Delinquencies are a major problem for many institutions and borrowers. Unfortunately, it’s easy for a borrower to get behind on their real estate tax payments, and it can be difficult for financial institutions to keep up with all their loans—creating a snowball effect.
Because interest and penalties can be charged the moment a payment is late—and borrowers often aren’t notified or aware—they may continue to make inaccurate payments, resulting in escalating fees and the risk of losing the property by foreclosure.
We created this guide to help you understand the major causes and consequences of delinquent property taxes, and how the right technology can help you prevent them while streamlining your business.
Borrowers are required by law to pay property taxes annually by a specific date or dates determined by each taxing authority. Unfortunately, borrowers often fall behind and become delinquent, resulting in numerous consequences—for both the borrower and the lender.
Confusion and inaccurate reporting.
For first-time homeowners in particular, the process of not only paying but understanding real estate taxes can be very confusing. So, communication between borrowers, lenders and tax agencies is critical.
If something changes and the lending institution or borrower is not notified, reporting errors occur, erroneous or wrong-amount payments are made, and delinquencies follow.
It is a difficult and time-consuming responsibility of the lender to ensure all tax information is up to date amidst continually changing regulations. There are many things that can go awry when an institution monitors its tax accounts internally. Here are the most common causes of inaccurate data.
Escrow Payment Errors
- Special assessments may get added without the payment amount getting updated
- It is quite common for the borrower’s last quarter water bill to get missed, which could get added onto the last escrow payment—without the borrower’s knowledge
- The lending institution could potentially make payments on the wrong amount (due to inaccurate information like the examples above), resulting in delinquencies or even a tax sale or foreclosure
- After the first date that the borrower is delinquent, interest accrues (can be as low as $10–$15 or up to a few hundred dollars for commercial loans)
Miscellaneous Information Updates
- Parcel information can be inaccurately reported due to changes in owner name, parcel identification number, or property address
- Other tax servicers only verify parcel identification number, which can lead to inaccuracies with property address and/or owner names
- Tax payment information such as payee and mailing address
- Due dates may be confused or misreported
These are just a few examples of common real estate tax inaccuracies. In order to avoid misreporting data, it is imperative that every parcel search is validated every time, rather than just once in a while.
Why many lenders struggle with inaccurate reporting.
Keeping every account accurate and validated is a substantial undertaking, and lenders may occasionally miss a few details or have an account slip between the cracks. For lenders that outsource this service, the provider often doesn’t provide validation, which can lead to time-consuming, expensive consequences.
Many large tax service providers are not concerned with the interest that comes with delinquencies because they know payment will be made one way or another. If partnering with a tax service provider, it is critical to choose one that will take the time to routinely check for any discrepancies and ensure immediate resolution.
Portfolio monitoring requires substantial time and effort, leaving many lenders struggling to stay on top of it, either because they lack the necessary internal resources or have outsourced real estate tax services to a subpar provider. When lenders fail to properly monitor their portfolio, several negative consequences follow.
Here are potential problems that can occur when real estate tax services are not up to par.
Delinquencies and accruing fees
When vendors or tax servicers report inaccuracies or do not take the time to research a parcel’s details, it can negatively affect all parties. Even just one day late with a payment can be costly for a borrower. Annual delinquency fees range from 18–22% on average, which could mean an additional 1.5% interest per month. When you do the math, this begins to add up quickly. With due dates frequently changing—and if the changes go unnoticed by the lending institution or provider—a domino effect begins that leads to more fees.
Inaccuracies are more common with commercial properties due to changing ownership. Commercial loan amounts (and property values) are higher on average than residential loans, meaning interest charges from late payments can add up to staggering amounts. What’s more, when the wrong payment amount is entered by a tax servicer it could auto trigger an escrow analysis, causing even more compliance issues for both the borrower and the lender.
Failed audits and non-compliance
Compliance is another risk. Strict federal government regulations must be adhered to in order to avoid penalties. It is important for banks and credit unions to be on the same page as taxing authorities as they govern tax amounts and due dates. However, this is an overwhelming task that is often best delegated to a vendor that specializes in property tax monitoring and delinquencies.
Foreclosures and tax sales
Eventually, inaccurate tax data can result in foreclosures and tax sales, which is why it is so important to align with a customer service focused vendor that provides, accurate, on-demand reporting. Inaccurate data not only causes higher payments, delinquencies and the possibility of losing the property, but it also creates stress on the homeowner or business owner when presented with unexpected back taxes.
Taxes sold to a tax buyer
Another situation that can occur when real estate taxes are delinquent for an extended period is their sale to a third-party tax buyer. In that scenario, the tax buyer holds the primary lien on the property. The lender or borrower must buy back the taxes at the fee the third party sets in order to save the property.
This is particularly risky because when a taxing authority sells taxes to a third party, they mark those taxes as “paid” with no designation to say if the taxes were paid by the property owner or the tax buyer. If the lender (or their tax servicer) just sees “paid” on the taxing authority’s tax website, they may not realize another party now holds the primary lien position.
Partnering with a vendor saves time and reduces errors.
In order for lenders to ensure borrowers are paying the right amount of taxes on time, they should consider a vendor with proven real estate tax monitoring expertise. The right vendor will have superior tools and resources to efficiently monitor each loan, ensuring accurate and timely payments.
In many cases, a delinquent escrow payment is no fault of the property owner. It is often the responsibility of the lending institution to ensure the borrower is aware of any changes in payment or due date. By partnering with a vendor that understands the importance of accuracy and goes above and beyond to verify information, you ultimately do your borrowers a great service.
Ensure data verification steps are in place
When a lending institution works with a large tax services vendor, they do not always receive the personal attention and level of customer service they deserve. While this may seem inconsequential, it can result in serious problems for the borrower. Choose the vendor that will work along with you to ensure no steps are missed and all data is accurate.
Many larger tax services vendors are not concerned with interest fees. Banks and credit unions, on the other hand, understand that unnecessary interest fees adversely affect borrower perceptions, compromise relationships, and damage reputations. An errant payment of just pennies could cause delinquency, leading to fees and an increased risk of loss.
Find a vendor with a right-sized solution
When seeking a property tax tracking vendor, avoid a one-size-fits-all solution. Find a vendor that not only provides on-demand reporting that can be accessed 24/7, but one that will go the extra mile to help guide your team, dig deeper, and ensure all data is reported correctly on every parcel.
Save money, free-up resources, and avoid delinquencies
There are serious consequences of inaccurate real estate tax data, including failed audits, tax sales and foreclosures. To avoid these issues, do your research and partner with a vendor that is committed to ensuring data accuracy and offers a high level of customer service. Not only will you be relieved of complex processes and reduce delinquencies, but you’ll be able to serve your borrowers better.