The Michigan General Property Tax Act, MCLA 211.1 et seq., MSA 7.1 et seq. creates a statutory lien for unpaid real property taxes. This lien is prior to all other liens and encumbrances on the land assessed for those taxes, including the lien of any real estate mortgage. MCLA 211.60; MSA 7.104. In other words, what we commonly call "first mortgage liens" are always junior to the lien for unpaid taxes. Even if your mortgage loan is secured by a first lien on real property, your mortgage can still be extinguished by a tax sale.
On July 23, 1999, the Michigan legislature amended the General Property Tax Act by enacting 1999 PA 123, 1999 PA 132 and 1999 PA 133 (the "Amendments"). The Amendments (i) shorten the period during which the property owner or mortgage holder may avoid a tax sale by paying delinquent taxes, (ii) change the procedures, adding certain protections for owners and mortgage holders, (iii) remove provisions allowing private citizens to purchase at tax sales or purchase the State's bid after the tax sale; (iv) increase fees and interest on delinquent taxes; and (v) provide for accelerated tax foreclosure sales for property classified as certified abandoned property. These amendments apply to taxes first coming due in calendar year 1999 and for all years thereafter.
The Amendments affect your rights as a mortgage lender. Most significantly, the Amendments reduce the time during which you can redeem from a tax sale by more than 18 months. If you or your borrower fails to redeem within this shorter period, you will lose your mortgage lien. The Amendments also significantly change Michigan's tax sale procedures and the number and types of notices which must be sent to parties with an interest in the property upon which delinquent taxes are owing.
Background
Under the General Property Tax Act before it was amended, (the "Current Act"), real property was first exposed to tax sale by the County in early May of the third year after the year in which the taxes were first assessed. In other words, in May of 1998, properties on which delinquent 1995 taxes were still owing were sold at tax sale. MCLA 211.60; MSA 7.104. Private purchasers could bid at the sale; if no private bid was received, the property was bid off to the State of Michigan. MCLA 211.70; MSA 7.115. After the tax sale, persons in possession or with a record interest in the property had an absolute right to redeem for one (1) year. In other words, property sold for unpaid 1995 taxes B which was sold at tax sale in May, 1998 B could have been redeemed at any time until May of 1999. MCLA 211.74(1); MSA 7.120(1). Beyond this initial period, a right to redeem continued for at least six (6) months, but the exact length of this second redemption period depended on several factors, including whether the State of Michigan or a private tax purchaser was involved and when certain notices were sent. MCLA 211.131c; MSA 7.190(1) (as to bids by the State); MCLA 211.141; MSA 7.199 (as to bids by private purchasers).
The tax deed held by the State of Michigan or by a private tax purchaser became absolute after the expiration of both redemption periods. In other words, all other liens and interests in the land, including mortgage liens, were extinguished when the tax deeds became absolute through non-redemption approximately 42 years after the taxes first came due. The risk of losing your security interest in real property sold for delinquent taxes, of course, is the reason you require your mortgage borrowers to agree to pay their real estate taxes in a timely manner.
Certain municipalities, such as Detroit and Kalamazoo, have adopted their own procedures and redemption periods for collecting local (city) taxes. These procedures and rights are not addressed in this article.
The Amendments, which became effective in July 1999, have abolished tax sales in their current form. They have also abolished the accompanying sale of tax liens to private purchasers. New forfeiture, foreclosure and sale procedures will apply to delinquent real property taxes for 1999 and subsequent years. 1999 PA 123, Sec 60, MCLA 211.60, MSA 7.104; 1999 PA 123, Sec 78a, MCLA 211.78a(1), MSA 7.124(1).
The last tax sales under the current procedures will be held in May of 2002. The first tax foreclosure under the new procedure will be held in early 2002.
The Amendments
Counties have the right to continue to administer the new system. However, a county may elect to have the state foreclose tax liens on property in its jurisdiction or enter into an agreement with local units of government to collect and foreclose on delinquent property taxes. MCLA 211.78(3), (5); MSA 7.124(3), (5).
The remainder of this article describes the new procedures in chronological order, with our comments regarding the stages of the delinquent tax procedures that may affect you and the decisions you may be faced with in order to protect your mortgage lien.
