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The Growing Risk in Municipal Liens

foreclosuresMunicipalities across the country have the legal right to place a lien against real estate for liabilities incurred by the property owner that remain unpaid. During the foreclosure crisis, filing a lien was the only way many taxing authorities around the country realized tax revenue for many properties in the communities hardest hit by the financial crash. But today, cities, counties, and states can place liens for much more than just unpaid taxes and a great many of these liabilities are still clouding title across the country.

Legally speaking, a municipal lien is a lien filed by a municipal corporation against a property owner for the owner's proportional share of public improvement that specifically and individually benefits the owner. In reality, they are risks that threaten the investor’s right to foreclose or add expense to the real estate disposition process.

Various states already had laws on the books allowing them to file the liens. The problem was collecting the money on tens of thousands of zombie foreclosures, where the homeowner had abandoned the property but the servicer had yet to foreclose on behalf of the investor.

Today, there are still municipal liens on the books on properties all over the country for unpaid taxes, water, and sewer charges. In some states, local authorities can file a lien for uncut weeds, pest extermination or other code violations. In some jurisdictions, these are super liens that replace the mortgage at first right to foreclose. A simple search for outstanding tax liens will not indicate clear title.

The solution to identifying these liens is a municipal lien search (MLS) that identifies lienable water and sewer charges, permits, code violations, and special assessments. The risk is a claim against the title policy. One of the most significant risks to servicers is that they receive incorrect or incomplete property tax reports. This can happen if the tax information provider does not have access to data nationwide (as many as 25,000 government agencies), or is not specialized in hard-to-track and research municipal liens. Only tax certificates that carry a 100 percent financial guarantee can protect servicers and investors.

Although the default industry has been in a bit of a slump in recent years, now is the time to make sure you’re ready to handle increased volume. Having a dependable MLS will go a long way to ensuring a smooth experience for you and your clients.

About Author: Timothy Moreland

Timothy Moreland is SVP, SLK Global Solutions, a firm that provides technology-based solutions for the real estate lending and settlement services industry. He can be reached at timothy.moreland@slkgroup.com

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