Randy Kozlowski: Mortgage Servicers Can Expect More Problems with Escrow in the Near Future


PERSON OF THE WEEK: Having access to current and accurate property tax data is critical for any mortgage servicer. The monitoring of property tax payments is essential for ensuring properties do not go into default, end up with liens or judgments or, worse, end up in foreclosure.

This monitoring is critical, as tax status can change at any given time. Fortunately, technology is making what used to be a very difficult job many times easier. To learn more about the role technology is playing in this niche “sub-sector” of mortgage servicing and lending and what challenges servicers will likely continue to see, MortgageOrb recently interviewed Randy Kozlowski, chief strategy officer for tax services firm LERETA.

Q: Having been in the tax industry for 25-plus years, what are some of the most promising trends you’re seeing in the industry? What are the most stubborn challenges?

Kozlowski: The technology keeps getting better across the tax servicer, third-party data providers and tax agency sides. Thirty years ago, this was a totally manual process that included physical paper tax bills, time consuming phone calls to the tax agencies and snail mail processes. Today roughly 80% to 90% of tax information is available online for major metropolitan areas of the country. 

What used to take weeks is now typically done in days. And in the next five years it will be all be done in real time with the use of automated intelligence which will be highly automated with few exceptions. Today, most of the focus is on exception processing.

Also, borrowers are becoming more sophisticated and are looking to take a more self-service approach in the overall servicing process. They are expecting to see real, or near-real time, tax information. With borrowers becoming more technologically advanced, having tax information pushed out via email and SMS/text is becoming table stakes.

In terms of challenges, errors in tax line set ups and new loan boarding quality continue to be a significant issue. When this happens, it creates a cascade of problems for the borrower and the servicer down the road. 

Not all the major tax agencies have modernized and in this era of budget cutbacks there are still delays in posting the tax information which hinders tax servicers and lenders from hitting their deadlines. Getting the right first tax payment due date, estimated tax amounts and the correct tax identification number is critical to the down stream servicing quality that borrowers are expecting.

There are still a significant number of borrowers who really don’t understand the real estate tax process or how escrow accounts work. Loan closings are complex and many times the details of the borrowers’ escrow account goes without explanation.  So, when things go wrong, and no matter how good our industry gets, a certain number of things will go wrong, borrowers get understandably upset.  It’s our job, as tax service providers, to minimize the frequency of these issues.

Q: You believe that this year the whole subject of escrow is going to be more challenging for servicers. Can you explain why?

Kozlowski: As mentioned, most homeowners have only a limited understanding of how escrow accounts work. When they get a notice that their payments are going up or they get a tax bill in the mail and they aren’t sure whether they should pay it, they call their servicer. I’m sure most servicers would agree that some of their longest and most difficult interactions with their borrowers involved escrow accounts. Historically, tax increases have usually been the main driver of escrow account shortfalls, but now homeowners’ insurance and flood insurance premiums, which are also paid through escrow accounts, are going to be major factors as well.

In some of the most populous states, like Florida, California and Texas, homeowners are seeing significant increases in homeowner insurance premiums and even seeing insurers stop writing policies in their states all together.

For the next several years federal flood insurance premiums will be rising for properties in most states under a new pricing model known as Risk Rating 2.0. In 11 states the increases could be more than 100% and in 29 others the increases could be in the 50% to 100% range.  Because there is an 18% cap on federal flood insurance premiums, the average policyholder can expect their rate to go up 18% a year for several years until they’re paying the full risk-based cost. 

And taxes and tax rates are going to go up. One reason is the dramatic home price appreciation that we’ve seen over the past three years. Another is the possible decline in the overall tax base in many markets that may be driven by the troubles that are playing out in the commercial real estate space.

Will all this happen at once? Maybe, maybe not. But it is safe to assume that servicers will definitely have more issues with escrow in the very near future.

Q: We’re coming up on the fourth quarter, the busiest time of the year for property taxes. What should servicers expect this year, and what should they be doing to get ready? 

Kozlowski: Every tax season is challenging because nothing significant can start until the taxing agencies release their bills, and the 24,000-plus agencies often change their release and due dates. 

Over the past three years, home prices have increased more than 29% year-over-year according to Zillow. Great news for homeowners and the $16 trillion+ in home equity they’re sitting on. However, from a servicer’s perspective, higher tax assessments mean higher tax bills which in turn will flood call centers with inquiries from borrowers saying, “What is going on with my tax bill [or escrow account]?”

And, as mentioned earlier, in many cases, taxes won’t be the only item within their escrow accounts that will be going up due to the incoming issues with homeowners and flood insurance.

But let’s get back to taxes. Obviously, there is nothing a mortgage servicer can do to change the tax bills they receive. But they can take steps to assure that they and, their tax service provider, aren’t making mistakes that exacerbate the situation.

Here a few questions servicers should consider when thinking about tax season:

How did Q4 2022 go? Was it a fire drill last year? Did your employees have to scramble over the holiday season triaging tax reporting and payments? Are you prepared to address the mortgage payment changes due to tax increases? Do you have a proactive plan to handle borrower communications on tax increases and the higher premium bills from homeowners and flood insurance policies? Has there been an increase in tax-related complaints? 

If servicers don’t like the answers to these key questions, it’s time to do something about it. 

Q: How is technology taking friction and errors out of the tax payment process?

Kozlowski: Automation is everyone’s favorite buzz word in the servicing industry. So, naturally, tax service providers are using automation to reduce tax procurement times and improve data quality and efficiency. Not so long ago, 30% of tax bills were procured manually, today, at our firm, that number is less than 5%. This takes significant time and friction out of the procurement cycle, reduces the possibility of transposition errors and ultimately most of the information is delivered via system to system. 

As an industry, tax service providers are also expanding their offerings and changing the way we approach different steps in the tax set up and boarding processes to catch defects before they become problems. A consistent audit protocol for reviewing tax line data quality is key.  Conducting these audits ultimately improve automation rates, reduce customer calls and tasks and help deliver accurate escrow analyses for the consumer.

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