BLOG VIEW: Mortgage servicers are routinely challenged by making timely escrow tax payments. Consistency is key. If a mortgage servicer knows that property taxes in a particular state or region are always due at the same time, forecasting workload volume and staffing needs can be more easily predicted.
However, some taxing jurisdictions tinker with collection schedules or offer alternate tax pay installment options that force servicers to stay on their toes.
What follows are just a few of the interesting changes and requirements of some of the jurisdictions around the country.
New York City
In New York City, real estate taxes in the five boroughs are collected either semi-annually or quarterly based on the property’s assessed value. If the assessed value is greater than $250,000, tax bills are mailed semi-annually. If the assessed value is less than $250,000, tax bills are mailed quarterly. Servicers must be vigilant monitoring accounts hovering near the NYC assessed value threshold because of potential frequency change.
In the Northeast, several towns have changed their property tax collection schedules in recent years. The Massachusetts towns of Orleans and Paxton converted from semi-annual to quarterly tax collection. The Vermont towns of Cabot and Fairfax moved from annual to semi-annual collection while Middlesex and Killington moved from annual and quarterly collection respectively to tri-annual collection. In Maine, the towns of Alfred, Bremen, Hancock, Newport, and Newburgh all shifted from an annual to semi-annual tax bill with Newburgh even testing tri-annual collection during this transition.
In the Atlanta metropolitan area, DeKalb County historically collected a two-installment real estate tax bill. In June 2015, the tax commissioner’s office requested that mortgage servicers remit a full-year bulk payment on or before September 30. However, the tax office website continued to display the installment payment schedule, which remained active for individual homeowners. DeKalb has since relaxed the full-year bulk payment request and resumed normal two-installment schedule.
In Michigan, the Detroit City Summer Tax can be paid in full or two installments. The first partial summer tax payment must be made by August 15 and the balance is added to the winter tax due January 15. If the first partial summer tax is not received on time, eligibility in the partial payment program is lost and the full summer tax is due by August 31. Other Michigan cities such as Flint and Warren also offer summer tax payment frequency options.
Wisconsin state legislation authorizes the escrow homeowner to choose from various real estate tax payment options. One option requires the mortgage servicer to send the tax payment check directly to the homeowner. Another option instructs the servicer to pay the January 31 tax by December 31. Yet another option instructs the servicer to pay the property tax “when due,” language that is surprisingly vague and subject to interpretation.
Some Wisconsin servicers interpret “when due” to mean an annual tax payment on or before the January 31 due date. Others interpret “when due” to mean installment payments.
Every Wisconsin tax office allows both annual and installment payments. Most installment plans consist of a first half tax collected by the municipal tax collector and a second half tax collected by the county tax collector.
Some municipalities have adopted a “multiple installment option” ordinance that allows the collection of three, four or more tax payment installments.
For example, Kenosha City collects three installments while Madison City collects four. Milwaukee City leads the pack by offering 10 real estate tax payment installments due monthly between January and October.
Perhaps the most misunderstood real estate tax payment policies are in the state of Maryland. State legislation in 1999 switched the method of paying owner-occupied property taxes from annual to semi-annual. Servicers were told to pay semi-annually on all eligible properties unless otherwise instructed by the homeowner. Combining eligibility and homeowner preference can often contradict and confuse servicers.
Every Maryland property tax bill can be paid annually, but not every property is eligible to be paid semi-annually. The 1999 state legislation mandated semi-annual tax payments for “principal residence” properties only. Defining “principal residence” is not always clear. When local assessment offices in five Maryland counties were recently asked if a boat slip, condo storage unit or condo parking space/garage could be considered “principal residence,” three responded yes and two responded no. In 2011, MD House Bill 463 extended semi-annual eligibility to certain commercial small business owners based on their property tax bill total, further muddying eligibility definition.
Maryland semi-annual tax law often appears to conflict with common RESPA principles. RESPA suggests a lump sum annual tax disbursement should be made if the taxing jurisdiction imposes any additional charge or fee for installment tax payments. To compensate local governments for lost interest and administrative expenses of sending and collecting two tax bills, semi-annual legislation allowed a service fee of up to 1.65% of the second half of the tax payment. The service fee, if locally invoked, is added to the second half of the tax bill. A long-standing public local law in Frederick County allows for interest to be charged on the second installment tax bill instead of this service fee.
RESPA also suggests a lump sum annual tax disbursement should be made if the taxing jurisdiction offers a discount for annual tax payment. The Maryland tax offices in Allegany and Carroll offer early payment discounts on annual tax payments, but not semi-annual tax payments.
Tax offices in the counties of Baltimore, Cecil, Frederick, Harford, Howard, Talbot, Washington, Wicomico, Worcester and the City of Baltimore offer a discount on annual and first half tax payments, but not on second half tax payments. As a result, discounts or portions of discounts are lost under the semi-annual mandate.
Garrett County once allowed discounted property tax payments, but this was restricted in 2014 to only payments made via e-check or downloaded electronic payment files. In 2018, Garrett County stopped offering any early payment discount.
Nearly two decades after Maryland semi-annual tax legislation became law, many still debate if implementation and the effect was worth it. Opinions among Realtors remain positive.
Alan R. Ingraham, CEO of the Greater Baltimore Board of Realtors, says, “This ([legislation]) resulted in a dramatic reduction in out-of-pocket closing cost which has served as an inducement to first time buyers to obtain homeownership. We see no reason for change in this tax payment plan and believe it has accomplished what was intended for potential first-time buyers and existing property owners throughout the state.”
Critics of the Maryland semi-annual tax legislation cite second half fees, lost discounts and increased year-end administrative workloads as reasons for change. Regarding inducements to first-time home buyers, detractors recall government policies that encouraged home ownership for those who otherwise could not afford it as one contributing factor in the subprime mortgage crisis and nationwide banking emergency a decade ago.
Mortgage servicers will always face challenges due to changing real estate tax collection schedules and frequency options. Staying informed of frequency changes and understanding the complexity of regional tax payment installment plans is essential for successful loan servicing and a healthy, performing portfolio.
Douglas Dick is manager of tax report processing for LERETA, a provider of tax services to the mortgage servicing industry.