When non-escrowed homeowners in Texas fail to timely pay their property taxes, they will be inundated with offers from companies offering to help pay the delinquent taxes. At any time between when taxes become delinquent and the tax collector obtains a judgment and sells a property to collect outstanding taxes, a homeowner may enter into a contract to transfer these taxes from the taxing authority to an outside company.
Such a transfer creates a transfer tax lien. This transfer tax lien, regardless of when it is created, is superior to any mortgage lien attached to the property as if it were still held by the tax authority. If a homeowner fails to pay the tax lien and the holder of the transfer tax lien forecloses, the mortgage will be extinguished.
There are several documents that must be executed to transfer and properly record a transfer tax lien in the property records of the county where the property is located. The transfer tax lien is supported by a deed of trust similar to a mortgage deed of trust. Additionally, an affidavit that identifies the property and the homeowner's agreement to the transfer must be executed and filed.
In the past, a servicer could only locate this deed of trust or affidavit with a manual search of the property records. Many servicers are unaware of a transfer tax lien until the property is foreclosed and the transfer tax lien documents are located by a foreclosure attorney.
It is very common that a servicer, despite its best efforts, will fail to identify one of these liens. If a servicer places a phone call or written request to a tax assessor to confirm the status of taxes, the assessor will confirm the taxes are current. Unfortunately, the tax assessor often does not disclose that the taxes were paid under a transfer tax lien. Unless further questioned by the requestor, one may not even be aware of the transfer tax lien's existence.
It is generally in a servicer's best interest to advance the funds to pay off a transfer tax lien. This will create an escrow account for a borrower but ensures that the tax lien will not foreclose.
The prior version of the law permitted a servicer to obtain payoff figures for a transfer tax lien within the first six months of the lien. After the six months, a servicer was required to obtain the borrower's written consent before the tax lender would release payoff figures.
Unfortunately, many of the tax lenders would not abide by the law and refused to provide such payoff figures under any pre-foreclosure circumstances. A transfer tax lender was previously permitted to foreclose in the same nonjudicial manner as a mortgage company. The tax lender would mail a notice of sale to the lien holder 21 days prior to sale. By the time the lien holder or servicer received, identified, transferred and processed the notice of sale, the tax lender already foreclosed and extinguished the mortgage.
The Texas Legislature, however, passed S.B.1520, which took effect in September 2007 and modifies the law relating to transfer tax liens.
With the recent modifications, there are now two specific points whereby a servicer can obtain payoff figures. First, once a transfer tax lien is delinquent for 90 consecutive days and before the 120th day of delinquency, the tax lien holder is required to send a notification of the delinquency to the mortgage lien holder. Second, if the mortgage lien is 90 days delinquent, the mortgage lien holder or servicer may send correspondence to the transfer tax lien holder to obtain payoff figures for the transfer tax lien.
The most helpful modification for mortgage servicers provided by S.B.1520 is the dramatic change to the foreclosure process for these transfer tax liens. The changes give servicers a very important gift: time. When a homeowner enters into a transfer tax lien, the tax lender will be required to forward a copy of the homeowner's transfer affidavit via certified mail to the current mortgage servicer or lien holder within 10 business days of its execution.
It should be easier for a servicer to identify a transfer tax lien without further questions to the tax assessor about who paid the taxes. It is paramount that sevicers have a mechanism to identify the incoming affidavits and the loans associated with the transfer tax liens, so the loans can be tracked for possible tax lien default.
A tax lender must now file a quasi-judicial action against the homeowner as well as the holder of a ‘pre-existing first lien.’ Second lien holders are not entitled to notice, as the law only requires notice to a first lien holder. Therefore, second lien holders need to monitor their liens closely to avoid a tax foreclosure.
The first lien holder will not be personally served through its registered agent as if there was a full court action, but the bank will receive a written notification that identifies the foreclosure action and provides the court information. The servicer must not ignore the court action. The tax lender will obtain a court order permitting foreclosure of the transfer tax lien through a process similar to a Texas home equity foreclosure.
Unfortunately, with these additional foreclosure requirements, the tax lenders are going to charge substantially higher fees, which will be passed on to whoever pays the tax lien.
Traditionally, tax lenders have disregarded their obligations under the law and have been uncooperative with the servicers. Although the Texas law took effect September 1, the legislature has failed to give the additional guidance necessary to follow the new requirements. Some tax lenders are completely failing to follow the new changes, yet are using the new provisions as an excuse to not cooperate with the mortgage servicers.
The legislature will release additional guidance in the near future. Therefore, it remains imperative that servicers and lien holders prioritize correspondence from tax lenders to ensure their properties are not foreclosed and avoid the costly process of attempting to repurchase a property after it is lost a tax sale.
Melissa McKinney is an attorney with Barrett Burke Wilson Castle Daffin & Frappier LLP.