The high loan volumes in the last 12 months have left some borrowers and servicers facing issues related to real estate taxes. HousingWire recently spoke with LERETA CEO John Walsh about why these tax lien problems exist, what role technology plays, and why tax services need business continuity plans.
HousingWire: Complaints about tax issues are a perennial headache for servicers and lately we’ve been hearing that this is getting worse, not better. Why? And what’s being done to prevent these problems?
John Walsh: It’s easy for things to go “sideways” when it comes to real estate taxes: Tax rates change, payments on non-escrow accounts can be late or missed, escrow accounts balances have to be adjusted, etc. When any of these events occur, a servicer is often confronted by a confused, sometimes irate, customer.
There is usually a fair amount of call center time involved in explaining what went wrong and what is going to happen next. Depending on the outcome, this can lead to formal complaints with the Consumer Financial Protection Bureau and/or ugly reputation-damaging reviews on social media.
Why are things getting worse? Sheer volume is one reason. More than 13 million loans – or $4.3 trillion in volume – were originated or refinanced in the past 12 months. That means millions of closings and new tax line set-ups, often done quickly, and, in many cases, while working remotely.
Anecdotally, we’re hearing about lots of borrowers who are seeing early increases in their escrow accounts, duplicate tax payments and/or missed payments because of errors that occurred in the hand-off between closing and tax line set-up.
We’re also hearing from servicers that last year’s 4Q tax season, which is when 40-50% of all tax payments are due, was significantly worse than usual in terms of late payments, errors and penalties.
Part of the problem, we believe, is that some tax service providers have become overly reliant on automation and are not providing the level of customer care that is needed to set up tax lines properly and pay taxes on time.
We know this because we see it when onboarding new accounts from other tax providers. For example, after onboarding several large portfolios last year we found major data integrity issues that required us to correct hundreds of thousands of errors and redo tens of thousands of tax lines.
At LERETA, we’ve invested in the technology, an experienced staff and infrastructure to meet the needs of mega-servicers and sub-servicers as well as regional and smaller players.
This has allowed us to master the nuances of the tax landscape and anticipate problems. We also understand the balance between the value and limitations of automation.
Finally, we are relentless when it comes to performance. For the first six months of this year, for example, we hit 99.9% of our SLAs for all of our 4,000 tax clients.
HW: Conventional wisdom suggests that borrowers with escrow accounts are protected against tax liens. This isn’t always the case though, right? What kind of things can still go wrong?
HW: When you hear stories of tax liens being filed, or worse, properties going to tax sale, you assume that the borrower is paying taxes directly and not through an escrow account. But problems can (and do) arise with escrow accounts, and they can escalate to the point where a home might be in jeopardy of being lost.
The usual suspects, when problems occur, tend to be “ghost” parcels and missed taxing agencies. Ghost parcels are unimproved lots, parking spaces and even driveways that are owned by a homeowner, but missed during tax line set-up, because they don’t have a property address.
This is happening more and more as tax service companies rely solely on the technology that simply matches the assessor information to the property addresses provided by the lender. Once these parcels are missed, the taxes can go unpaid – in some cases, for years – as the amounts and penalties add up.
In the U.S., there are 23,000 taxing agencies, and in some states, property taxes are not only collected at the county level, but also by other jurisdictions: for example, a city, a school district or township.
Depending on the location, a borrower might be obligated to pay taxes for 5 or more collecting agencies. If an agency – say a school board – is missed during the tax line set-up, the homeowner could face the same issues as a missed parcel.
The identification of all collecting authorities is done through an indexing-based program on known boundary lines for certain agencies. To some degree, this process also relies on subject matter expertise. Knowledge of local tax collecting protocols is critical especially when faced with complex situations.
In addition to being accurately aware of these situations, we’ve developed proprietary technology to ensure that all parcels and appropriate agencies are identified during the tax line set-up. The technology uses geographic information systems (GIS) and matching logic to capture parcels and agencies that are added to the tax tracking records for future reporting and payment purposes.
HW: You have been a vocal advocate on the need for business continuity and disaster recovery plans for tax services. Why don’t servicers have them? What risks are they exposing themselves and their customers to by not having a plan?
JW: Mortgage servicers, as a rule, have redundant providers for most critical services: credit, valuations, telephone, internet and more (in fact, their regulators insist on this.) Yet most servicers still work with a single tax service provider and often don’t require diversification or backup planning for tax service vendors.
Fast-moving, often unforeseen events – like last February’s ice storms in Texas – underscore the need for operational resiliency and redundancy. For example, what would the impact have been on servicers if the storms had occurred in December, at the height of the tax season, instead of February?
To prepare for such eventualities, we believe servicers should have a backup provider and conduct due diligence on their current tax service provider to determine the resiliency of their operations.
Why don’t they? The usual response is, if the worst-case did happen and their tax servicer went down for an extended period, they’d just move the process in-house. But how realistic is that? And how prepared are they to do it, particularly if it has to be done under emergency circumstances?
In addition to being a best practice, there are other advantages of having multiple tax service vendors. If you have only one vendor, and you’re unhappy with their performance, as many servicers are, you only have two options: live with it or go through a total migration. Having two vendors provides servicers the option of creating champion/challenger scenarios to improve performance.
We’re finally seeing these ideas take hold in the industry.
HW: Recently LERETA was sold to two PE firms. What prompted this step and what will this enable you to do?
JW: In early July, we announced the sale to two private equity firms: Flexpoint Ford and Vestar Capital Partners. I believe they are ideal partners for LERETA, as each of these firms has deep experience in financial services and a wealth of knowledge around scaling and enhancing technology.
Over the years, LERETA has competed by providing the highest level of customer service in our markets. As a result, we’ve been successful in adding new customers and building market share. This transaction will enable us to accelerate our already strong growth, step up our investments in technology and scale our operations to address the changing needs of the mortgage servicing industry.
The bottom line: the timing was right, the deal was right and we’ve found the right partner.