicers should ensure they have methods in place to sufficiently educate staff about the institution's policies regarding deferred property taxes so they can properly inform borrowers.
Consider this example. As an older American, Joe Smith put tremendous emphasis on making his monthly mortgage payments on time. Being on a fixed income, Smith had always sought ways to make his limited monthly funds go just a little bit further. Because he lived in a taxing jurisdiction that provided relief to seniors, Smith applied for and received a property tax deferral.
As required, he notified his mortgage company, which assured him it understood that he had been granted a tax deferral and would no longer need to have his taxes paid from his escrow account. The mortgage company performed an escrow analysis on his loan. The removal of taxes from his monthly mortgage payment resulted in a $200 monthly savings. For three years, Smith was satisfied and shared his story of good fortune with other seniors so that they, too, would know the advantages of the property tax-deferral program.
However, problems started when Smith received a letter informing him that his loan had been sold to another lender. The letter assured Smith that there would be no effect on how his loan was serviced, and he would just need to send his regular monthly payments to the new company. A year after his loan was transferred, a new escrow analysis was received notifying Smith that his monthly payment was going to increase by $700.
The new lender had paid the deferred property taxes. In addition, it was now collecting for taxes due the following year.
State and local compliance
First and foremost, lenders need to be aware of the laws governing property tax deferrals for the customers they serve. Property tax deferrals can be complex.
These deferrals are intended to provide relief--typically for low-income, senior citizens--but qualifications for the programs vary from state to state and, in some areas, by local municipality. Common qualifiers include age, income, disability, retirement status, resident status and mortgage status.
In a few cases, the lender's position is considered and the borrower is required to get approval from the lender before the deferral is granted. In many jurisdictions, including all counties in Oregon, the lender does not have the right to deny a deferral but the borrower has an obligation to notify the mortgage holder of the deferral request.
In Texas, on the other hand, lenders do have the right to deny deferral and the onus is then on the borrower to check with his or her mortgage company to ensure that the deferral does not violate the terms of the mortgage agreement, as some prohibit borrowers from deferring property taxes.
Changes in the economy can lead to changes in regulations, adding another layer of complexity to this situation. For example, in 2011 the poor economy in Oregon coupled with the weak housing market forced the legislature to make changes to the property tax-deferral program. Currently there are about 6,000 participants in the state's deferral program.
Twenty-nine states have some form of property tax deferrals in place and other states are considering similar measures as well. In Massachusetts, the state senate recently passed SB 1494, which is intended to offer seniors in the state deferrals as a relief option for property taxes.
Once compliance is completely understood, and policies and procedures are put in place to follow the rules, mortgage servicers must implement tracking mechanisms.
Tax collectors may or may not provide indicators to servicers at the time when tax bills are issued, so they should exercise caution to ensure taxes are not paid when a borrower has an approved deferral.
The most commonly used mortgage servicing systems lack sufficient tracking methodologies to flag loans that have property tax deferrals, so lenders often must develop their own processes to identify and verify tax-deferral status. Some options include setting up databases, using stop codes to prevent payments and changing the escrow status to non-escrow.
Whether or not an investor allows tax deferrals depends on its specific appetite for risk. Fannie Mae and Freddie Mac investor requirements do not cover property tax deferrals. Under certain conditions for reverse mortgages, Fannie Mae requires that the tax deferral be subordinate to the mortgage lien.
The Federal Housing Administration (FHA) explicitly prohibits the borrower from participating in any real estate tax-deferral program unless the lien created is subordinate to the insured mortgage. Private investors may or may not have rules specific to tax deferrals, so lenders need to be diligent in their efforts to follow the appropriate guidelines.
A situation such as the earlier one of Joe Smith, whose deferred taxes were paid by a new servicer, may create what can be an unbearable payment situation for a borrower. This is especially true for someone with limited resources to manage a large increase in monthly payments.
Decisions not to honor deferrals--where not required--may be beneficial to manage the associated loss risk for the lender. But such decisions also may lead to undesirable reputational risk as this could fuel a perception of poor treatment of vulnerable classes of borrowers.
Escalated negative customer service issues, negative press and regulatory complaints are certain to be issues for the lender when a customer in this situation faces a payment increase because a lender chooses not to honor a deferral and instead pays deferred taxes.
Also, remedying a payment made in error for a customer with deferred taxes can be difficult to manage, as collectors may be unlikely to issue a refund of paid taxes.
Communication with the borrower is critical to mitigate these risks. At the time of origination, the borrower should be notified of investor and lender policies on tax deferrals. Decisions to honor or not honor a deferral should be communicated to the customer in writing.
Servicers should avoid paying taxes when not honoring a deferral without first communicating with the borrower if at all possible. Communication should be clear during loan transfers, modifications and any other change in loan status that could disrupt or change a borrower's perception of his or her tax-deferral status.
Clear compliance research, policies and procedures, tracking controls and communication are valuable tools that should be implemented by lenders and servicers in regard to tax deferrals. Doing so can ensure that senior citizens, a valuable customer base, and others are not at odds with their mortgage lenders and servicers when they take advantage of programs designed to help them manage their finances.
Jim McGurer is first vice president of Covina, California-based LERETA. He can be reached at firstname.lastname@example.org.
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|Title Annotation:||COLUMNS: SERVICING|
|Comment:||Avoiding the dangers of property tax deferrals.(COLUMNS: SERVICING)|
|Date:||Aug 1, 2016|
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