Magazine article The RMA Journal

Delinquent: Real Estate Taxes Threaten Lender's Collateral: A Delinquent Real Estate Tax Lien Is Superior to a Lender's Loan Position, Potentially Putting the Lender's Collateral at Risk

Magazine article The RMA Journal

Delinquent: Real Estate Taxes Threaten Lender's Collateral: A Delinquent Real Estate Tax Lien Is Superior to a Lender's Loan Position, Potentially Putting the Lender's Collateral at Risk

Article excerpt

IN 2010, ABOUT 10% of commercial real estate (CRE) loans that did not escrow for real estate taxes incurred penalties, delinquent interest, and possible foreclosure because of delinquent taxes.

"That means in a commercial real estate portfolio in today's environment, one in 10 of your loans will incur delinquent real estate taxes if you are not escrowing," said Thomas A. Dujanovic, managing director of the SunTrust Bank Commercial Real Estate Line of Business, in a recent RMA audioconference. "In 2010, real estate lenders lost collateral due to foreclosure caused by nonpayment of real estate taxes at a greater rate than at any other time since the Great Depression."

To raise money for city and county governments, tax collectors are required by law in most states to sell their real estate tax receivables to third parties, who purchase them to reap interest and penalties and perhaps to gain ownership of the property in the event of foreclosure. Because a third-party-owned tax lien is superior to a lender's loan position, lenders risk losing collateral to lien holders.

Lenders should take advantage of opportunities to safeguard against foreclosure risk due to delinquent real estate taxes. These opportunities can occur:

* During initial loan underwriting and due diligence. ("When you conduct loan underwriting, it's a good idea to review payment history of real estate taxes. If taxes historically have been late or delinquent, that might give you a heads-up about future payments," Dujanovic said.)

* Prior to a loan closing, during annual loan review, and when loans are modified, renewed, or extended.

* When notified by local authorities of delinquent taxes in the case of a loan becoming delinquent, during loan workout, and before or after foreclosure when the asset is transferred to OREO.

Lenders can protect themselves by ensuring that loan documents have language allowing them to advance funds for delinquent real estate taxes and to add the amount to the note. Also, lenders need to make sure the section of the loan document indicating where to send notice of default provides a specific person to contact and a phone number or e-mail address.

"In many cases, the notice may just include a post office box or the address of legal counsel," Dujanovic said. "This can cause lenders to lose their collateral to real estate foreclosure due to delays in responding to written notice. While tax collectors are required to provide interested parties such as lenders written notice, in some states tax collectors send notice via certified mail as short as 10 days prior to the foreclosure sale."

Lenders also should have a central repository dedicated to housing real estate tax information. "Lenders will record all the information about the loan, the interest rate, and the borrower, but not have a centralized database to house real estate tax information on a lien that is superior to their mortgage," Dujanovic said.

Real estate tax information in a typical repository should include:

* Property's parcel ID number or folio number.

* Property's street address, city, state, and ZIP code.

* Name, address, e-mail, and phone number of local tax collector.

* Date on which real estate bills are mailed to property owners.

* The date or number of days allowed for payment before taxes become delinquent and penalties and delinquent interest are assessed.

* Whether the tax collector will send duplicate tax bills or notices of pending delinquency to lenders.

* Whether the tax collector offers discounts for early payment.

Lenders sometimes use third-party tax-monitoring vendors, but they should be aware that vendors generally cap their liability if something goes wrong. …

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