Keep in mind that the discussion that follows assumes that the property has not been abandoned. If property is unoccupied and certified by the governmental unit as abandoned, the dates and deadlines outlined in this article are accelerated by one year. 1999 PA 132, Sec 2; MCLA 211.962; MSA 7.756(41). Special procedures apply to all kinds of abandoned property. Under the Current Act, they applied only to abandoned residential property. MCLA 211.55a; MSA 7.99(1). In the case of abandoned property, there is a separate notice requirement. 1999 PA 132, Sec 4; MCLA 211.964; MSA 7.756(44) and 1999 PA 133, Sec 79a; MCLA 211.79a; MSA 7.125a. Most of the notices described in this article do not apply to property certified as abandoned.
Year 1 -- Tax Assessed. Taxes are assessed by either the county or the local unit of government or both. For example, last year, city or township taxes may have been billed by the local unit of government on July 1, 1999 and county taxes were billed as of December 1, 1999. MCLA 211.40; MSA 7.81 and MCLA 211.44a; MSA 7.88. These dates have not changed under the new amendment.
Year 2 -- Request for Notices Must Be Made Between January 1 and February 1 . As under prior law, all parties with an interest in real property will get notice of delinquent taxes. The maximum number of notices you can receive under the Amendments is four. The timing of each of the notices is discussed below. Two of these notices will be given to you only if you make a request, and pay the applicable fee, for notice. As under the Current Act, the Amendments allow you to apply to the local county treasurer between January 1 and February 1 of each year to receive notices of delinquent taxes for the prior year. 1999 PA 123, Sec 78a(4); MCLA 211.78a(4); MSA 7.124(1)(4). The fee has been substantially reduced for mortgage lenders -- from $5.00 to $1.00 per parcel. MCLA 211.57(4); MSA 7.101(4).
If you furnish a list of mortgaged parcels to the county treasurer during this period, and pay the treasurer's fee which may not exceed $1.00 per parcel, the treasurer is obligated to send you the First Notice and a Second Notice of delinquent taxes for the prior year, as described later in this article. For example, if you furnished the list and paid the fees between January 1 and February 1 of this year, you will be entitled to receive a list of those parcels for which you paid the $1.00 fee on which 1999 real property taxes have not been paid, as described below. You should list parcels on which you have mortgages on a form prescribed by the treasurer for the county in which your mortgage property is located. 1999 PA 123, Sec 78a(4); MCLA 211.78a(4); MSA 7.124(1)(4).
Many of you currently perform your own searches at the county treasurer's office, and there is no reason you cannot continue with this practice. However, you may wish to reevaluate your decision to perform this task yourself, and to consider paying the $1.00 fee per parcel for the notification from the county treasurer.
Year 2 -- Taxes Become Delinquent on March 1. Real property taxes not paid as of March 1 of the year following the year in which they were assessed are considered delinquent. For example, any real property tax levied in 1999 which remains unpaid as of March 1, 2000, is delinquent. At that point, a 4% fee will be added to the tax, and 1% per month (non-compounded) interest will begin to accrue on the unpaid tax. 1999 PA 123, Sec 78a(3); MCLA 211.78a(3); MSA 7.124(1)(3). This date and its associated penalties have not changed under the new system. MCLA 211.59(1); MSA 7.103(1).
Year 2 -- First Notice on June 1. Under the new procedure, on June 1 of each year the county treasurer will send a First Notice to the owner of real property on which taxes first became delinquent during that year. If you have furnished a list of parcels and paid the $1.00 fee per parcel, the county treasurer must also send you a copy of this First Notice. 1999 PA 123, Sec 78b; MCLA 211.78b; MSA 7.124(2). For example, if you applied for notices between January 1 and February 1, 2000, the treasurer must send you a list of those parcels on which 1999 taxes became delinquent as of March 1, 2000. Under the Current Act, the county treasurer was required to send a notice to the taxpayer and mortgagees who have paid the described fee within 120 days after the county treasurer receives a statement of unpaid taxes from the local treasurer. MCLA 211.57(2); MSA 7.101(2).
Year 2 -- Second Notice on September 1. If the taxes remain unpaid, the county treasurer will send a Second Notice to the owner on September 1 of the year in which the taxes become delinquent. Again, the county treasurer must also send you a copy of this notice if you are a mortgage lender who has previously paid the $1.00 annual fee for each parcel. 1999 PA 123, Sec 78c; MCLA 211.78c; MSA 7.124(3). For example, for delinquent 1999 taxes, the Second Notice will be sent on September 1, 2000. Under the Current Act, the county treasurer was required to send a second notice to the taxpayer and mortgagees who had paid the described fee within 120 days after March 1 of the year following the return of the delinquent taxes. MCLA 211.57(3); MSA 7.103(1).
