The most common tax loan situation affecting lenders is presented by a borrower for whom taxes are not escrowed, who cannot afford to pay property taxes, but seeks to postpone payment of past due taxes in hopes of improving his or her financial situation in the future.   Due to the higher interest and fees of a property tax loan, the borrower often defaults on the tax loan, leaving the lender or servicer to deal with the aftermath.  Since a tax lender lien jumps or primes all other liens, including a first lien mortgage that was recorded before the taxes became due, the lender or servicer must deal with the tax lender and its exorbitant fees and interest, in order to preserve its lien right to the collateral.

As a practical matter the only parties benefiting from a tax loan are the taxing authority that receives immediate payment or the tax lender who profits from the high interest and fees.  The borrower who makes the misguided decision to take out a tax loan is often making a short-term decision out of perceived necessity, but that decision is often fatal to his or her attempts to retain ownership of the property once the mortgage servicer becomes aware of the problem.

The perceived temporary benefit of avoiding a tax suit or foreclosure is often soon eclipsed by not only the increased expenses but the fact that a tax lender lien is a technical event of default under the owner’s mortgage, which itself may give rise to a basis for foreclosure by the mortgage company.  The mortgage company that provided the loan to the owner ends up inheriting a tax bill is substantially greater than it would have been if the taxes were still owed to the taxing authority.

Five Steps to Mitigate the Risks of Tax Lender Liens

Lenders and mortgage servicers that maintain or service non-escrowed loans should have a system in place to mitigate the risks involved.  These steps should include:

1.    Prior to January 31 of each year, the borrower should be contacted to ensure evidence of paid taxes as required by the contractual terms of the loan for all non-escrowed accounts;

2.    Literature or warnings in statements or notices of default provided to borrowers advising them of the pitfalls of tax loans;

3.    Pull title once a year on all non-escrow accounts to search for tax liens;

4.    Make sure that an appropriate system is in place to ensure that all notices from tax lenders are sent to a central location for handling by a person with knowledge of Texas tax lender loans and their potential impact on the existing mortgage; and

5.    Consider whether to accelerate the loan balance to expedite foreclosure proceedings by the lender in the event a tax loan is discovered when there is high likelihood the borrower will not be able to bring the loan current.  Leaving the tax lender lien in place is never a good option as the fees and interest will adversely impact the economics of any loan from the lender’s perspective if left in place.  Often the tax lender is content to let it go for years without foreclosure since they are almost always over secured.

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have any questions or would like more information about Texas Tax Lender Liens, please contact Michael F. Hord, Jr. at 713-220-9182.