The Risks Associated with Unpaid Utility, Fire District and Sewer Bills

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Many escrowed borrowers do not realize that their mortgage company or bank does not escrow for utility and fire district bills. These bills are most commonly collected in the Northeast and are typically to be paid by the homeowner, outside of the escrow funds that are collected. Unfortunately, many bills go unpaid and put both the homeowner and the lender at risk. These unpaid bills can be liened against the property and may eventually lead to the mortgage company or bank losing its interest in the property.

Lenders/servicers could lose interest in a property for an unpaid utility or fire district bill that can be as little as $15. That should frighten you. Don’t worry, though, because knowledge is power, and making your borrowers aware after closing that these types of bills are not escrowed could prevent future risk.

Homeowners receive many notifications at closing, and it is easy for them to not completely understand the risk related with not paying their utility and fire district bills. Finding the right avenue to educate borrowers is vital in mitigating the risk these types of bills create.

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One method a lender could use is a letter campaign, which costs just pennies on the dollar and could save both the homeowner and lender thousands of dollars along with reducing borrower’s frustration.

Here is some sample phrasing to include in a letter to a borrower to help ensure he or she makes those overlooked payments:

  • “Utility, fire district and sewer bills are typically not escrowed with your mortgage company.”
  • “A lien can be placed on your property for not paying utility and fire district bills.”
  • “If the lien is not redeemed timely, this will most likely lead to the loss of interest in the property.”
  • “Avoid the risk and stress by ensuring you pay your utility and fire district bills.”
  • “Do you need clarification regarding what is included in your escrow account? We can help. Please call us at (xxx) xxx-xxxx.”

Typically, when the borrower receives notification that a lien will be placed on the home for such bills, he assumes it was due to the lender mishandling the account. Regardless, once a lien is placed on the property, it can become expensive to resolve. In most cases, after a utility or fire district bill is liened to the property, and after the payments are made to resolve the delinquency, additional steps are needed to release the lien. In some scenarios, you may also have to record a quit claim deed after redeeming the delinquency. Most of this can be avoided by educating the borrowers about their payment obligations.

Then, there are states, such as New Jersey, that have water and sewer bills. If the water and sewer bills go unpaid, they will most likely be added to the next installment of the regular tax bill or purchased by a third party. The third party is hoping that the delinquency continues to go unpaid, so they can take ownership of the property once the redemption period expires. They look at these types of unpaid bills as an effortless way to acquire properties.

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Until you resolve the unpaid water/sewer bills, your regular escrow disbursements may be back-applied to these outstanding amounts from previous installments. Additionally, third-party liens require the lien to be not only released, but also cancelled. Lien release recording fees range anywhere from $20 to $50, and all documents must be the original forms from the collecting agency. This manual processing can burden a tax disbursement team and hinder your ability to pay future disbursements in a timely manner.

Don’t let an unpaid bill be the reason you pay thousands to recover a property that has been lost.  Save yourself the trouble, risk and worries, and start your letter campaign now!

Karen Stephens and Jessica Phoonphiphatana are with LERETA, the industry’s largest tax and flood services vendor.

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