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How Mortgage Delinquencies Could Impact Property Taxes

An atypically high number of mortgage delinquencies and forbearance programs should not significantly affect property tax payments, reported Fitch Ratings, provider of credit ratings, commentary and research, with the caveat that there is an increased possibility of timing delays. The report from Fitch cites the 2008 recession, noting that during that period of economic crisis, despite a large number of defaults and forbearances, overall property tax collections saw minimal decline.

"Mortgage servicers are obligated to advance property taxes when a borrower is not making mortgage payments and, due to the elevated number of delinquent loans and loans in forbearance, servicer liquidity is critical," Fitch reported. "Unemployment levels remain high, and Fitch expects a slower economic recovery following a third-quarter 2020 bounce back. In the absence of further federal aid, mortgage delinquencies may increase, placing greater pressure on mortgage servicers."

Property taxes are an important, generally stable source of revenue for local governments, the report noted. These taxes also serve to "moderate higher volatility" found in "more economically sensitive taxes, service charges, and state aid."

As detailed in Fitch's U.S. RMBS Sustainable Home Price Report (Second-Quarter 2020), home prices are rising (although growth is decelerating).

Black Knight reported that mortgage delinquencies, excluding mortgages in foreclosure, declined in August to 6.9%, but the rate of decline was slower than in months leading up to it. The total delinquency rate during the Great Recession peaked at 10.6%.

More forbearances have been offered that during the 2008 recession, but those too are beginning to decline, according to Mortgage Bankers Association, which this week reported that 6.8% of mortgages are in forbearance.

Noted Fitch, "Mortgages in forbearance are generally reported as delinquent, although some borrowers with loans in forbearance are still making payments on time."

Some local governments have waived late-payment fines and/or postponed property tax deadlines for those who can prove that coronavirus has hindered their ability to pay, Fitch noted.

Property tax delays, say the researchers at Fitch, "are predictable and allow officials to plan for alternate sources of liquidity until tax payments are received. In contrast, an inability by servicers to advance payments to governments could cause an unexpected short-term liquidity shortfall."

Fitch Ratings' full report is available here.

About Author: Christina Hughes Babb

Christina Hughes Babb is a reporter for DS News and MReport. A graduate of Southern Methodist University, she has been a reporter, editor, and publisher in the Dallas area for more than 15 years. During her 10 years at Advocate Media and Dallas Magazine, she published thousands of articles covering local politics, real estate, development, crime, the arts, entertainment, and human interest, among other topics. She has won two national Mayborn School of Journalism Ten Spurs awards for nonfiction, and has penned pieces for Texas Monthly, Salon.com, Dallas Observer, Edible, and the Dallas Morning News, among others.
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