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Home Foreclosures: 7 C.F.R. § 3555.307 Assistance in natural disasters

(a) Policy. Servicers must utilize general procedures available under this subpart for servicing borrowers affected by natural disasters, as supplemented by Rural Development, to minimize delinquencies and avoid foreclosure.

(b) Evaluating the damage. Servicers are expected to inspect a security property whenever they have reason to believe the property has been damaged.

Home Foreclosures: 7 C.F.R. § 3555.301 General servicing techniques

In accordance with industry standards and as provided by the Agency:

(a) Prompt action. Lenders shall take prompt action to collect overdue amounts from borrowers to bring a delinquent loan current in as short a time as possible to avoid foreclosure to the extent possible and minimize losses.

Home Foreclosures: 7 C.F.R. § 3555.302 Protective advances

Lenders may pay the following preliquidation expenses necessary to protect the security property and charge the cost against the borrower’s account.

(a) Advances for taxes and insurance. Without prior Agency concurrence, lenders may advance funds to pay past due real estate taxes, hazard and flood insurance premiums, and other related costs.

Home Foreclosures: B.6 Rural Development Administrative Notices, Letters and Handbooks

RHS provides instruction to lenders and servicers of Section 502 Single-Family Housing Program guaranteed loans, and information on the agency’s direct loans, through Administrative Notices, Letters, and Handbooks. In originating and servicing Section 502 Direct Loans, the agency’s staff and its servicer will follow the guidelines in the Handbooks:

Home Foreclosures: 16.1 An Overview of the Process

All states have statutes that authorize both the creation of a lien against real property when taxes on the property are not paid and the enforcement of this lien by a sale of the property.1 These statutory schemes are not uniform. Nevertheless, enough common features exist to permit some generalizations. While a detailed comparison of state property tax laws is beyond the scope of this treatise, this chapter discusses the basic legal principles involved in the real estate tax and enforcement process.

Home Foreclosures: 16.2.1 Property Assessment

The first step in the taxation process is the determination or assessment of the value of the real property, in accordance with the method of valuation used in the jurisdiction. Some jurisdictions assess at full value while others use a percentage of full value.11 It should be noted, however, that merely because property is assessed at full value for tax purposes does not mean that the actual tax is higher than the tax in a jurisdiction using a percentage assessment. It is the tax rate that determines the amount of the tax.

Home Foreclosures: 16.2.2.2 Mortgage Holder Liability for Unpaid Taxes

Due to a mortgage holder’s negligence or malfeasance, a homeowner who is paying real estate taxes in escrow to the mortgage servicer will sometimes nevertheless receive notice of a tax delinquency or sale. Tax escrow payments may have been misdirected, lost, or retained by the servicer. When this occurs, further investigation is necessary to find out whether payments were sent in a timely fashion by the mortgage holder or its servicer to the taxing authority.26

Home Foreclosures: 16.2.3.2 Notification of Tax Sale

At some point following a period of nonpayment of property taxes, the tax obligation becomes a lien on the property. In some states, a lien for the tax obligation may arise automatically upon assessment even without a delinquency. If the outstanding taxes are not paid or the tax lien is not discharged by payment, the taxing authority will generally initiate the first “notification” stage of the tax sale process.

Home Foreclosures: 16.2.3.3.1 Types of tax sales

There are three different approaches taxing authorities generally use to dispose of tax liens during the “tax sale” stage following nonpayment of taxes by homeowners: sale at auction, negotiated bulk sale, and sale involving securitization.40 The auction method was the only method used until the 1990s, and it remains the most common tax sale procedure today.

Home Foreclosures: 16.2.3.3.2 Bidding procedure at tax sale auctions

Unlike traditional auction sales and mortgage foreclosure sales, potential buyers at a tax sale in most states do not bid based on the value of the property. This is because state law may require that the property be sold for no more than the amount of unpaid taxes, interest, fees, penalties, and related costs. In states that do not permit the property to be sold for more than the unpaid taxes, there is generally no competitive, value-based bidding such as might exist at other auction sales.

Home Foreclosures: 16.2.3.3.3 Negotiated bulk sales

Negotiated bulk sales are the second way taxing authorities sell off tax liens. This involves the pooling of delinquent tax liens which are then sold as a package at a discount to a private entity. The local government relinquishes its ability and obligation to collect on the tax liens. The private entity essentially steps into the shoes of the taxing authority and becomes the owner of the liens.

Home Foreclosures: 16.2.3.3.4 Sales involving securitization

The final method available to taxing authorities is similar to a bulk sale but is done through the securitization process. Officials in Jersey City, New Jersey, pioneered this method in 1993, and it initially became popular with large cities having cash-flow problems. In most securitization cases, the municipality creates a trust which purchases the tax liens at a discount. After the purchase, the trust issues bonds backed by the liens. The taxing authority receives a portion of the proceeds from the bond sale.

Home Foreclosures: 16.3.1.1 Overview

It may be possible to avoid a tax lien and eventual sale by obtaining a reduction of property taxes through an abatement or exemption before the taxes become delinquent. Homeowners may pay too much in property taxes either because the assessment of their property is too high or because they have not taken advantage of available tax relief programs or exemptions.64 By successfully challenging an excessive assessment the homeowner can reduce their tax burden accordingly.

Home Foreclosures: 16.3.1.2.1 Assessment exceeds taxable value

Subject to the limitations of local statutes and case law, there are basically two grounds on which a property assessment can be contested: the assessment exceeds the property’s taxable value, or the property is disproportionately assessed. For special tax assessments that are created under loan programs, such as the Property Assessed Clean Energy (PACE) program that provides financing for energy efficiency improvements, it may be possible to challenge the assessment on other grounds if the assessment was obtained fraudulently.65

Home Foreclosures: 16.3.1.2.2 Property is disproportionately assessed

An assessment is also subject to challenge on the grounds that the property is disproportionately assessed. That is, the property’s assessment is higher than assessments of similar properties in the area. The ratio of assessed value to market value should be the same for all homeowners within a taxing jurisdiction.

Home Foreclosures: 16.3.1.3.1 Special tax relief programs: Overview

Every state has enacted special property tax abatement or exemption schemes that relieve at least some taxpayers of a portion of their property tax liability by virtue of age, disability,85 income level,86 or personal status (e.g., firefighter, police officer, veteran, or disabled veteran).87 All states have approved tax relief for older homeowners, and some states extend this relief to older renters as well.88

Home Foreclosures: 16.3.1.3.2 Types of programs

The extent of any relief available under state programs will depend on the type of program and method of calculating relief. While these programs vary as much as state property tax laws, the following methods are the most widely used.

Home Foreclosures: 16.3.1.3.3 Seeking tax relief

A common problem in many localities is that taxing authorities never establish a procedure for evaluating and granting the abatements, exemptions, or deferrals which are provided under state law. An unrepresented homeowner seeking an abatement may walk into an assessor’s office and find that knowledge of state standards for tax relief is nonexistent.

Home Foreclosures: 16.3.1.4 Agreement and Compromise

Some states preclude abatements once a homeowner has fallen behind on tax payments.113 Whether or not an abatement is available, a defaulting taxpayer may be able to reach an agreement with the taxing authority to compromise the outstanding tax bill.

Home Foreclosures: 16.3.1.5 Deferred Payment Plans

Property owners who have missed several tax payments often find it difficult to cure a tax default by making a lump-sum payment, particularly when interest and penalties have been added to the outstanding balance. Just as mortgage servicers have seen the benefits of forbearance and loss mitigation programs, some local taxing authorities permit property owners to enter into payment plans to avoid a tax sale.