John Walsh of LERETA on Servicing Tax Issues
John Walsh is CEO of LERETA, Pomona, Calif. He leads an executive leadership team focused on providing the mortgage and insurance industries accuracy, responsiveness and innovative technology.
Walsh has more than 20 years of senior management experience in the financial services industry and more than 10 years leading technology firms. Prior to joining LERETA, he was President of DataQuick, a nationwide provider of real estate property information, analytics and mortgage settlement services. Previously he was President of Del Mar Database, a provider of technology platforms to residential lenders. Earlier in his career, Walsh was President of RF/Spectrum Decision Science Corp and Chairman and CEO of PureCarbon Inc. Additionally, he has held executive management positions at several mortgage companies and banks earlier in his career.
MBA NEWSLINK: Why is Q4 the equivalent of “Black Friday” for servicers and tax service companies, and why will this tax season be even more challenging?
JOHN WALSH, LERETA: Roughly 60% of all tax bills go out in Q4 and most are due by the end of the year, so year-end is always a stressful time for servicers. This year there are also several other factors in play that are increasing the level of difficulty.
The first is the flipside, if you will, of the record-high home price appreciation that we’ve experienced over the last several years. These gains are now resulting in higher assessments and tax bills for a majority of American homeowners, and recalculating these increases is putting a strain on taxing agencies. Increased volume and staffing issues have caused many of the more than 24,000 taxing agencies to delay getting tax bills out this year. This directly impacts servicers because their hands are tied until the agencies do their part. To give you an idea of the scope of the problem: one of the largest counties in the country, which has more than 1.8 million assessed parcels, usually sends its bills on July 1. But this year that agency didn’t release its tax bills until December 1.
Another factor contributing to the challenges this year is the high volume of mortgage servicing rights that are being traded in the second half of the year, many of which will close in late Q4. With originations down, many mortgage companies have been selling servicing to generate revenue. The new owners are responsible for onboarding and paying the taxes on these portfolios, and all of this activity, combined with the late arrivals of tax bills, means the industry is scrambling even more than normal this tax season. Often when this happens, servicers throw bodies at the problem. But this year, given the sharp drop in revenue and deep cuts in staffing, requests for temps and overtime may be met with pushback.
Data integrity is another challenge for servicers that, while not unique to Q4, can nevertheless add to Q4 problems including missed payments, inaccurate escrow analysis, lower automation rates and, inevitably, complaints from borrowers. Because we conduct an audit during the onboarding process for new clients, we are able to see firsthand the quality (or lack thereof) of data and uncover issues that servicers may not have even known they had. Interestingly, most of the issues we see are the result of initial tax set up that was flawed at the outset and never subsequently reviewed or updated. With more tax assessments and tax increases this year, flaws in the data and tax set up will lead to more pronounced problems.
Despite all of these challenges, I’m pleased to say that our firm is farther ahead than it has ever been before, and I encourage servicers to challenge their vendors on where they are with reporting for year-end payments in order to minimize potential problems.
NEWSLINK: You mentioned increased borrower complaints. What can servicers do to minimize customer frustration?
WALSH: Customer service issues are bound to increase with delayed notices and increased tax bills.
Having said that, servicers can’t do anything about delayed notices or increased tax assessments. But they can commit to stay on top of the things they do control. We’re encouraging our clients to focus on the details that could slow the process once the bills arrive. This includes things like ensuring tax contracts are up to date; noting any active contracts on paid-in-full loans that should be cancelled; making sure contracts are properly categorized by escrow/non-escrow; and providing plenty of advance notice to properly manage portfolio acquisitions. We provide these tips and other helpful information in a Q4 tax service “success kit” for our clients because we know that while our firm plans and prepares for the Q4 tax push all year long, our clients need extra help during peak. Helping our clients stay on top of the things they can control goes a long way to minimize customer complaints.
And of course, there is the all-important element of good customer communications which is critical in Q4. Forward-looking servicers are getting ahead of these issues with up-to-date data, and positive, proactive communications to help manage customer frustration and increased call volume.
NEWSLINK: Can you speak to automation and how it’s changing tax servicing. Is automation the solution?
WALSH: Automation is a huge part of the solution, and new technology is leading to more automated functionality that can address some of the industry’s age-old problems by streamlining operations, ensuring data accuracy and increasing resource efficiencies. For instance, within our company, automation has reduced the number of tax bills that are manually procured from about 80% to less than 5% for our clients. That alone is a huge savings on staffing and procurement time, not to mention improving data quality and reducing errors caused by humans. Automation can also identify possible defects before they become actual problems, saving both time and money. Possible pitfalls such as overlooked specialty lien taxing agencies or unidentified adjacent secondary parcels can now be more easily flagged and corrected before missed tax payments result in even bigger tax bills and accompanying penalties.
So yes, automation is the backbone of a well-oiled tax servicing operation, but automation without the benefit of experienced tax professionals will only lead to more problems. It’s critical, in our view, to have access to experienced tax experts who can navigate the nuances that automation can’t handle and manage exceptions efficiently and effectively, especially during a busy Q4. Our firm balances an automated system with tax professionals who can quickly manage exceptions and who regularly engage with individual jurisdictions and taxing agencies to maintain up-to-date information. We do this because we know that without the expertise of a tax specialist who can work with the servicer, and in some cases the homeowner, even minor exceptions can cause big problems and backlogs.
NEWSLINK: As servicers navigate Q4 and plan for 2023, what should they be thinking about?
WALSH: I’d start with vendor diversification and back-up plans, particularly for large servicers. If the pandemic taught us anything, it’s that catastrophe can happen at any time. Crisis planning isn’t just a good idea, it’s crucial, and in the case of Q4 tax processing, there is little room for error. In addition to the obvious benefit of avoiding service interruption, having multiple vendors in place can reduce risk, enhance contingency planning and improve performance.
Servicers that diversify by working with multiple tax service providers give themselves a smart Plan B if and when needed. For those relying only on a single tax vendor, or their own in-house tax department, when you consider the costs and potential risk a disruption can cause, it’s not hard to justify the reasonable cost and time to diversify and to consider outsourcing if they haven’t already.
As the industry increasingly recognizes the benefits of using automated systems combined with experienced tax professionals, servicers are becoming more inclined to adopt outsourcing as a viable solution. The economies of scale are obvious with companies like ours being able to bring the technology, automation and experienced talent that simply can’t be replicated in-house.
While it may be too late for some companies to explore outsourcing and/or diversification this Q4, it isn’t too early to put plans in place for 2023.
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