Western Independent Banker - July/August 2008 - (Page 26)

Distressed Real Estate Loans and Their Property Tax “Kicker” IF YOU ARE confronted with a distressed loan secured by a deed of trust or mortgage (“security instrument”) on real estate, it is time to get familiar with your state’s property tax framework. What you don’t know could cost you dearly – and timely action can enable you to avoid, or at least minimize, significant unanticipated expenses. In most jurisdictions, property taxes provide funding for many vital local services; thus, it is not surprising that the lien for unpaid property taxes and penalties is superior to all other liens against a property, regardless of the time of their creation. A security instrument may have been recorded in 2005, when there were no tax delinquencies; however, upon foreclosure in late 2008, any unpaid property taxes from the 2006, 2007 and 2008 tax years, plus penalties, become the obligation of the entity that acquires title upon foreclosure. Because of statutory multi-year waiting periods before a property can be sold for tax delinquencies, most borrowers in distress simply ignore property taxes. The ongoing penalties associated with an owner’s failure to make timely tax payments, which can run to 25 percent of the unpaid taxes, only exacerbates the obligation. As a result, by the time the property is in the foreclosing lender’s hands, the opportunity, both to eliminate or reduce penalties and to challenge the property’s previous assessed values, has been lost. A lender that views a troubled loan only in terms of a principal write-down is shocked to learn the magnitude of this additional, inescapable out-of-pocket expense. Savvy lenders faced with this scenario are well-advised to initiate early action to minimize the resulting impact on their bottom line. Protective Measures Available to Lenders A lender dealing with a distressed loan has two primary proactive measures available to it: payment of property taxes before delinquency and attempts to lower the property’s assessed value. Each of these actions is extremely time-sensitive. Annual real property tax bills are typically payable in installments, with a clear deadline for payment. Most well-drafted security instruments give a lender the right to make payment of property taxes when it can demonstrate reasonable grounds to inform. educate. connect. Business Development, Sales & Growth Forums September 9-10, 2008 Fairmont Newport Beach Newport Beach, Calif. October 22-23, 2008 The Westin San Francisco Airport San Francisco CHARTING A COURSE TO SUCCESS NAVIGATING THROUGH ROUGH WATERS • Focus on aligning activities to achieve bottom-line goals and overcome the challenges of today’s uncertain environment • Examine topics including: shrinking the sales cycle, advisory boards, developing a referral pipeline and “sticky” products • Develop key leadership skills that promote increased motivation and productivity in the sales and growth environment. For more information or to register, go to www.wib.org. 26 www.wib.org Western Independent Banker http://www.wib.org http://www.wib.org

Table of Contents Feed for the Digital Edition of Western Independent Banker - July/August 2008

Western Independent Banker - July/August 2008 Contents A Message from the President & CEO Getting Creative and Competitive with Leaders' Incentive Compensation Financial Covenants - What Good Are They Really? Homes Within Reach Revisiting Credit Quality and Risk Management Loan Yield Shock Wave - What Can You Do? What Lending Crisis? - Community Banks Flex with Lending Strength How to Fine-Tune ALLL During Uncertain Times Productivity, Technology and Export Growth Trump Housing's Fall in the Long Run - The Economy According to Brian Wesbury Distressed Real Estate Loans and Their Property Tax "Kicker" WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - July/August 2008

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