Foreclosure(s) and Property Taxes
In my State and Local Public Finance (PA5113) class last night, I got an interesting question: What happens with property taxes when homes go into foreclosure?
After some research, I came to realize that there are actually two different foreclosures. One is a “bank foreclosure,” the typical foreclosure we refer to in the current housing crisis. It is the legal and professional proceeding in which a lender terminates a mortgagor’s right of redeeming a mortgaged estate. That is, after a bank foreclosure, the estate becomes the absolute property of the lending institution.
Another one is a “property tax foreclosure,” which is a legal proceeding by which a local government acquires legal title to a property if the real property taxes aren’t paid by a certain date. In Oregon, for example, real property is normally subject to foreclosure three years after the taxes become delinquent.
This article explains how the two foreclosures and property tax are related:
If property tax foreclosure occurs before bank foreclosure, delinquent property taxes will be added as a lien on the property. However, the lender tends to prevent this as it will take additional costs for them to obtain the line beyond the the delinquent amount. Thus a bank “will not let the house go into a property tax foreclosure while they are pursuing their own foreclosure.”
If property taxes are paid through the escrow account, when a mortgagor default his/her payment, the lender will pay the property taxes on time as they come due. The amounts paid for taxes will be added to the total payoff needed to sell the house or refinance to stop foreclosure.
If the homeowners are paying the taxes on their own, and they get behind, then the proceeds from the sheriff sale will be used to pay off the property taxes, which has priorities before the mortgage and any second mortgage or other liens. Banks do not like this to happen, and so they tend to impose an escrow account on the homeowners.