A Supreme Court decision last year in a
The case involved Hennepin County, which took $25,000 in excess funds from the foreclosure sale of 94-year old Geraldine Tyler’s condominium over $15,000 in tax debt. The court ruled that the county could not take the excess amount under constitutional law, largely agreeing with the plaintiff’s attorneys, who argued that the issue has been a widespread concern. Their estimates suggest more than $860 million in surplus funds have been taken by public entities.
The decision is of interest to housing finance firms because tax liens generally trump all others, including those that secure mortgages. They’re a particularly large concern for the industry right now given that
Mortgage companies may require escrow accounts to keep tabs on property taxes and insurance and to manage potential issues, but not all do. Escrow accounts also may be removed once equity reaches a certain threshold.
The Tyler v. Hennepin County precedent could help borrowers and servicers when there is a tax default risk in that context if it compels jurisdictions to adjust their policies in line with what attorneys say is the court decision’s main message.
“One of the things the Supreme Court said very clearly is local governments can take what they are owed, but no more,” said Matt Kreis, general counsel at the Center for Community Progress, in a webinar the anti-blight group staged with the National Consumer Law Center.
“This is very important for states like Minnesota and roughly a dozen other states that historically have some measure of being able to do so — to keep the property and keep the excess value in it,” Kreis said.
The restrictions on what public entities can claim could benefit borrowers and servicers, said John Rao, senior attorney at the NCLC, in a recent interview.
“In general, I would say that as states reform their laws in light of Tyler, there may be more opportunity for mortgage holders to recover something when, in the past, they would have lost their interest in the property, just like the owner would,” Rao said.
However, while the general limit on government recovery in Tyler may be clear, other ramifications of the decision are not.
One of the key questions around Tyler is, “How can local governments determine whether a surplus exists?” Kreis said, noting that this gets into questions about how the property’s valuation should be measured.
The Supreme Court decision suggests that having a public sale in which the market comes in to bid on property seems to be an acceptable way for local governments to establish a home’s value, but specific direction on this point is lacking, said Kreis.
Such uncertainties are
“A lot of states are going to be looking at their tax foreclosure laws because of the Tyler v. Hennepin case,” said Andrea Bopp Stark, another senior attorney at NCLC, during the webinar.
That could lead to a lengthening of
“These liens can grow pretty quickly because of the statutory penalties and interest, and the interest for nonpayment of property taxes is substantially higher than any other type of interest. There are some states where it’s 18%,” Rao said.
How big a concern these liens turn out to be for the mortgage industry in the context of Tyler or otherwise may depend on a property tax default rate that’s generally not as well-measured on a national scale as loan performance is, he added.
While overall mortgage delinquencies have remained historically low amid some broader reports of consumer finance stress, what’s happening in tax foreclosures is tougher to draw a bead on because information tends to be jurisdictional, or in line with investments that may be, said Rao.
