PERSON OF THE WEEK: The fourth quarter is always a busy time of year for real estate tax matters – especially for mortgage servicers because they must be aware of any tax liens or other tax issues that could end up impacting their portfolios. To learn more about how tax service companies deal with the flurry of activity at the end of the year, as well as the common fourth-quarter tax issues servicers need to stay aware of, MortgageOrb recently interviewed Susan M. Portnoy, first vice president for tax services firm LERETA.
Q: With the fourth quarter being the busiest tax service cycle, how do you feel 2016 ended for customers?
Portnoy: The fourth quarter is the “Super Bowl” of the real estate tax season. There are 36 states with taxes due, including several states in which taxes are traditionally paid by year-end for IRS tax write-off purposes (1098 statements) but are really due in the first quarter.
It is a lot of stress on a tax vendor, as well as on borrowers and loan servicers. We have heard some tax vendors struggled through this last cycle and were not able to make all necessary tax payments, or that they even used the previous year tax amounts to at least make a payment for 1098 statement purposes. Unfortunately, these types of strategies may cause an increase in call volumes, borrower complaints and unplanned expenses, as borrowers either will not receive their tax deduction or will not receive their full deduction.
It is important that tax vendors support you and your borrowers, especially during this very busy tax cycle. Fielding Consumer Financial Protection Bureau (CFPB) complaints or potential Real Estate Settlement Procedures Act violations during this time would be the equivalent of a 15-yard penalty or ejection from the game.
Q: Do you have any thoughts on the new administration regarding potential changes for the industry?
Portnoy: At this point, the view of Dodd-Frank and the CFPB is unknown. We do know the new administration is signaling that it is not in support of various aspects of Dodd-Frank and the CFPB. Democrats are planning to fight hard to maintain both.
The bottom line is that the increase in regulations we have seen during the last eight years will not entirely go away, and lenders/servicers need a vendor that can help them manage their businesses better in the post-economic crisis environment. Vendors need to continue to focus on doing a better job for borrowers and servicers. That said, lenders need to have partnerships with vendors that are able to move quickly and easily in the changing environment. Being prepared, communicating and being a flexible vendor is key now more than ever.
Q: What’s new in tax service?
Portnoy: Good question. As loans transfer from servicer to servicer, we have seen a lot of parceling issues, which means either bad parcel numbers associated with properties or a missing number of parcels. This has been a long-standing problem and a difficult one to figure out in a cost-effective manner for tax vendors. We have researched this issue, with a goal to provide a real solution, and have developed new technology and data that allow us to take portfolios and determine if there are potential missing parcels. We began offering this to our customers and have already found over 10,000 missing parcels in portfolios. That means more than 10,000 fewer claims or lost properties to tax sale for investors and loan servicers, which brings unplanned expenses, loss of assets and borrower complaints. I would encourage any lender or servicer to test our new technology and learn more about its portfolio.
Q: What do you foresee with mortgage origination volumes?
Portnoy: According to the Mortgage Bankers Association, there will be a 16% drop in originations this year. We are in a unique situation because, out of our more than 1,500 clients, there is a large number that have always focused on purchase originations, and their volumes are actually increasing.
Long story short, we have not seen our volume decrease. However, some of the largest lenders in the country have a heavy concentration of refinances. If a vendor primarily serves this market, it will be important to understand the potential effect this will have on their clients.
The bottom line is that if your vendors are negatively affected and need to downsize and/or cut costs to bridge the gap, this could adversely affect your business. Lenders should ask questions, understand the risks and be prepared.
Q: What is a common misconception regarding property taxes? How can that be remedied?
Portnoy: This question is great timing. We previously talked about the fourth quarter and the tax payments that must be made during that time to meet economic loss dates and year-end states that are not due until the first quarter of the new year for income tax purposes (1098 statements). Within this process, there is a misunderstanding that the tax payments made for first-quarter states, commonly called “false year-end” states (including Connecticut, Michigan, Tennessee, Texas and Wisconsin), must arrive at the tax offices by the last day of the year, despite their true economic loss dates of January through February of the new year.
For borrowers to be able to write off their real estate taxes for that year, they must be debited from their escrow accounts by Dec. 31 to be included on their 1098 statements. The IRS itemized deduction guideline does not state that taxes must be mailed by Dec. 31 or received and posted by the local taxing authority by Dec. 31.
What follows is from “IRS Publication 530 – Main Content – Credits and Deductions”:
Escrow accounts: Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.
Lenders and loan servicers may help remedy this misunderstanding and reduce call center volumes and borrower frustration by educating borrowers through website communication, email blasts and/or letter campaigns.