Why Did My Mortgage Lender Pay My Delinquent Property Taxes?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon:

I own a home and am current on my mortgage. I recently fell behind on my property taxes. My lender paid the taxes and is now billing me for them. Why would the bank pay my taxes?  And what happens if I don’t reimburse the lender for the tax payments?

Dear Stan:

If you don’t pay your property taxes, the bank will advance money to pay the property taxes, then turn around and bill you for that cost. If you don’t reimburse the bank for the taxes you owe, your lender can foreclose on your home.

Here’s why this happens.

The Lender Wants to Protect Its Interest in the Property

If you have a mortgage on your home or other real estate, the lender has a security interest in your home. If you default on the mortgage, the lender can take the home back to get reimbursed for the mortgage payments you owe. This is called foreclosure. Not surprisingly, the lender wants to protect its interest in your property, and make sure nothing happens that will hurt its ability to foreclose or to get reimbursed for mortgage payments.

For this reason, your lender will require you to maintain fire insurance and other types of homeowner’s insurance. In addition to keeping the property insured, the lender will also require that you stay current on the property taxes (this will be part of your mortgage contract). Here’s why the lender cares about your property taxes being current.

Why Does the Lender Care About Property Taxes?

Under the California State Constitution, property taxes become a priority lien on the property as soon as the county tax assessor issues an assessment notice for the tax. The “priority part” means that the property tax lien jumps ahead of the mortgage.

If the taxes remain unpaid for a long enough time (usually five years), then the county has a tax sale of the property. The tax sale of the property is not subject to the other liens against the property. This means the buyer at the tax sale takes title free and clear of any other encumbrance, not even the mortgage! Hence, banks are scared to death of letting property be sold at a tax sale because it wipes out their mortgage.

A mortgage lender is in for a horrible loss if they let that happen. Somebody might walk away with the property as the successful bidder at a tax sale, paying far less than market value, and the mortgage lender might get absolute nothing!

How the Lender Protects Itself

Lenders can protect themselves from losing their collateral at a tax sale by monitoring the tax delinquency status on every parcel they have loaned against. If the borrower fails to pay the property tax, the lender will advance the money to pay the taxes. That removes any danger of a potential tax sale, and then the lender can bill the owner for the taxes that the lender has paid.

Paying the taxes also allows a lender to take their sweet time in foreclosing on the borrower. For example, a bank won’t rush through a foreclosure if it already has too many repossessed condos in their inventory.

If you have delinquent taxes, you can work with the IRS to structure a payment plan. Learn more in our Back Taxes & Tax Debt area.

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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