Property Tax Hikes Compound Mortgage Market's Woes
Housing counselors say they are increasingly concerned about the toll rising property taxes are taking on consumers' ability to get mortgage financing and borrowers' ability to make payments.
As it is, many loan applicants are having difficulty meeting the 43% debt-to-income limit in the Consumer Financial Protection Bureau's definition of a qualified mortgage. Higher property taxes only make it tougher. And while historical property taxes are factored into underwriting and loan terms, tax hikes that can increase the size of a monthly payment are an unknown that tends to creep up on borrowers.
"They don't go into a home thinking their property tax is going to increase," says Stephen Lewis, president and chief executive of the Mansfield, Texas, counseling agency Making Acceptable Homeowners.
Nationwide, state and local property tax collections per capita have increased each year since 2006, when they were $1,208, according to the Tax Foundation's Center for State Tax Policy, a nonpartisan research organization in Washington. By 2010 they had risen by more than $200 to $1,434.
Consumers purchasing their first home are particularly susceptible to property tax payment shock, says Lyman Stone, an economist at the center.
"I think first-time homeowners can be very surprised. It's not withheld like your income tax, or on your receipt like a sales tax. You just get a bill," he says. "So I think it can be very shocking to first-time homeowners, especially if you are in a somewhat higher tax area."
The tax burden "is a growing topic among housing counselors now that home prices are increasing and municipalities are struggling with revenue," says Douglas Robinson, a spokesman for NeighborWorks America, a Washington-based national network of more than 240 community development and affordable housing organizations.
The 43% DTI ratio is one of the criteria loans must meet for lenders to enjoy extra protection from legal liability under the CFPB's rule requiring them to assess applicants' ability to repay mortgages. Higher taxes can help municipalities generate much-needed revenue, but they challenge borrowers' ability to get financing under the new rules, says Lewis, who has previously worked in mortgage underwriting and servicing.
"Consumers are really hitting that threshold of that 43%, and so when property values increase, or let's say the tax-assessed value increases on that property, then customers are actually exceeding that 43% threshold," he says. "That increases a level of concern about default and foreclosures for the lender that the customers are unaware of."
Defaults resulting from property tax increases could also get lenders in legal trouble, says Ari Karen, an attorney in the Bethesda, Md., office of law firm Offit Kurman. A borrower could later claim that failing to inform the borrower of the future risk was a deceptive act under the Truth in Lending Act, he says.
Rather than change the DTI limit or other underwriting standards, Lewis says, he would like to see counselors make more borrowers aware of the possibility that their tax bill may rise. This can be a challenge, he admits.
"Customers generally want to get more money for the house. They don't care about the educational aspect," Lewis says. "They don't necessarily care about the ramifications. It's all about, 'What can I get for the house?'"
However, those who get homeownership counseling tend to a little more open to the message, he says.
"They go into an education program if they want to be honest and transparent about their situation," he says.
Getting a national sense of property tax trends is challenging because the wide variation in how the different regional public entities in charge of them handle them, says Stone. But generally, data available to date from the Tax Foundation, and other reports of home price appreciation, suggest property taxes aren't going to stop increasing any time soon.
Whether this is increasing default risk depends on the regional taxation authorities' property tax policies, says Ben Graboske, a senior vice president in the real estate and financial services division of Irvine, Calif.-based data provider CoreLogic. "It's absolutely the case in places like Texas and Florida," he says.
Tarrant County, for example, where the majority of Mansfield is located, had one of the higher amounts of median taxes paid in 2010, at around $3,100. The U.S. median was close to $2,000 that year.
A notable example of property tax risk has been in the federally insured reverse mortgage market. The inability on the part of some seniors to pay taxes and insurance caused default risk to rise in the recent past, putting a dent in the FHA's finances and leading to reform in that sector.
Recent data on traditional "forward" mortgages suggests delinquencies are declining. But some have questioned whether this trend is more the product of a shift in the holders of servicing rights than an actual improvement. Also, recent data suggests an increase in loan modification activity. Property tax increases are frequently mentioned in hardship letters filed in connection with modification, says Lewis.