Current Industry Practice, Potential Improvements and Benefits
In the days prior to the democratization and standardization of credit scores and credit reports, the process of estimating a borrower’s credit worthiness was a non-standardized, cumbersome and time consuming process. The process relied on specialized knowledge and personal interpretation of financial information. As the mortgage process evolved, breakthrough productivity and quality improvements were achieved through the standardization of underwriting processes and the full availability of the credit analysis toolset.
Much like the evolution of credit scoring, another critical component of the new loan origination process has emerged – property tax amount estimation for residential properties. The estimating process is conducted during the initial stages of origination in order to complete the required Loan Estimate provided to the borrower. With increased scrutiny around the preparation of the Loan Estimate, lenders must increase the quality and consistency of the processes used to calculate the projected tax amounts listed in the documentation provided to the borrower. Estimates also need to be validated during the underwriting stage to qualify the borrower’s ability to financially support all of the mortgage costs, and ultimately, property taxes need to be included in the settlement documents. Asking a borrower or a real estate agent for tax information is analogous to requesting a homeowner to estimate his own credit score. Only a consistent procurement process can ensure access to the best information available. A standardized version of a validated property tax estimating process in line with the RESPA-TILA requirements follows these main steps:
- Validate address
- Determine county and tax agencies (there can be more than one)
- Identify the source of information for each county/tax agency
- Determine Tax Identifications for each tax agency. This step cannot be fully performed for new construction loans or apartment units where the final allocation to each unit has not yet been completed by the tax agency. New construction tax estimates require additional steps to calculate the tax amounts
- Find and document tax amounts and tax bills
- Analyze tax amounts to determine expected future tax amounts
This description of the process illustrates the complexity and the knowledge/experience required to make accurate estimates of future tax amounts. The current RESPA-TILA (Real Estate Settlement Procedures/Truth in Lending) regulation calls for lenders to use reliable sources and methods to determine accurate tax amounts: “Creditors are responsible for ensuring that the figures stated in the Loan Estimate are made in good faith and consistent with the best information reasonably available to the creditor at the time they are disclosed.”
The tax estimating challenge is even more complicated in areas in which legislation caps tax increases for existing residents. In 1978, California amended its constitution to add Proposition 13, officially named the People’s Initiative to Limit Property Taxation. The Proposition 13 amendment limits the annual increases of assessed value of real property except in cases of (a) change in ownership, or (b) completion of new construction. When a property changes ownership or new construction occurs, the law requires the assessor’s office to reassess the property at current market value. During times of large increases of property values, Proposition 13 can create abnormal increases in assessed property values when a change in ownership occurs. These increases create a challenge for any lender trying to predict property tax amounts in order to assess the full cost of ownership and accompanying escrow amounts as part of the loan origination process outlined in the TRID (TILA-RESPA Integrated Disclosure) rules. California is not the only state in which this effect can be widely observed. Florida also introduced legislation, referred to as “Save Our Homes,” which limits assessed value increases for existing homeowners. Massachusetts, Maryland, Michigan, Texas and Oklahoma also have limits on assessment changes.
Access to historical data and knowledge of the property tax structure and legislations are critical foundation blocks for delivering new products designed to quickly and consistently generate high quality property tax estimates throughout all stages of loan origination.
Industry Best Practices
A comprehensive property tax estimation solution should, at a minimum, be configured to facilitate the following steps:
- Loan Officer collects basic information about the property
- Loan Officer technology triggers XML call
- Automated receipt of information by data provider
- Automated address standardization
- Automated search of property in property database and extraction of information
- Automated calculation of value-based tax amounts, excluding exemptions
- Automated standardized return of information to the user through XML link (few seconds)
A complete property tax estimation solution will reduce the total tax amount process time from 20 minutes to no more than 3 minutes. Additionally, an estimation tool eliminates the need for any specialized skills required for the procurement and eliminates the quality issues and time variation across property complexity and loan officer tenure.
In today’s mortgage environment, borrowers’ expectations and knowledge are increasing. Accurate information must be readily accessible. Millennials demand transparency with easy and instant access. Efficient distribution of information is expected. Originators lacking the processes and controls to help ensure accurate property tax data collection, analysis and estimation, will not be positioned to move forward with those adopting a comprehensive property tax estimation solution as part of their lending process.
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