Year 2 -- Fees/Interest Added on October 1. On October 1, the county treasurer will add a $15.00 fee to the amount of delinquent taxes remaining unpaid. On or after October 1 of each year, in order to pay off delinquent taxes for the prior year, you will have to pay this fee. 1999 PA 123, Sec 78d; MCLA 211.78d; MSA 7.124(4). For example, if you want to pay delinquent 1999 taxes on or after October 1, 2000, you must pay this fee as well as the delinquent tax amount. Under the Amendments, the State Treasurer has the right to adjust (read "increase") this fee at any time through December 31, 2002. 1999 PA 123, Sec 78p; MCLA 211.78p; MSA 7.124(16). Under the Current Act, the fee is $10.00. MCLA 211.59(1); MSA 7.103(1).
Year 3 -- Third Notice on February 1. On or before February 1 of year 3, the county treasurer must send a Third Notice to the taxpayer, mortgagees and several other categories of recipients. 1999 PA 123, Sec 78f(1), MCLA 211.78f(1), MSA 7.124(6)(1); 1999 PA 123, Sec 78e(2), MCLA 211.78e(2), MSA 7.124(5)(2). As a mortgage holder, you will receive this notice whether or not you have applied for notice and paid the annual $1.00 fee per parcel mentioned above. For example, on February 1, 2001, the county treasurer will send you a notice for each parcel on which you have a mortgage that 1999 taxes became delinquent on March 1, 2000. There is no provision in the present statute for a third notice. If you have not applied for notice and paid the $1.00 fee per parcel, this will probably be the first notice you receive that taxes are delinquent.
Year 3 -- Forfeiture on March 1. If the taxes remain unpaid on March 1 of the year following the year in which the taxes became delinquent, the property is "forfeited" to the county treasurer. 1999 PA 123, Sec 78g(1); MCLA 211.78g(1); MSA 7.124(7)(1). As used in the Amendments, the word "forfeiture" means merely that the governmental unit may later seek to foreclose on the property for taxes. The governmental unit does not acquire the right to possess the property at the time it is "forfeited". 1999 PA 123, Sec 78(g)(1); MCLA 211.78(g)(1); MSA 7.124(7)(1).
More importantly, on this date, a fee of $175 is added to the taxes and interest is retroactively increased from 1% per month to 12% per month from March 1 of the previous year (the date the taxes originally became delinquent). MCLA 211.78g(1), (3)(b); MSA 7.124(7)(1), (3)(b). The State Treasurer may increase the $175 fee at any time through December 31, 2002. 1999 PA 123, Sec 78g(1), MCLA 211.78g(1), MSA 7.124(7)(1); 1999 PA 123, Sec 78p, MCLA 211.78p, MSA 7.124(16).
For example, if 1999 taxes remain unpaid on March 1, 2001, then interest and a fee is added to the amount of delinquent taxes on that date. The fee is $175 and interest is added for the period from March 1, 2000, re-calculated at the rate of 12% per month.
You must pay these costs if your institution ultimately decides to pay the taxes to avoid a tax foreclosure. 1999 PA 123, Sec 78f(1); MCLA 211.78f(1); MSA 7.124(6)(1). Under the Current Act, there is no such fee and the interest rate is 1% per month from March 1 after the date on which the taxes were assessed until the date of the tax sale in May of the third year. At and after the tax sale, the interest rate increased to 13% per month retroactive to the date the taxes became delinquent. MCLA 211.59(1), MSA 7.103(1); MCLA 211.60, MSA 7.104.
Year 3 -- County Title Search Prior to May 1. Prior to May 1 of each year, the county treasurer, or a title agency with whom the treasurer has contracted, must conduct a title search with respect to all parcels on which taxes became delinquent in the prior year. The purpose of the search is to identify all parties who are entitled to notice of the show cause hearing and the foreclosure hearing to be scheduled later, as described below. 1999 PA 123, Sec 78i; MCLA 211.78i; MSA 7.124(9). For example, the county treasurer must obtain a title search between March 1 and May 1, 2001 with respect to properties on which 1999 taxes have not been paid. If you hold a mortgage on the tax delinquent property, your interest will be identified in this search. The Current Act does not provide for such title searches.
