Here’s how home price appreciation impacts taxes – And what that means for servicers

HousingWire recently spoke with LERETA CEO John Walsh about what servicers should be
doing to anticipate tax issues this year and how LERETA balances technology and human
expertise.

HousingWire: Taxes are never a very popular subject with consumers, and you think this
is going to be even more unpopular this year. Why is that, John, and what should
servicers be doing to anticipate issues?

John Walsh: Real estate prices (and home appreciation) have been on a tear over the past few years: up 27% since January 2020. But sooner or later, depending on where your borrowers live, all this good fortune will translate into higher assessments and tax increases. For every silver lining, there’s a semi-dark cloud, right?

tax

While homeowners have been thrilled to see their Zestimates go up month after month, many may be surprised (and less thrilled) to see a notice that their escrow is also heading north.

Some servicers will be ready to handle higher call volumes and longer call times. But others may be more challenged. If I were a servicer, here are few of the questions I’d be asking my escrow operations staff now – while there’s still ample time to make changes ahead of the fourth quarter tax crunch.

First, how did 4Q 2021 go? Was tax season a fire drill? Did your employees have to scramble
over the holidays triaging tax reporting and payments? Are you prepared to address the
mortgage payment changes due to tax increases? Do you have a proactive plan to handle
borrower communications on tax increases (website posts, statement stuffers, call center
scripts?) Finally, has there been an increase in tax-related complaints to the CFPB or a jump in social media complaints?

If servicers don’t like the answers to these important questions, now is the time to do something about them.

HW: In the past, you’ve mentioned tax problems that some large clients have faced
during portfolio transfers and during peak tax cycles. Based on what you are seeing, are
things getting better or worse?

JW: When I came to LERETA about six years ago, one of my first observations was that the tax
service industry hadn’t meaningfully changed in the previous 30 years. Many clients were
accustomed to low service levels and accepting penalties and borrower complaints as the price of doing business.

While I think we have made significant progress in changing the industry and client perceptions, the 4Q tax season continues to be grueling for servicers that are doing everything in-house or working with some large one-size-fits all tax servicers.

How did our clients do last year? I think most would say things went smoothly from a reporting, payments and penalty standpoint. Dallas, which is one of our biggest operations centers, prides itself on finishing all tax work for our clients by Dec. 17th (their version of an early Christmas) and they did it again last year.

Also, clients are seeing that they have new choices. At LERETA we’re adding an average of 20
new clients per month: some shifting from in-house and others moving away from our
competitors. There’s also new interest in champion/challenger scenarios and in vendor
diversification for business continuity reasons. One very large servicer awarded us a significant share of its tax business on this basis last year.

In terms of portfolio transfers, we continue to see data integrity issues during the tax line set-up and on-boarding process. These problems usually stem from tax servicers that rely too heavily on automation during the initial tax line set-up process. Automation helps efficiency, but you have to understand the black holes of automation and build technology to catch the loans with exceptions that will ultimately lead to an unhappy borrower.

To compensate, we added new technology into our tax line set-up process for all new loans,
including acquisition portfolios and entire portfolio conversions. For example, our proprietary
technology allows us to quickly identify contiguous or adjacent secondary parcels which are
commonly missed in our industry and can immediately cause missed tax bills, penalties or
worse. Similarly, we have GIS (Geographic Information System) technology that allows us to
map lower liens (like utility districts or sewer liens).

Finally, we have added a new document review service to make sure that taxes are paid (or not) at 30 days out from closing or during portfolio transfers, this prevents defaults or over-payments, both of which create reputational issues for clients. Anything outside of this is bad for the industry and bad for borrowers.

HW: Tax servicers, like other participants in the mortgage space, are investing heavily in
technology and automation, do you think this means that there will be less need for
domain knowledge in the future?

JW: Today’s clients want the robot-like efficiency of automation, until something goes wrong.
That’s why LERETA takes a different approach to technology and automation than some of our competitors. We believe there needs to be a balance between automation and human expertise, and it is critical to understand how best to apply both.

That said, we’re constantly investing in technology to continually improve accuracy, service-
level performance, client transparency into the tax processes and our ability to customize our
solutions to client-business models. Technology is certainly one of the primary reasons that we met 99.8% of all customer SLAs last year, and why our outsourced customers recently rated us a perfect score of 100 on our net promoter score.

At the same time, we are committed to investing in talented tax experts who know the nuances of various tax jurisdictions and who can anticipate issues before they arise. At LERETA, it’s not an either-or proposition when it comes to technology and domain knowledge. We’re expert in both.

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