On March 23, I reported that there was pending in the New York State legislature a proposal that would allow local municipalities to sell their property tax liens to private parties, with the consent of the property owner. The lender who pays the pax in exchange for the lien would be in a senior position on the btitle (senior to the first mortgage) and would enter into an agreement with the property owner to pay back the loan, at interest of up to 18%. If the property owner defaults, the property tax lender could foreclose on the property.
My March 23 posting included the full text of the bills (Assembly A6348 and Senate S2976.) After consulting with some other local attorneys, I have submitted a letter with my analysis of the bill to the sponsors (Buffalo Assembly Member Sam Hoyt and Western New York Senators George D. Maziarz and Michael F. Nozzolio.)
I have also sent a copy to Rochester's two senators, Joseph Robach and James S. Alisi, as well as the two Assembly Members closest to where I live and work, Harry B. Bronson and Joseph Morelle. I have aslo sent a copy to Russ Haven, Esq., Legislative Counsel for the New York Public Interest Research Group, Inc. (NYPIRG.) Mr. Haven originally brought this legislation to my attention.
The following is my analysis and recommendations, as expressed in the letter:
I am an attorney who has been practicing in Rochester for over twenty years. I am primarily a bankruptcy attorney, and am the past Chair of the Bankruptcy Committee of the Monroe County Bankruptcy Committee. In my practice, I deal regularly with persons in distressed financial situations.
I have reviewed pending bills in the New York Legislature, A6348 and S.2976, which would allow local governments to sell property tax liens to third parties, with the consent of the property owner. Assembly Member Hoyt is sponsor of A6348, and Senators Maziarz and Nozzolio are sponsors of S. 2976. The other recipients of this letter are my local gegislators. I have solicited comments on the bill from other attorneys in our area; however, the comments herein are my own.
I believe that the proposal has merit, but could be subject to abuse by predatory lenders. I would recommend that the lenders permitted to be a "property tax payor" under this bill be limited to banks, credit unions and parties licensed as mortgage brokers by New York State, at least for property which is the owner's residence.
My concern is not only for the unsophisticated property owner but also for the banks holding mortgages against the property and the community-at large. As we are finding out in the mortgage foreclosure area, ownership of mortgages is becoming a serious cloud on titles in New York and elsewhere. As these are relatively small loans, and senior to all other loans, keeping track of the ownership of the My recommendations will be set forth in greater detail at the end of this review.
Who would use these loans: First, please understand the likely property owners who would need the assistance of this property tax financing. Business property owners and investor owners may qualify for this program, and I believe they are, or ought to be, sufficiently sophisticated to protect their interest, and so my recommendations do not extend to that group.
Elderly or poor: Among individuals who own their own homes, most people have a mortgage that pays property taxes through the mortgage escrow. Individual residential owners who do not have a bank paying their taxes either own their property outright -- which is most often elderly people, or owners with non-conventional mortgages (sub-prime or home equity mortgages), who are often poor and unsophisticated.
What a deal! Please understand that this loan is a fantastic deal for the lender; they get a senior lien against the real estate, interest rate of up to 18%, and their expenses all paid. Unless the property is environmentally contaminated or have a derelict structure on it that would cost more to tear down than the property is worth, these loans will always be fully secured, far more than fully secured. As one attorney told me, "I would take that deal all day long."
Local lenders: Since this is such a good, well-secured loan, I would think that convention lenders -- banks and, especially credit unions -- would be happy to make these loans. To put it another way, I do not think that we need out-of-state predatory lenders getting involved in this line of financing and inserting themselves into the chain-of-title. There is great danger, to both the property owner and mortgage banks, if a fly-by-night entity gets in as a first lien holder of property and fails to account for the loan properly, or charges too much, or assigns the rights to other entities, or simply disappears. They could mess up title to property to everyone's detriment: homeowner, mortgage bank, community, and municipality.
I would recommend the following, either for all loans under this provision or at least for loans to individual owners where the property is their principal residence:
1) Simple interest: Clarify that the interest rate in Sect. 965(4) is "simple interest", calculated on the outstanding principal balance of the tax paid as of the end of each month of the loan, and does not apply to any expenses, including attorney fees or foreclosure costs. If interest floats, or compounds, or is calculated daily, or runs on expenses, calculating the payoff balance will be much more complicated. As the proposed maximum interest rate is extremely high, there is no need to allow interest to compound or run on expenses.
2) Local lenders: If a "property tax payor" makes five or more of these loans, require that the lender be a bank, credit union, or mortgage broker licensed to operate in the State of New York, and that they maintain a full-time physical customer service office within the county where the property is located, an adjacent county, or within 60 miles of the property. The idea is to make sure the lender is available for an owner to go to an actual office and review the account. If an out-of-state lender messes up an account, where can the property owner go to straighten out the problem? The exclusion for lenders who make fewer than five such loans would allow friends or relatives of the property owner to provide a one-time property tax loan without complicated regulation.
3) No assignment: Do not permit the loan to sold or assigned, and do not permit the loan to be serviced by an agent. This is not a form of financing that should require secondary financing, and assigning the loan to future parties complicated ownership when it comes to payoff the loan. The lender should service the loan directly, so that there is no confusion as to the ownership of the loan.
4) Record everything: The recording requirement of Sect. 962(4) should include the transfer certificate, the transfer authorization affidavit, and, the property tax lien payment agreement. It is important for mortgage lenders and property purchasers, as well as property owners, to have all the terms of the loan on record. The loan should not be effective until recorded.
5) Serve the bank: Require that the holder of the senior mortgage lien on the property be served with a copy of the transfer certificate, the transfer authorization affidavit, and the property tax lien payment agreement. The private lender making the property tax loan is inserting itself in the title as senior to the mortgage bank. The mortgage bank's equity is being reduced by the costs and fees of the loan, and the bank, at a minimum, should at least have some idea that a security interest senior to theirs has been created on the property.
6) State keeps track: Require that the State Banking Department or some other entity be served with a copy of the transfer certificate, the transfer authorization affidavit, and, if applicable, the property tax lien payment agreement. Someone in the government ought to be keeping track of these agreements, to see what's going on around the state. A $50 filing fee for this would be appropriate.
7) No loans by first mortgage: Do not permit the holder of the senior mortgage lien, its subsidiaries or affiliates, to make this loan on their mortgaged property. Mortgage banks now usually have a system in place to escrow and pay property tax payments. It would not be good to discourage a mortgage bank from continuing these escrow programs. A bank might be tempted to abandon its escrow program, allow the property owner to pay the taxes directly, and in event of default encourage the property owner to take out an expensive loan from the mortgage bank to pay the taxes.
8) Five year sunset: Sunset this law after five years. This would allow the legislature to review the actual execution of these loans after five years of practice, before extending the program.
Please feel free to call me if you have any questions.