By Matthew D. Urban, Esq.
The recent economic downturn has had a wide ranging impact on all facets of the economy. Mortgage foreclosures are at all time highs, credit card delinquency rates have increased and the unemployment rate remains around 9.0% nationwide. An additional casualty of this crisis has been an increase in the failure of homeowners to pay the property and other taxes associated with their homes, which has created additional pressures on those taxing bodies relying on these revenues to support their operations. In response, the taxing authorities have been left to pursue any and all options available to them in an effort to recoup this lost revenue. As more taxing bodies assert their rights, existing lien holders run a greater risk of losing a potential avenue for collection of their own liens, which can have a substantial impact for credit unions as they attempt to improve and enhance their recoveries.
In Pennsylvania for instance, when a property related tax becomes delinquent, the taxing authority has the ability to file and perfect that lien in the county where the property is located. Pursuant to the Pennsylvania Real Estate Tax Sales Act (RETSA), lawfully levied taxes operate as a first lien on the property in question, provided the lien is perfected by its filing in the county where the property is located. As a result, even if a credit union holds a first mortgage on the property, that mortgage is now subservient to the tax lien. The same fate also awaits a judgment lien that was secured by the credit union through the courts.
Although a tax lien once perfected takes precedence over other liens, the credit union may not necessarily lose their ability to be repaid the amounts secured by its lien as the taxing authority may or may not take further steps to execute on the tax lien. Should it choose to execute on the lien however, the property must first be subject to a tax upset sale. At a tax upset sale, properties are listed for public sale with the highest bidder being awarded the deed to the property. However, any third party acquiring a property at a tax upset sale takes that property subject to all other recorded claims and liens.[1] In this instance, the credit union could theoretically be in a better position to secure a recovery on the amounts owed to it, as a new owner is presumably in a better position to make good on the outstanding obligations following the property. Unfortunately, since a tax upset sale does not extinguish existing claims and liens, only a handful of these properties are sold at this point.
If a property is not sold at a tax upset sale, upon petition of the tax authority and proper notice to all lien holders, a property is then exposed at a judicial sale at which time the property is sold free and clear.[2] Therefore, whether it be a mortgage or judgment lien, the credit union’s lien on that property is extinguished forever. Despite the lien against the member’s real property being removed, the credit union’s judgment against the member does not disappear.
In neighboring Ohio, credit unions face similar challenges regarding tax liens and their subsequent sale. Like Pennsylvania, Ohio tax liens take first priority.[3] However, as opposed to a tax upset sale, Ohio tax liens are put up for sale to third parties. At these Tax Certificate Sales, when the tax lien is sold, the purchaser effectively steps into the shoes of the taxing authority.[4] The purchaser has the right to collect the outstanding tax due, plus interest and fees. While the credit union’s mortgage or judgment lien survives, it is left in a worse position than it had initially been in as its claim or lien is now subservient to the tax lien. However, should the holder of the tax lien wish to execute, it may take the necessary steps to have a Tax Foreclosure or Deed Sale conducted. Much like the Pennsylvania Judicial Sale, the tax or deed sale serves to extinguish all existing liens and encumbrances against the property.[5] Therefore, the credit union again is in the position of having lost a potential avenue for the collection of the member’s debt.
While a credit union may become frustrated with its lien being extinguished and therefore losing a possible avenue of recovery on a delinquent account, all is not lost. As foreclosures increase and home values decrease, members quite frequently have very little, if any equity available in their homes, thus making the home a less attractive resource for future collections. If a member is not paying on his or her mortgage, chances are they are likely not paying their taxes either. Ultimately, credit unions that hold first mortgages are in a position to suffer the most from the continued growth of delinquent taxes, as they must pay the outstanding property taxes so as to continue to secure their position as the first lien holder.
However, those credit unions that sit in the second or third position due to home equity lines of credit, along with those who have secured judgments against members on a car, credit card or signature loan have other options available to them in collecting those debts. Ultimately a credit union sitting as second mortgage holder may not see much benefit in attempting to foreclose on the mortgage, as it would be in the less than desirable position of having to buy the property at sheriff’s sale, which would require satisfying the first mortgage. Additionally, most credit unions do not want to go into the business of owning and subsequently selling homes. Therefore, instead of foreclosing on the second mortgage, the credit union can file an action under the terms of the note and secure a personal judgment against the member, thus placing them in the position as a regular judgment creditor.
While it may not seem like an enviable position to be in, based on the dismal state of the current housing market, along with the increase in delinquent taxes and tax sales, exploring other avenues of collection of judgments have started to yield better recoveries for credit unions. In the past when a credit union secured a judgment against a member, it could typically wait for a member to sell its house or refinance a mortgage in a reasonable period of time. As a result of those actions, the judgment lien would need to be paid in full before the sale or refinancing could take place. That simply is not a viable option currently.
In Pennsylvania for instance, a judgment creditor has the ability to execute on a judgment by filing a writ of execution in bank attachment against the member. Once a bank attachment is filed with the court, the local sheriff will then serve the member’s bank. Once the bank receives the paperwork from the sheriff, they are required to immediately put a hold on the member’s account(s). As a result, the member is unable to withdraw any money while money from sources such as direct deposit from an employer can continue to come into the account. While various exemptions exist that may preclude or limit the amount of recovery, the placing of the hold on the members bank account can create substantial leverage in favor of the credit union thus thrusting its claim back into the forefront. In Ohio, creditors have additional options including wage attachments through the member’s employer.
The current financial climate continues to have an impact on credit unions. The increase in delinquent mortgages and taxes leading to sheriff and tax sales has changed the landscape of how creditors must collect their debts. Credit union’s, however, do not have to sit by while their chances of recovery diminish every time a tax lien is filed or sold but rather can take a proactive approach in collecting outstanding amounts owed.
Matthew Urban is the managing attorney of the Credit Union Group in the Pittsburgh office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 412.338.7134 and murban@weltman.com.
Footnotes:
[1]72 P.S. §5860.609
[2] 72 P.S. §5860.610
[3] ORC §5721.10
[4] ORC §5721.35
[5] ORC §5721.39(E)
That Credit Union Blog 