PERSON OF THE WEEK: Mark Collins is senior tax executive with LERETA, a provider of property tax data to the mortgage servicing industry.
MortgageOrb recently interviewed Collins to find out if the new tax code will affect tax payment processes, as well as how the purchasing of delinquent property taxes creates reporting challenges for servicers.
Q: Will the new tax laws affect tax line building or tax payment processes on a go-forward basis?
Collins: Fortunately, from a property tax servicing perspective, the effect of the new tax changes and capping the property tax and state tax deductions at $10,000 will only affect them for a single year. Homeowners in states with large property tax bills who were trying to get that one last full tax deduction had to pay their taxes early, by Dec. 31, 2017. So this was a one-time event that affects servicers.
Unfortunately, this tax change will negatively affect homeowners in various states for the rest of their lives. For example, the average family in California whose total family income equals or exceeds $100,000 per year will effectively no longer be able to deduct a single dollar for the payment of their real estate taxes.
Q: What happens to delinquent taxes that are purchased by third parties? How has this practice changed the real estate servicing world, with recent changes expanding the role of third parties and lenders in the delinquent tax payment processes?
Collins: Although the practice of tax collectors selling off delinquent taxes to third parties has been around for quite some time, we have seen a tremendous growth and change in the number of states as to how third-party liens work, and the number of parties that can foreclose on a homeowner and take away their homes has grown considerably in the last few years.
The purchasing of delinquent property taxes is big business. There are many get-rich-quick ads that tell you that you can makes thousands of dollars a month by simply enrolling in classes that teach you how to invest in purchasing delinquent taxes, or tax liens. But you will be competing with very large companies that make millions of dollars each year when you enter that business. Almost every state has some variation of a third-party lien sale.
The average tax collector has a tax delinquency rate of 7% to 8%. Considering they need to pay their bills, selling delinquent tax liens became an attractive business for them, and the practice quickly took off.
Now, they are selling the liens to investors more quickly to get those uncollected funds right away. Because folks who purchase these delinquent taxes file a lien on the homeowner’s property, they are guaranteed a return on their investment. The house cannot be sold without paying them their due, with a generous amount of interest and administrative fees heaped on top of the tax bill.
Although the typical collector charges a 10% delinquent fee for not paying taxes on time, individual investors often get 25% or more and often charge just to obtain the redemption amount and payment instructions for paying off the third-party lien. In Pennsylvania, that average fee for just checking to see if there is a delinquent tax owned by a third party is about $40. This makes it harder for the homeowner and for the mortgage servicer to find delinquent taxes and to pay them. And, of course, the amount they have to pay is much higher.
So what happens if those investors are not paid? That varies by state. But in many states, the investor is able to foreclose on the property, take ownership rights for the property and sell the property at auction to obtain their money. Because the mortgage holder can lose hundreds of thousands of dollars in the process, the third-party lien holder has a great deal of leverage and can sell back the lien to the mortgage company prior to the auction and make a tremendous profit.
The problem is we now have investors who benefit when a homeowner is unable to pay their delinquent taxes in a timely matter. They are not impartial, like a tax collector. There is money to be made when it takes longer to get paid. They can make it hard and expensive for interested parties to make that payment. You can see how this became big business and why some people do not want to see that business go away.
Q: How has automation affected the research required to determine if real estate taxes are paid?
Collins: The automation of tedious manual research is what makes companies great. We evaluate many of our vendors on the speed at which they can perform a task for us. And, of course, that means the more automation that is inserted into the process, the happier we as clients become.
Well, a strange thing happened to the automation processes for servicing companies that have detected delinquent taxes using files they receive from tax collectors or tax collector websites – again, having to do with third-party lien sales. When a homeowner neglects to pay his or her taxes and a tax collector sells that tax lien to a third party, they often mark those taxes as paid on their ledgers. For all intents and purposes, the tax is paid. It was just not paid by the homeowner. It was paid by an investor.
Now we have entered into a world where there is good property tax research automation and bad property tax research automation. What is the worst mistake a mortgage servicer can make? Well, that would be indicating that property taxes are all paid current and everything is good with a loan when, in fact, the taxes are not paid and the property is in jeopardy of being sold for delinquent taxes, and the homeowner could lose their home. So what happens if a collector marks a delinquent tax paid by a third party as paid? Any attempt to automate the research can result in a servicer’s thinking a tax is paid when it is not.
Servicers must be more careful than ever before. A new layer of data is needed before a company can safely automate delinquent tax status research. Does the tax collector indicate taxes are paid or have a zero balance when a third party purchases the delinquent tax lien? If so, does the collector indicate who paid the taxes (owner or third party)? If the answer to the first question is “yes” and the answer to the second question is “no,” then automation is not possible. One must research the property manually and determine who paid the taxes. That can require phone calls and even field trips to the tax collector’s offices, which take time.
