Mitigating Lower-Lien Risk With GIS Technology

It’s true in life and certainly true in tax servicing: if you overlook the small things they can grow into big problems. Take special liens for example. These are typically assessments for things like water, sewer, trash, solid waste, garbage, and other services. The bills are generated separately by thousands of municipal agencies and usually sent directly to homeowners. Because they are not included with property tax bills, servicers and their tax service providers are often unaware of them or their payment status.

However, these bills, if left unpaid, can become lower liens against a property. Depending on the severity of the delinquency, lower liens in super-lien states can, over time, move into first lien positions. So it’s possible, for example, that a small water bill left unpaid for a year or more could potentially result in a tax lien sale.

Even if it doesn’t get that far, missing taxing agencies and accompanying payments can strain the borrower’s relationship with the servicer, and in turn, the servicer’s relationship with the GSEs.     

Fannie Mae makes clear their position:

“Without regard to whether the mortgage loan has an escrow account, the servicer must protect Fannie Mae’s mortgage lien and the property securing the mortgage loan by…monitoring the status of all escrow and related charges, which may include but are not limited to …any other charges, fines, and imposition attributable to the property which can attain priority over Fannie Mae’s mortgage lien.”

Tracking Special Liens

Some of these liens are “ad valorem” (based on property value) and therefore easy to identify. Non-ad valorem assessments, such as irrigation, drainage, solid waste/sewer, and property improvement districts, are much more difficult to identify because they aren’t included in a homeowner’s primary property tax. Until recently, tax service providers relied on their local-market expertise and knowledge to identify properties that might be subject to lower liens.

What makes these special-lien taxes even more tricky is that each neighborhood, city and state can vary widely in terms of what taxing agencies are in place and how the taxes are paid. It’s a complex web of various taxing jurisdictions and agencies that changes on an ongoing basis as laws and ordinances change. So, it’s an ever-evolving list that must be maintained. Every five years, the U.S. Census Bureau conducts a “Census of Government” that counts special districts, but the census doesn’t indicate how many of these can take a lien position above a mortgage lien if unpaid.

That’s where technology comes into play to help mitigate the risk of special taxing agencies that could slip through the cracks. LERETA has been using geographic information services (GIS) technology to identify these hidden risks. GIS combines data analysis, programming and cartography using mapping software and digital maps informed by multiple geographic and other data sets. GIS, also referred to as “geospatial mapping,” has been used to determine flood zone designations for years at LERETA, and now the same tool is being used to provide further protections for servicers and homeowners against risk associated with an undisclosed lower lien or specialty tax encumbrance.

GIS technology can take counties that are part of metropolitan statistical areas (MSAs) and create a spatial intersected map that can be digitized for automated property tagging which shows whether additional tax assessments affect the property. For example, GIS can overlay the boundaries of a local water district with existing parcel maps to instantly identify all properties that are impacted by the special assessment. This automated, seamless analysis can significantly reduce exposure for all parties and help avoid missed taxes that, undetected, could cause big problems.

While most tax servicers are diligent about paying straightforward property tax bills, mistakes can happen when a taxing agency doesn’t offer electronic assessment and billing data with accompanying electronic notification to the servicer and homeowner. As a result, some homeowners may receive a special tax bill and assume it’s being paid as part of their monthly mortgage payment and tax escrow. Starting off during tax set up with full knowledge of all of a property’s tax obligations using GIS technology helps mitigate potential problems down the road and allows servicers to get ahead of communications with borrowers so that they don’t disregard tax notifications. 

Once the lower lien has been identified, the parcel can be tagged with an alert that notifies the servicer of any delinquencies, regardless of whether or not an escrow account has been set up. For homeowners who have escrow accounts in place, an additional escrow account can be set up to cover the special taxes and keep servicers informed not only of the amounts, but also when the taxes are due.

It’s not the straightforward city and county property taxes that servicers should worry about, but rather the thousands of special taxing agencies that can trip them up. Tapping GIS technology, along with knowledgeable tax experts, is a smart way to avoid a stumble.