When you hear stories of properties lost in a tax sale and the owners being evicted, the assumption is that these unfortunate people had been responsible for paying their own taxes and had fallen behind or were perhaps in over their head with a reverse mortgage. One assumes that if they had tax escrow accounts, this wouldn’t have happened. That is because, in theory, a borrower making mortgage and tax payments with an escrow account should never have to worry about the prospect of losing that home in a tax sale and being evicted. But unfortunately, even with escrow accounts, serious mistakes can occur and they do more often than you’d think. In some cases, they can escalate to a tax sale and eviction; though in most instances the outcome is lots of hassle, anxiety and expense for both the borrower and the servicer.
“Ghost” parcels and overlooked taxing agencies are two of the most common causes of these unfortunate situations.
Ghost parcels are usually unimproved parcels such as empty lots, parking spaces and even driveway lots that are not given a property address, nor are they directly associated with the improved lot, where the home sits. Because they don’t have a proper address, these parcels are often missed in tax line setups, particularly if the tax service is using technology that speeds up the process. What usually happens in these cases, is that the technology simply matches the assessor information to the property addresses provided by the lender. When a good address is provided, and the property is only represented by a single tax parcel, this process is very effective. But, if there are additional parcels, they become ghost parcels, and they can haunt you down the road.
One case that comes to mind involved a borrower who experienced a tax sale, but not of the property his house was on, but rather on a contiguous lot that was also secured by his mortgage. The problem was his driveway was on that overlooked parcel! The case ended up working out, but not without significant expense for the lender and great deal of hassle and inconvenience for the borrower.
Ghost parcels are a leading cause of tax sales within the industry, if you look at it purely from a numerical standpoint and count instances of tax sales of mortgaged escrowed properties. They are particularly prevalent in certain markets. For example, in Cook County, Illinois, the county that includes Chicago, there are thousands of condominiums and, in many instances, the parking lots are listed as parcels that are separate from the residential units. So, there are a lot of misses.
Even starting with an address can be problematic. For example, a best practice in setting up a new tax line, is to scrub the lender-supplied address against the USPS property data base. Manual search work using loan documents can be effective in uncovering ghost parcels, if done properly. Unfortunately, it is a very time-consuming process that involves an individual tasked with interpreting sometimes very complex legal property descriptions. Due to the complexity, manual errors can result. Payments of the wrong tax bill or missed payments for a parcel not identified can lead to delinquencies or even a dreaded tax sale.
Where's the bill?
In some states, property taxes are collected by multiple local jurisdictions. The tax servicer needs to ensure that all bills are properly tracked to ensure payment by the lender. The property may have taxes due to a county, city, school district, township, etc. A borrower may have five or more collecting agencies for property taxes depending on location. Identifying the correct agencies is critical. A missed set up and a school tax bill could go unpaid through several tax cycles and suffer the same consequences as a missed parcel: delinquencies or even tax sale.
The identification of all collecting authorities is done through indexing based on known boundary lines for certain agencies. This process to some degree also relies on subject matter expertise. Knowledge of local collecting protocols is critical especially when faced with complex situations. In some Texas areas, for instance, a customer may owe a bill to more than the county in which they live if their school district crosses over to a different county. Cross- county collected bills are examples of those that may be missed by the tax service provider.
Ghost-busting technology
As mentioned earlier, trying to identify ghost parcels through manual reviews can be time consuming, expensive and still expose the servicer and borrower to errors. Over the past few years, companies have developed software to help identify ghost parcels during tax line setup or portfolio conversions. Technology, such as our proprietary solution, Parcel Pro, uses unique matching routines to tie contiguous lots to improved lots that may be encumbered by the same mortgage. To verify, these selected probable matches are compared to the mortgage legal description. Only true additional parcels are added to the tax tracking records for future reporting and payment purposes.
In addition, we’ve developed an agency tool that uses similar logic to the parcel solution and includes matching routines followed by manual verification including agency outreach, if needed, to verify that all liens are identified for tracking purposes.
In a recent quarter these tools were run during the setup of approximately 950 loans and they identified nearly 1,500 missed additional parcels or agency liens.
Tax search processes can be complicated, but the trick to managing risk is targeting where problems can occur so the risk does not outweigh the benefits that automation can bring. 1,500 missed parcels and liens turns into thousands of phone calls, significant corporate advances, angry borrowers, tarnished reputations and possibly a lost driveway or worse a lost home.
