David Funkhouser and Benjamin Nielsen, attorneys with Quarles & Brady LLP, recently warned in their Commercial Litigation Law Update that Arizona tax lien foreclosures are wreaking havoc on lenders and borrowers. Quarles & Brady represents many large banks and lenders, so it should come as little surprise that they are concerned about the impact of tax lien foreclosures on their lender clients. Lenders should be concerned, as real property tax liens have lien priority over just about everything, including lenders’ deeds of trust. Funkhouse and Nielsen claim that “lenders are losing millions of dollars, and homeowners are losing their homes.” They go on to pose the question of why are lenders allowing it to happen? They provide three possibilities:
1. Financial institutions — particularly large financial institutions that operate nationally — may simply be unaware of the tax lien process in Arizona.
If this is true, then these institutions would be well advised to seek legal counsel, lest indeed, they lose their collateral.
2. The tax lien foreclose action does not timely reach the hands of the appropriate person within a financial institution and/or their outside counsel; thus, no one responds and judgment is entered.
Having handled upwards of 1,600 tax lien foreclosure actions on behalf of tax lien investors, I see it time and again that large financial institutions fail to act in these cases or fail to act timely. When they do act, it is often after a default application is about to become effective. I even had a case where a major bank wired in funds to the Pima County Treasurer as I was walking from the parking garage on my way to obtain a Final Judgment foreclosing the rights of all parties to redeem the subject tax lien – the final step in a foreclosure action. The foreclosure crisis exposed many of the systemic weaknesses in the large financial institutions. They are often too large to handle the onslaught of demands placed upon them. Most institutions use corporate statutory agents, and by the time a lawsuit is filed and forwarded to the institution, it simply takes too long for those institutions to dole out the work to their appointed outside counsels. Sometimes, they fail to act and lose their collateral in the process.
3. Some financial institutions may be hesitant to redeem tax liens on properties with upside-down loans.
It is true that some banks simply do not want to pony up the money to secure their deed of trust position. Why spend more money to secure an underwater property? Even when the math adds up, as Funkhouser and Nielsen point out, it simply makes no sense why a bank is willing to let a property go so as to avoid paying the real property taxes. Rational explanations are not always available.
Funkhouser and Nielsen cast this warning: “Falling asleep at the wheel can cost lenders their security interests and borrowers their homes — all while the tax lien holder, who purchased the tax lien for a few thousand dollars, enjoys a windfall.” While it remains very rare for any tax lien investor to achieve such a windfall, lenders (and those attorneys representing them), should grab a Monster or a large cup of coffee, and be very aware of what is going on with their portfolios and lawsuits, as yes, a tax lien is a very powerful instrument indeed.