In an effort to raise revenue for municipalities, Pennsylvania lawmakers have passed a law that will have a major impact on how distressed property owners - including REO holders - liquidate their assets.
This law, Act 93 of 2013, was meant to target slumlords and other property owners who have the ability to pay their property taxes but are unwilling to pay. The law, once fully implemented, will allow in personam judgments to be filed by a municipality - without a court proceeding - against any property owner who has failed to pay taxes and has reached the stage when the tax is considered a claim absolute. The claim absolute status would normally be reached one year after the tax goes delinquent.
How does Act 93 change tax collection? It removes the barrier of a court proceeding for the approval and filing of an in personam judgment. Since the law sets no further restrictions beyond claim absolute status for selection of property owners, we have to presume that some counties, if not all, will file such judgments against ALL property owners vested in title with such delinquent taxes, including Fannie Mae.
That's right. It is important to note that Act 93 does not distinguish between types of property owners. Mortgage lenders and other market entities who routinely acquire property through foreclosure are treated in the same manner as all property owners under this new law.
What happens when an in personam judgment is filed against an individual or entity? The judgment automatically attaches to ALL real estate owned by that individual or entity in the county. This means that one property could not be sold without also paying the judgment or judgments. It's an all for one and one for all method of delinquent tax collection.
This is perfectly fine for targeting so called slumlords and others who have the ability to pay, but what about properties were the owner doesn't have the extra cash or equity? What about owners who are close to break even or underwater because they are in financial distress? How do they liquidate assets to avoid foreclosure or get out from under a bad situation?
Tying one property to others in these cases, I argue, will cause harm. If an owner is able to liquidate the asset, the good old fashioned in rem tax lien will cause delinquent taxes to be paid. If an owner is not capable of covering an additional judgment caused by Act 93, then taxes aren't paid, the property remains distressed and if mortgaged, a candidate for foreclosure.
Let's talk about two techniques used by mortgage lenders and property owners to avoid foreclosure - short sales and deed in lieu.
In the case of a short sale, the property owner negotiates with the mortgage lender to accept less than what is owed on the mortgage loan making the case that the property value is insufficient to meet transaction costs and the unpaid balance on the loan. As part of these negotiations, mortgage lenders typically allow payment of normal closing costs including a real estate commission and delinquent taxes owing on the mortgaged parcel. It is inconceivable to me that a mortgage lender would also allow the payoff of an Act 93 judgment for taxes owed on a different parcel so in cases where we have a property owner in distress and subjected to Act 93 rules, I would argue that they no longer have a short sale as an option for foreclosure avoidance.
The same is true with deed in lieu in which an owner would negotiate with a mortgage lender to simply take back the property rather than to foreclose. If there are Act 93 judgments attached, the owner and lender are forced into foreclosure because it is only with good notice in a foreclosure that such judgments can be divested and cleared from the title to this distressed property. I would argue then, that owners and mortgage lenders faced with Act 93 judgments lose the option of avoiding foreclosure with a deed in lieu.
Act 93 impedes the ability of distressed sellers liquidating assets to avoid foreclosure, thus delaying the payment of delinquent property taxes. Once unable to avoid foreclosure, the property then is subjected to a lengthy proceeding which if done properly will divest the Act 93 judgments making the entirety of the exercise seem ludicrous if not simply sad.
Now we must take the Act 93 scenario one step further and consider what happens after foreclosure. Once a sheriff has deeded the property to the mortgage lender, now the mortgage lender itself may find this property attached with other properties owned by the mortgage lender in that county by Act 93 judgments. Stay with me because I know this might be confusing. Remember that no restrictions exist as to what kind of entities might be subjected to such judgments. Take Fannie Mae for instance. In the normal course of business Fannie Mae owns multiple REO properties in every county and many of these properties have delinquent taxes. The same is true for all mortgage lenders. Each would be a target for Act 93 judgments which would cause at minimum, a need for REO managers to change the way they do business and pay delinquent taxes as they acquire the property rather than when they sell the property. This may be easy for some and not so easy for others but it certainly would be a change. The question is, how big of a change is it and does it make doing business in Pennsylvania more onerous than doing business elsewhere? How does that impact the business of mortgage lending?
Frankly, it's the long term impact on mortgage lending in Pennsylvania that scares me the most. There are all sorts of possibilities and I'm sure I haven't considered them all but here are a few:
Escrow waivers: Will mortgage lenders continue to grant waivers so that consumers can pay taxes on their own?
Second homes and investment property: Will mortgage underwriters consider multiple property ownership more risky in Pennsylvania and what will that mean to these types of transactions?
Pre-qualification: How do mortgage lenders and Realtors change the way they uncover information about buyers and sellers to avoid Act 93 transaction killers?
The bottom line is that Act 93 will fundamentally and negatively change the market mechanism for moving distressed properties in Pennsylvania and in the process have little, if any, positive impact on tax revenue.