HousingWire recently spoke with LERETA Chief Operating Officer Jim Micali about tax season and how technology is solving legacy issues servicers have historically had with taxes.
HousingWire: We’re about to go into the fourth quarter, which historically has been crunch time for servicers and tax providers. Will this tax season be any different? If so, how?
Jim Micali: Every tax season is challenging because nothing, or at least not too much, starts until taxing agencies release their bills, and taxing agencies often change their release and due dates. For example, one of the largest counties in the country with over 1.8 million assessed parcels, historically released its tax bills by 7/1, and they were due 8/1. This year, however, it has yet to announce when its tax bills will be released. Estimates suggest a late fall release of bills with taxes due 30 days later – right in the middle of the busy tax season. And that’s just one taxing agency. There are approximately 24,000 in all.
Thanks to home price appreciation, the tax assessments will be higher than normal this year, and that means the agencies will have to calculate those changes, which could cause more delays. From a servicer’s perspective, higher tax assessments mean higher tax bills which in turn their customer care units will be inundated with calls from borrowers saying, “What the heck happened to my taxes?”
Finally, selling servicing is a key way that many mortgage companies can raise cash these days. We saw this at the end of last year, and we expect to see more of it this Q4 given the current increase and volatility of interest rates. Keep in mind, an investor that buys a large portfolio is now responsible for paying the taxes on those loans. Last year, for example, one of our clients closed on a large deal in mid-December, and we had to execute a full-court press to procure the tax bills and pay them by year end.
Having said that, this tax season, like every tax season, is all about preparation and communication with customers regarding what to expect. At LERETA, we proactively engage with our clients throughout the year, but especially for Q4. This year, we started preparing for year-end in August. For example, we have put together a series of recommendations that clients can use to enhance their readiness for Q4 volume spikes. We call it call our Q4 Survival Kit.
Despite the market dynamics that I’ve mentioned, we’re confident that we’ll be ready, and that our clients and team members will be home for the holidays and not working overtime to meet tax deadlines.
HW: What are the biggest challenges servicers face with taxes? Have they changed over time?
JM: Data integrity has always been one of the biggest challenges servicers face in the tax space. These data issues drive missed payments, inaccurate escrow analysis, lower automation rates and, ultimately, increase calls and complaints from borrowers.
Over the past few years, we’re seeing more data issues with the portfolios we’re onboarding from other tax servicers and in-house operations. Some of the problems are the result of poor initial tax line setups. For example, an adjacent parcel might be missed or a lower-lien taxing agency – maybe a water company or sewer utility – might be overlooked during tax line setup. Then there are issues that come from assumptions and gaps in the loan closing process, which tend to spike up during high-volume periods. Let me give you an example. When mortgage companies originate a loan or buy loans in bulk through correspondent channels, there’s an assumption that the taxes that are due 30 to 60 days out have been paid at closing. But frequently that doesn’t happen or it happens twice, and now months after the loan closes, there is either a missed payment or an over-payment. In either case, borrowers and servicers are both unhappy.
At LERETA, we’re addressing these issues two ways. First, we are providing a range of audit services to detect tax line defects. We’re also moving upstream to identify “assume paid” issues pre-closing.
Staffing for tax season is another perennial challenge for servicers, and COVID-19 has only exacerbated it. In good times, servicers often reassign staffers, greenlight overtime and use temps at year-end to get their taxes paid. With originations down dramatically and every cost being scrutinized, throwing bodies at the problem may be less of an option going forward. And as we’ve seen, servicers that are doing their taxes in-house will get their tax bills later, and higher tax assessments will increase in-bound call volume from borrowers. These headwinds, in my opinion, will prompt new interest in tax outsourcing solutions that address the cost-and-demand issues and shift the burden to companies, like ours, that can dedicate the resources and invest in technology.
HW: How are tax service providers using technology or new approaches to solve for these issues?
JM: Automation is at the top of every servicer’s wish-list. So, tax service providers are using automation to reduce tax procurement times and improve data quality and efficiency. While in the past many tax bills were procured manually, today, at LERETA, that number today is probably less than 5%. This takes time and friction out of the procurement cycle, reduces the possibility of “fat-finger” errors and means that most of the information is delivered to clients through what I like to call, the “happy path,” or system to system.
In our case, we’ve also developed proprietary technology to solve for age-old industry concerns such as unidentified contiguous or adjacent secondary parcels and missed taxing agencies These pitfalls often result in repeated missed payments, sometimes for years, and generate significant penalties. As an industry, tax service providers are also expanding their offerings and changing the way we approach different steps in the tax set up and boarding processes to catch defects before they become problems. Our audits improve automation rates, reduce customer calls and tasks and help deliver accurate escrow analysis’ for the consumer. An example of this is our expanded suite of 50 different audits that strives to ensure tax line data integrity from the point of loan boarding through the tax payment or delinquency cycle.