The Property Tax Shuffle

by Ouida on May 18, 2010

I am working on a post, “Why Medicare Sucks.”  I am having difficulty writing it.  Not because Medicare is perfect.  It isn’t.  But because so many users of Medicare believe it is a great program.  Great insurance.  It isn’t.  I have written about the perils of the stock market and home ownership as wealth-creation vehicles.  Both are lousy wealth-creation vehicles, but most of the people who were told to invest in the markets for retirement or that a home was an investment have learned the bitter truth.  The same with Medicare.  As I put the post together, I will take you from my cousin’s practice in Atlanta, to a conversation that I and 2 other doctors had almost a decade ago on the beach in Santa Monica, to a conversation I had with a retired doc who told me that the happiest day in his practice was the day he closed his doors to both Medicare and Medicaid.  The post is coming.  Watch out for it.

Now for a rather abrupt change of topic.  Something rather interesting happened the other day that I just have to share.  As I mentioned before, when I was getting my financial life together, I read beaucoup books on personal finance.  Still do.  But I came across some advice from Suze that I should manage my property tax and insurance payments myself.  At the time I was paying a certain amount each month to my mortgage company so that they could escrow the funds for me and make the property tax and insurance payments on my behalf.  Millions of American homeowners do this:  pay additional money to the bank each month that the bank then sets aside, so I was not special in this regard.  You can understand why the bank might want to do this.  When a bank loans money for a home, they actually own the home and they just let the mortgagee live in it.  The insurance is there to protect the bank’s collateral, the home.  Property taxes actually trump a mortgage.  A home owner or mortgagee can fall so far behind in property tax payments that a county can order a home sold for the unpaid taxes leaving the mortgage company stuck with a loss on the mortgage.  It is in the mortgage company’s best interest to collect the property tax payments from the mortgagee and pay the taxes.

The reason I don’t escrow is simple I want to control my cashflow and banks are allowed to keep a cushion in the account as stipulated by the mortgage contract.  As an example, that cushion may be equal to 90 days of property taxes and 60 days of insurance premiums.  The bank is not required to pay interest on that cushion.  So for a home with a $720 dollar insurance premium and a $2400 dollar tax bill the monthly escrow amount would be $720+$120+$2400+$600 = $3840/12 = $380.  The balance in the escrow account must never drop below 60 days of insurance premiums plus 90 days of property taxes or, in this case, $720 dollars.  If it does, the mortgage company will increase the mortgagee’s payments to escrow to make sure they can make the property tax and insurance disbursements and maintain their target cushion.  If you are a home owner, you know that that cushion represents a new washer, dryer, water heater and it is just silly having that money literally locked in a bank just to make the bank feel better about lending you the money in the first place.

But what happens if the bank doesn’t actually do with the money what they were supposed to.  What if they don’t make the payments or make them on the right property. This is a rare occurrence, but something that happened yesterday put me right in the middle of such an event.  I made property tax payments on the properties that I hold before I went on vacation.  When I returned, I ran the checks to make sure they had cleared.  Two of the properties I hold are right next door to each other.  I placed the property tax checks for those properties with coupons in the same envelope and sent it in.  When I ran the checks I realized that the county treasurer had only cashed one of the two checks I placed in the envelope.  When I called the county treasurer they told me that they had received so many property tax checks they were behind in data entry, the fact that they hadn’t cashed my check didn’t mean they had lost the check and asked me to check back with them in a week.  They ran the account for the property and pronounced that the tax account had a surplus on it and that Chase Financial had been making payments as well as lil’ole me.  That’s all well and good except that Chase wasn’t the lien holder on the property.  B of A was.  In other words Chase was mistakenly making tax payments on a property they had NO financial interest in.  How could this happen?  I asked and a mistake of this type can happen pretty easily.  See a financial institution like Chase sends over a portfolio of parcel numbers to county tax assessors across the country.  These parcel numbers are data entered in to a company like Chase’s system a simple key error could produce an incorrect parcel number. The parcel numbers are not sent with a corresponding property address which would allow crosschecking to occur at the county tax assessor’s office.  The tax assessor sends the bill to Chase or any other requesting financial institution and the institution pays the bill. No questions asked.

By this point I had the supervisory treasurer on the phone and she gave me the contact for Chase Financial.  Her contact information was not valid and it took me several tries to get a live body on the phone which, at least for Chase, is virtually impossible if you don’t have a Chase account.  The rather stunned Chase property tax representative said, “Now, let me get this straight.  Chase is making property tax payments on a property we have no financial interest in?”  When I told her yes, she made a move to get off the phone to confer with her supervisor.  The problem with conferring with her supervisor was that she had no information, she was so flabbergasted that all she could do was think to confer with her supervisor.  I pointed out that she had no way of researching the property without a parcel number and situs address.  I provided both.  Now the information I provided was the correct information for MY property (okay the one I co-own with B of A), but the parcel number should allow Chase to back track and find an associated loan number and correct property address.  I also gave the Chase representative the name of the supervisor in the county treasurer’s office so that they could request their money back.

Why did I even bother to phone Chase?  I wasn’t worried about myself because I don’t have Chase’s money, the county treasurer’s office does. I phoned because somewhere out there a home owner or investor is paying into escrow believing that their lender is correctly making payments on their behalf.  At this point that home owner or investor is now one year behind in their property taxes and it is not their fault.

This odd situation is a reminder to me that the homeowner or investor is ultimately responsible for all expenses on their property even if they escrow and it behooves the homeowner or investor to follow up with their property tax office and insurance company to make sure those payments are made.  If your accounts are delinquent and you escrow, be sure to obtain documentation of your delinquency from the tax office then contact your lender’s property tax division.  Make sure they have the correct address and parcel number for your property.  If they don’t correcting the information will require you to provide that information to your lender in writing.

Please comment.

  • Share/Bookmark

{ 1 trackback }

The Mortgage Shuffle
May 20, 2010 at 8:49 pm

{ 3 comments… read them below or add one }

Deban May 19, 2010 at 5:42 am

Very good advice, I have gotten a tad lazy in this but started out always double checking my mortgage company and will now return to that policy as they have neglected to properly record things before. Like you said it’s rare but does happen.
Thanks for the reminder!


tonya thames taylor May 19, 2010 at 6:08 am

This article was so on time. Let me explain. On one of my properties, my mortgage went up by $121/m because an escrow deficit and projections for insurance. I called the mortgage company disgruntled, but resolved, “oh well.” Not so, anymore. Thanks!


Ouida May 19, 2010 at 11:18 am

Actually you can drop escrows, the problem is that the criteria for dropping escrows are different for each mortgage company. Some require loan-to-value of as much as 50% once the loan has been made but for buildings with fewer than 5 units a loan-to-value of 80% is enough to avoid escrow when the loan is being set up My business partner and I have a commercial loan on a building (8 units) and 50% LTV is what is required to drop the escrows. When setting up a new loan, the bank will charge a higher rate of interest to drop escrows (usually 1/8 of a point and if you are using a mortgage broker, the broker may pressure you to accept escrow because dropping escrows may affect his commission) We are looking at an increase this year that is pretty substantial because at any given time $1500 dollars is just sitting in escrow. It is pretty painful to experience.


Leave a Comment

CommentLuv Enabled

Previous post:

Next post: