Mortgage Orb - Susan Portnoy, Karen Stephens and Jessica Phoonphiphatana - 13 December 2016
BLOG VIEW: Despite the fact delinquency rates are falling, lenders are still losing properties due to unpaid property taxes and utility bills. There has been an increase in the number of properties getting to the more severe status of “pay delinquency immediately or lose the property.”
Here’s what happens many times: Borrowers are receiving notices of tax sale and foreclosure warnings, but they are either not acting or not acting fast enough to protect themselves or the commitment they have to their lender. Although borrowers are receiving the notices, many lenders/servicers are not notified because deeds are not being recorded. The delinquencies for utility, trash and fire district bills can be small amounts – some as low as $50 – and traditionally are not paid through escrow accounts. Additionally, some states, such as Massachusetts, have short redemption periods (six months in Massachusetts) and require immediate action to avoid loss.
So, why is this such a serious problem? Utility and fire districts specifically depend on these funds to operate and keep up with demand from the jurisdictions they serve. Most agencies shut off the utility (water, gas or electricity) service for non-payment, but other jurisdictions, primarily in the northeast, will sell the property due to delinquent utilities at a tax sale.
Fire and utility districts primarily collect through normal billing statements to homeowners, but when they become delinquent the districts do not have the capacity for collection efforts. Therefore, they may resort to tax sales by giving the delinquent records to the local taxing authority or county tax collector to be included in the tax sale process. The bottom line is, these agencies need funding to maintain their service areas and while most are budgeted by the state, there are several northeastern states that depend on those funds by billing homeowners. The most active fire district states are Connecticut and Rhode Island and the most active utility districts are in Maryland and New Jersey.
In other states, such as Arkansas, lenders cannot redeem the property if they cannot show proof of interest or that the property is in their portfolio. The property could be lost by the time the deed is corrected and recorded. If all delinquencies (taxes and utilities) are resolved at the time of acquisition, or servicing transfer, it would allow time for the required documents to be recorded in the new servicer’s/lender’s name.
Lenders with property in Texas may not know the taxes were delinquent as the borrowers may be securing third-party loans to pay the delinquent taxes.
What can complicate the situation further is that utility districts, several northeastern fire districts, as well as third-party purchasers of delinquent taxes will not supply data to lenders or their tax service vendors, even if they are severely delinquent. Some taxing authorities may require written consent from the homeowner for a company to obtain the status of the utilities. The only ways lenders can find out about delinquencies is if the homeowners provide them immediate notification or if the lender’s tax service vendor receives notification from the local taxing authority during their collection of property tax bills and provides notification.
To avoid losing assets, lenders/servicers need to make sure to record the transfer of mortgages, or state and local statutes will not be able to protect them. Courts may no longer accept a lenders’ filing of a late request to the court for the transfer because the lender is unable to show ‘’good cause” precipitated by an unrecorded deed, which means the lender was not notified. This may not be enough “good cause” for the courts to overturn the sale. If there is no record of the transfer, neither the taxing authorities nor third-party purchasers of the delinquent utility or fire district bills are required to send any notification during the redemption period.
Lenders/servicers should also encourage their borrowers to keep the lines of communication open. Lender/servicers could create a special mailing for borrowers in these areas, especially if they are in financial trouble. Many borrowers do not realize they could lose their home for nonpayment of a utility or fire district bill or being delinquent on a third-party loan.
Lastly, lenders/servicers should ask their tax service vendors to provide additional data (may require additional service fees), when available, or attempt to work with tax agencies that sell these delinquent properties at tax sales.
By being proactive and working closely with their vendors, lenders can prevent the loss of many assets due to a $50 or less utility bill. The real keys are communication and ensuring title information is correct. If these two activities are in place, delinquent utilities could be managed more efficiently therefore reducing the risk of asset loss.