Year 3 -- Petition for Foreclosure Proceedings -- June 15. No later than June 15 of each year, the governmental unit must file a petition in the Circuit Court for foreclosure of all parcels "forfeited" to the governmental unit the previous March. 1999 PA 123, Sec 78h(1); MCLA 211.78h(1); MSA 7.124(8)(1). For example, if 1999 taxes remain owing on a parcel of land on June 15, 2002, the county treasurer or other governmental body, must commence an action on that date to foreclose on the land on which the taxes are owing. Immediately upon receiving the petition, the Circuit Court Clerk must set a date for the foreclosure hearing, but that date must be no earlier than January 30 of the following year.*1 1999 PA 123, Sec 78h(5); MCLA 211.78h(5); MSA 7.124(8)(5).
Year 3 -- Fourth Notice Sent Between June 15 and January 23 Between June 15 of year 3 and January 23 of year 4, the county treasurer is required to send a Fourth Notice to interested parties. The interested parties include the taxpayer, all mortgage holders, and others with an interest in the property. This notice advises the recipients of the date of the foreclosure hearing and of the right to attend a hearing before the county treasurer to show cause why title in the property should not vest in the treasurer. The show cause hearing will be held at least seven (7) days prior to the foreclosure hearing. 1999 PA 123, Sec 78i(2), MCLA 211.78i(2), MSA 7.124(9)(2); 1999 PA 123, Sec 78j(1); MCLA 211.78j(1); MSA 7.124(10)(1).
For example, if 1999 taxes remain owing, at some time between June 15, 2001 and January 23, 2002, the county treasurer will send you a notice of the foreclosure hearing and your right to attend a show cause hearing prior to the foreclosure hearing. The present proceedings do not include a show cause hearing before the treasurer.
Year 4 -- Personal Visit; Publication Notice. In addition to sending the Fourth Notice described above, a representative of the foreclosing unit of government must also personally visit each parcel of forfeited property to determine whether it is occupied. If it is occupied, notice of the foreclosure and show cause hearing must again be given. If the foreclosing unit is unable to meet with the occupant, it must post this notice in a conspicuous location on the property. 1999 PA 123, Sec 78i(3); MCLA 211.78i(3); MSA 7.124(9)(3). Finally, if the foreclosing unit is unable to ascertain the address of the owner of the property, it must arrange for notice of the foreclosure to be published for three successive weeks. 1999 PA 123, Sec 78i(6); MCLA 211.78i(6); MSA 7.124(9)(6). The Amendments do not give specific dates by which the personal visit or publication of notice must be completed. For example, if 1999 taxes remain unpaid, the county treasurer will visit the parcel on which the taxes were assessed at some time before the show cause hearing is scheduled.
Year 4 -- Show Cause Hearing No Earlier Than July 14 and No Later Than February 22. A show cause hearing must be conducted at least seven days before the foreclosure hearing that the Circuit Court Clerk scheduled when the petition for foreclosure was first filed in June. The owner or any other person with an interest in the property, including mortgage lenders, may appear at the show cause hearing to contest the taxes. 1999 PA 123, Sec 78j; MCLA 211.78j; MSA 7.124(10). For example, if 1999 taxes remain unpaid, a show cause hearing will be held at some time on or before February 22, 2002.**1 You should receive notice of this hearing no later than January 23, 2002.
Year 4 -- Foreclosure Hearing Held No Earlier Than January 30. If the show cause hearing is not attended by the taxpayer or does not result in a finding that the tax proceeding should not continue, a foreclosure hearing will be held in circuit court at the time set by the Circuit Court Clerk the previous June. The foreclosure hearing cannot be held earlier than January 30 of the fourth year.*** You will have received at least 37 days' notice of the time, place and date of this foreclosure hearing in the "Fourth Notice" discussed above. 1999 PA 123, Sec 78i(2); MCLA 211.78i(2); MSA 7.124(9)(2). The present procedure also provides for a circuit court proceeding. MCLA 211.61; MSA 7.105.
For example, if 1999 taxes remain unpaid, a foreclosure hearing will be held at some time between January 30 and March 1, 2002. You should receive notice of this hearing by no later than January 23, 2002. If no one contests taxes at the foreclosure hearing, the Circuit Court will enter a judgment of foreclosure by March 11, 2002.
Year 4 -- Judgment of Foreclosure Between March 1 and March 11. Assuming that either no objections to the foreclosure are made, or none is successful in circuit court, the court will enter a judgment of foreclosure against the property at some time between March 1 and March 11 of the fourth year. 1999 PA 123, Sec 78k(5); MCLA 211.78k(5); MSA 7.124(11)(5).
