While new challenges continue to arise daily in this tumultuous market, the modus operandi of the moment is survival. Servicers that can catch their breath long enough to gain a proactive perspective stand to not only survive, but grow as a result.
As we know, a key area of struggle – and opportunity – is bulk processing of loan modifications. Savvy servicers are recognizing that tax servicing is one facet of this effort that truly represents a double-edged sword. This article outlines tips to help servicers use this sword to gain an edge without getting cut.
Lenders and servicers are increasingly monitoring portfolios to ensure borrowers are paying taxes on time. If the borrowers aren't current on their taxes, this information could be an indicator that the borrower is delinquent and at risk for liens. And for modified loans in particular, this is a valuable exercise. It is imperative to note any delinquent tax payments as early in the process as possible for two reasons.
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First, as noted above, delinquent payments are often indicators that the borrower is in financial straits. Second, state tax offices, recognizing revenue opportunity, are moving to tax sale on delinquencies much faster than in the past.
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Once borrowers default on their loans, lenders should redeem taxes to avoid liens from other parties and consider modifying or switching non-escrowed loans to escrowed. Many lenders are taking this a step further to reduce the risk of loan default by sharing tax appeal information with borrowers. Many borrowers are not aware of the steps, timelines and even opportunities to reduce their annual property taxes.
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Many homeowners are pleasantly surprised to find they can appeal the current value of their property tax set by the assessor's office. The opportunity, however, comes just once a year, and there is a specific time frame during which homeowner scan request value review and reduction. If they get a reduction in value, the taxes are reduced.
From a lender's perspective, obtaining some front-end tax relief for the borrower helps keep the homeowner current and protects the invested property. This requires maintaining a national "deadline database" for counties and states and then implementing borrower communications with the specific timeline and processes.
Jurisdictional awareness
States – and even counties – can vary immensely in how they process tax information requests. Servicers and lenders need to know these variances in advance to ensure efficient management. For instance, the state of Pennsylvania is primarily non-automated, and requests for tax bills or certificates must be submitted by mail, and are returned by mail. The process is lengthy, arduous and expensive.
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In addition, many jurisdictions have very specific, detailed guidelines about submitting payments, including an explanation of how a check should be written, if postmarks are accepted, whether original tax bills are required, and other details that, if missed, can cause a jurisdiction to return a servicer's payment and require it to be resubmitted. Knowing the unique requirements of each jurisdiction and how to submit payments or requests in bulk can save servicers time, costs and headaches. And simply knowing which jurisdictions are more arduous than others can help servicers plan accordingly.
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Areas in Pennsylvania, Massachusetts, New York, New Jersey and Indiana, as well as Cook County, Ill., are generally considered among the most difficult taxing entities.
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In light of these findings, there are steps that can be taken to make jurisdictional efforts more cost-effective.
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For example, servicers are advised to confirm submittal fees. In some areas, you only need to pay a one-time fee to receive one year of service for tax validation. Many servicers don't know this and automatically pay the fee with every request. The tax entity, needless to say, has no problem accepting these extra payments.
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Research shows that, over the past five years, there has been a 30% increase in cases of jurisdictions extending their due dates past the statutory due dates or economic loss date (ELD). These tax entities are struggling to complete the front-end work to establish accurate bill amounts, requiring many jurisdictions to push back the statutory due date or ELD.
This reality, in turn, makes the deadline a rolling due date, which can be difficult to manage. Lenders should monitor the tax entity weekly to find out when they'll set the tax rate, tax due date and release the tax statements. This can be time-consuming and, again, holds possible risk if overlooked and/or mismanaged.
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Finally, servicers should compare the costs and time expended in a "manual" state's processes versus other states' more up-to-date processes. This practice will allow servicers to allocate resources accordingly and strive to generate volumes that deliver economies of scale and/or efficiencies through bulk requests.
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It's important to remember that delinquent taxes can be hidden in various areas, so servicers must keep up on current due dates, amounts and even which offices are currently handling the tax work. If taxes shift from one office to another after the due date, catching up with the change may more appropriately equate to starting from scratch. To avoid having to act in a reactionary mode, servicers should keep abreast of jurisdictional and process changes.
Preparing for volume
The sheer volume of modifications on this current level is still very much a new experience for most servicers. To process these volumes effectively, lenders and servicers should familiarize themselves with such changes as taxing entity payment requirements, late release of due dates or tax bill release dates, tax collector name and other pertinent information to successfully manage their real estate portfolios. These are reasons why, when it comes to managing volume, your best plan is to be proactive rather than reactive.
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In addition to maintaining a keen knowledge of jurisdictions and timelines, servicers should manage processing closely to ensure nothing is missed that could cause a property to go into tax sale. It is evident that not paying real estate taxes will eventually lead to tax sale, but many may not realize that other taxes relating to water, sewer, sidewalk and other special-assessment type taxes may lead to tax sale as well, depending on the taxing entity.
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A good start to proactive management is to consider the big picture: Categorize loan modifications into mandated and requested buckets, and then align with jurisdictional variances. For instance, single parcels are not that difficult to manage. However, to manage three unique jurisdictions with 12 installments (which haven't sent bills yet) over 12 months requires dedicated attention and resources. Consider establishing shared FTP sites and other technology shortcuts for data transfers and requests with third-party service providers.
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As with any business process effort, the right intelligence can take an operation to new levels of performance. When it comes to processing and servicing modified loans, obtaining a one-time snapshot of taxes is a good certification tool for servicers. An even better practice is to obtain regular updates, preferably after each economic loss date, which can reveal patterns that ensure the loan is current and that there is no danger of default.
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Lenders and servicers are finding value in the detailed, year-over-year tax, such as event data, tax roll data and jurisdictional details. Vendors may opt to purchase an entire tax roll and incorporate it into their loan database. This assists with maintaining current and prior tax amounts, which are beneficial for tax estimates, escrow analysis and parcel changes. This one-time match for all of the parcels is immeasurably faster than manually keying data and enables better management and enforcement, along with a reduction in the possibility for human error.
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Most servicers have automated the importing of tax data directly into their servicing systems, so having access to full tax-roll data is another benefit for both parties. This is particularly valuable for larger jurisdictions, but can also be beneficial for some of the more process-heavy jurisdictions where lenders want to ensure their submittals meet all requirements to guarantee expedient processing.
Lori Eshoo is president and CEO of National Tax Search LLC, a majority woman-owned business based in Chicago that provides property tax management, tax certification and sales tax payment processing services. Eshoo can be reached at (312) 233-6440 or lori.eshoo@nationaltaxsearch.com.