So, the next time a vendor brags that its delinquent search automation is 90% or greater, be careful; that is not a good thing. Hundreds of collectors cannot be safely automated.
Q: Where do you see technology supporting property tax collection heading in the next five years?
Collins: I have seen many new and exciting technologies in my position with LERETA. Everything from software that allows normal business experts who are not programmers to create robots that mimic the research that they performed when visiting websites, to OCR technology that allows people to scan real estate tax bills and then the software “learns” where to find the correct data elements on the bill and how to more accurately interpret the data on the bill as quality assurance experts correct the mistakes. It truly is amazing how intelligent our tools have become. And how much technology is allowing non-programmers to create automation.
The key to leveraging this new technology is understanding that it is only as good and as creative as your people. So, being the place to work, and treating your employees with dignity and respect, and allowing them to grow, is an essential element to using technology correctly. Our job is to make our clients’ lives easier every year by delivering more accurate tax data faster – and setting the bar higher each and every year. And we can only get there with employees who are engaged and well trained. It is wonderful to see our workforce transform and become more highly skilled. It is very rewarding to be a part of that personal growth.
Our business partners, tax collectors, are, of course, becoming more sophisticated, as well. Their websites are far more data rich. We can perform extensive research into complex payment issues and seriously delinquent taxes without picking up the phone or driving out to the collectors’ offices. We are seeing a rapid expansion of electronic property tax delivery for reporting and payments. There are more fully automated payment processes that use wire transfer processes instead of paper checks – far less paper and far more electronic data exchanges, which makes everyone’s life a bit easier.
Q: What is the most problematic tax collection process that mortgage servicers face in your opinion?
Collins: Of all the strange tax collection processes in the U.S., by far the most unusual and dangerous I have ever seen is called “property tax lien assignments.” It’s a fancy term for property tax lending, which is a high-interest-rate, multibillion-dollar business. These lending companies cater to lower-income families in financial distress, in the guise of helping them through tough times. Until recently, it was only legal in the state of Texas.
Here is how it works: A homeowner who is having trouble paying their property taxes is allowed to approach a lender to obtain a loan to pay those taxes. The business sprung up in the 1990s and took advantage of an old law on the books in Texas that was intended to give protection to family members lending sums of money to family members who could not afford to pay their taxes. And it allowed those family members making the loan to take over the property if the loan was not paid. Suddenly, businesses used that law to enable them to make small loans to homeowners to pay taxes, where that loan was secured by the house. And the lien took priority over the first mortgage. The loan could be made without the consent of the mortgage company, and even without notifying them of the loan and new lien.
There are examples of people who owed $5,000 in back taxes on homes with hundreds of thousands of dollars owned to a first mortgage company where the homeowner defaulted on the small loan within a couple of months and the property tax lender subsequently took possession of the property. The mortgage holder was left holding a worthless piece of paper with no recourse, and the homeowner was out on the street.
There were even cases of fraud and abuse where folks would take out a loan, intentionally not pay it back, and then work with the loan company to obtain the title to their house for pennies on the dollar. Both parties benefited from the mortgage company’s loss. It was incredible to me that this practice existed – especially in Texas, where collectors are legally obligated to create delinquent tax repayment programs for owners who cannot afford to pay their delinquent taxes and tax deferment programs for owners over the age of 65.
Incredibly, the state of Nevada recently adopted the same type of program, and several other states are looking into legalizing the practice, as well.
Q: What is the singular most important thing that will improve tax collection?
Collins: I believe the single most important thing in the property tax industry is communication. Think of the logistics of this business. We work with more than 22,000 individuals who collect taxes. Compare that with countries like England that have a single tax collector, or Canada that has 10, one for each province.
Then there are thousands of mortgage origination and servicing companies that need to board loans to servicing systems, pay real estate taxes for their clients via escrow accounts or check behind those homeowners who pay their own taxes. These activities are to ensure everything was paid correctly and that there are no outstanding tax bills that might create a lien against the home or even cause them to lose their home.
Also consider we do not live in a static world. So, this population of 22,000 collectors is ever-changing. Some tax collectors are elected officials, so the names change. The checks made out to them can change. Their addresses can change. The tax bill due dates can change. The tax collection systems can change. New taxing authorities may pop up (new school districts, municipal districts, etc.) or go away and get collected by another agency such as a town or county. And the servicing world is also changing constantly, with new players entering or exiting the market. The collectors need to know about all the changes related to servicers.
The key to making all of this work is stellar communication. It means having a staff of people dedicated to talking to tax collectors and asking them about any possible upcoming changes – and noting those changes so that they can be communicated to the servicers. And it means having great customer representatives who keep in touch with the servicing companies to determine if any new loan acquisitions are in the works or any servicing changes are coming so that those can be communicated to the tax collectors.
As with many business, it is challenging to identify all the changes that are happening in the industry before they happen and to quickly and accurately communicate those changes. But it is essential. And the better we do it, the better the tax collection processes will become.