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National Property Tax Delinquency Declining

Matt Cannon    |    Mortgage Performance

Real estate taxes in the United States are assessed by various taxing authorities and are generally based on the value of the property, including the land. The taxes may include county, city, town, borough, school or a special assessment, such as a Municipal Utility District (MUD) tax. Different locations can have different types of property taxes. Homeowners with a mortgage typically pay property taxes in one of two ways: the property owner can make payments into an escrow account throughout the year with the funds in the account being used to pay the taxes when due; or, with a non-escrow account, a homeowner pays the taxes directly to the taxing agencies.

Property tax delinquency is an important issue for mortgage lenders and servicers who need to track and pay taxes in a timely manner. Mortgage servicers need to disburse taxes to the taxing authorities on escrowed loans from borrowers’ escrow accounts. For non-escrowed loans, mortgage servicers directly monitor delinquent taxes and may request proof of payments from borrowers. Tax delinquency due to servicer/borrower neglect can result in penalties to the servicer/borrower. More importantly, tax agencies have the option of foreclosing on a property if tax delinquency is not addressed within a pre-specified time window set by each local area. In the foreclosure process, tax liens usually have a higher lien priority than mortgage liens. Furthermore, since property tax payments are often correlated with mortgage payments, property tax delinquency may be associated with an increased risk of future mortgage delinquency. Unpaid property taxes could indicate that borrowers are struggling financially even if mortgage payments are paid on time. Similarly, mortgage delinquency may foreshadow property tax delinquency.

Figure 1 uses the tax lien history data from the CoreLogic Tax Data Warehouse to illustrate the tax delinquency rate on properties with outstanding mortgages in the U.S. between 2006 and 2014.  The overall tax delinquency rate peaked during the economic downturn in 2008 and has steadily improved since that time.

Figure 2 shows the difference in delinquency rates between escrow and non-escrow accounts. The delinquency rates of the two types of accounts follow similar patterns over time, but at different levels. The tax delinquency rate for non-escrow accounts is generally higher than escrow accounts. The lack of escrow during the underwriting process may increase the risk that consumers’ borrowing decisions could be based on misleading low monthly payment quotes that do not reflect the true cost of their homeownership obligations. It could also reflect the fact that escrow accounts help homeowners with budgeting and avoiding the payment shock that comes from a big lump sum tax bill in non-escrow loans, especially since insurance and property taxes can fluctuate from year to year.

Figure 2 also includes the unemployment rate, graphed on the right axis. Comparing the changes in unemployment rate with tax delinquency rates over time shows that property tax payment performance improved as the overall economy strengthened and the unemployment rate dropped. Although both types of accounts have seen delinquency rates drop over the past four years, escrow account tax payment performance began to improve earlier than non-escrow account tax payment performance, and the drop in the delinquency rate has been larger overall.

Contributor: Dingxi Qiu

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