Property taxes and Texans are knotted together like tree roots. Settlers in the 1800s struck a deal with Mexico to settle wild parts of Texas and were granted what we consider today to be a tax abatement. When the Mexican government pulled the rug out it didn't take long for Texas to begin its battle for independence. Yes, taxes are a big deal to Texans.
From Texas' independence in 1835 until 1933 the property tax system in Texas can be described as chaotic and inconsistent, even corrupt. The system of appraisals, collections, foreclosures and redemptions since then has been codified in excruciating detail and very few legislative sessions go by without bills being floated out there to tinker with the system. The "Peveto bill" in 1979 refined the property tax system into its current form.
During the Great Depression more than 40% of home mortgages were in default and delinquent tax accounts in Texas ran as high as 20% and didn't return to single digits until the mid-1940s. To help property owners avoid foreclosure, the Texas Legislature passed a law in 1933 allowing a third party to pay the delinquent taxes in exchange for a transfer of tax lien.
When property taxes are delinquent, county tax assessor/collectors by law charge a late fee and a monthly penalty totaling 12% from Feb.1 through July 1, plus annual interest of 12%. After July 1, private tax collectors may impose an additional 20% collection fee. The combined penalty and interest amount for delinquency in the first year could be an astounding 44% of the original tax bill.
Until the 1990s, interest on tax-lien transfers was capped. Then the Legislature allowed an increase in the rate that could be charged for transfers. Since the 2000s the industry has grown rapidly and Texas has responded with a substantial amount of state oversight and licensing requirements to protect homeowners (NMLS and OCCC/Texas licenses). There were 75 licensed lenders in Texas originating 14,000 loans in 2015. Competition in the industry has brought residential tax loan rates down to single digits, making a tax loan far less expensive than a homeowner remaining in delinquency.
From 1990-2010 property taxes increased 205% while incomes only increased 70% in the same period. I frequently hear from property owners that they are being taxed out of their homes. Some property owners come to us when lenders refuse to modify a mortgage and include unpaid taxes. In the worst case of tough mortgage company tactics, a mortgage company may refuse to allow a tax loan and instead force an escrow "catch-up plan" on a homeowner, sometimes doubling their payments temporarily. Many heirs to "mom's house" come to property tax lenders to finance deferred tax debt when they cannot qualify for a bank loan. Although mortgage lenders do not like property tax loans, the data supports the idea that there is a way for property tax lenders and mortgage lenders to co-exist.
Mortgage lenders have ample opportunity to clear a delinquent tax problem. First, tax lenders source their prospects from the same public data available to mortgage companies. Homeowners with mortgages must wait until taxes become delinquent before taking advantage of a tax loan — a requirement that can add significant costs to homeowners seeking to pay their taxes. A statutory notice that a tax loan has been made is required of all tax loans when there is a mortgage. Additionally, tax lenders are required to send any notice of foreclosure to mortgage lenders.
The opportunity for mortgage companies to solve the problem exists before delinquency (escrows), after delinquency (escrow catch up plan or loan mod), and at any time after notice of a tax loan is received (pay it off with borrower consent and add to the mortgage balance). When a mortgage lender applies none of those options they are leaving the borrower to find their own solution — remain delinquent or apply for a tax loan.
To put some perspective into the perceived risk that tax loans place on mortgage lenders priority, tax loans have an industry average rate of 0.7% foreclosure. By contrast, thousands of properties go to the county tax sale each month in Texas' 254 counties. Precinct 3 in Harris County alone foreclosed on more than 1,000 properties in 2015.
The property tax loan business focuses on helping delinquent taxpayers. To paint tax loans as predatory is silly. When the choices are foreclosure, lender-escrow-catch-up plan or a tax loan, a tax loan is the easiest way for property owners to pay delinquent taxes and keep their property. Simple as that.