Year 4 -- Expiration of Redemption Period Between March 22 and March 31. Twenty-one days after entry of the judgment, title vests with the treasurer and all "redemption rights" expire. In other words, at that point the county treasurer has clear title to the property. 1999 PA 123, Sec 78k(5); MCLA 211.78k(5); MSA 7.124(11)(5). The present procedure provides for a one-year redemption period. MCLA 211.74(1); MSA 7.120(1). For example, under the Amendments, if 1999 taxes remain unpaid, the circuit court will enter a judgment of foreclosure against the property on which the taxes were assessed at some time between March 1 and March 10, 2002 and the period during which you can redeem the property will expire 21 days later B between March 22 and March 31, 2002.
Year 4 -- Sale of Land Without Redemption Rights Between July and September. Subsequent to entry of the circuit court judgment, the county treasurer may sell the property pursuant to public notice. In any event, by this time all of your redemption rights would have expired. 1999 PA 123, Sec 78m(2), (4); MCLA 211.78m(2), (4); MSA 7.124(13)(2), (4).
The Act also gives a statutory lien to a person, other than an owner, who redeems property during the 21 day period after foreclosure for delinquent taxes. 1999 PA 123, Sec 78g(3), (4) and (5); MCLA 211.78g(3), (4) and (5); MSA 7.124(7)(3), (4) and (5). The person redeeming the property must record a notice of lien within 30 days after the redemption.
The new procedure shortens the period between nonpayment of real property taxes and extinguishment of the owner's interest (and your interest as mortgagee) in the real property on which delinquent taxes are owing. For example, a taxpayer's interest in real property, for which taxes have not been paid in 1999, will be totally extinguished no later than April 1, 2002. By contrast, under the Current Act, a taxpayer (or his mortgage lender) who has not paid his or her 1998 real property taxes will not lose all his or her interest in the property before November 2003. MCLA 211.140, MSA 7.198; MCLA 211.131c, MSA 7.188c; MCLA 211.131e, MSA 7.188e.
What to Do?
At this point in reading this article, it should be clear to you that you must adopt new methods to ensure payment of real property taxes on parcels which secure your mortgage liens, and to ensure that real property securing your mortgage is not lost to a tax foreclosure.
Presently, many of you annually search tax records to ensure that your borrowers who are not subject to escrow are abiding by their mortgage terms and keeping real property taxes current. In the alternative, you may rely on and pay third parties to perform tax searches. You may continue either of these procedures, but is it necessary? If you pay the $1.00 annual fee per parcel discussed above, you will receive notice of your borrower's tax delinquency on June 1 of the year in which the tax was returned delinquent to the county treasurer. As an example, if a tax was not paid in 1999, the tax would be returned to the county treasurer on March 1, 2000 and would be the subject of a First Notice to the taxpayer (and to you, if you paid the annual $1.00 fee for that parcel) on June 1, 2000. A Second Notice would be provided to the taxpayer and to you (if you paid the $1.00 annual fee for that parcel) on September 1, 2000.
If you elect to pay the fee to the treasurer, you may pass it along to the borrower by collecting an estimated amount at closing, adding it onto the mortgage each year, or billing the borrower. If you bill the borrower, it may be added to the amount of one month's payment each year, or it may be spread over 12 months' payments. The fee is a finance charge under the Truth in Lending Act ("TILA") and must be disclosed in the finance charges and in the loan's annual percentage rate ("APR"). 12 CFR 226.4(c); Regulation Z Commentary 4(c)(7)-3. In addition, the fee must be itemized on the Good Faith Estimate and HUD-1 or HUD-1A. 24 CFR 3500.7; 24 CFR 3500.8.
As is the case now, if your borrower does not pay his or her real property taxes and you do not pay them for the borrower, ultimately, you will have to pay them or you will lose the property as collateral. Hopefully, with the increased fees, interest rates and notices (which include a personal visit by the county), borrowers will be more attentive to payment of their taxes.
Summary
What do you, as a lender, need to do? First, you need to decide whether you want to pay the $1.00 fee per parcel to the county treasurers in those counties where you have mortgaged property. As discussed above, if you want to receive the First Notice and Second Notice, you must pay the fee annually for each parcel you have mortgaged. If you do not pay the fee, the first notice of delinquent taxes you will receive for taxes not paid in 1999 will be February 1, 2001. Of course, if you do your own searches, this will be of no real consequence. Second, be aware that if your borrower, or you, do not pay taxes levied in 1999, the borrower's interest in the property (and yours) will be eliminated by April 2002.
- EXHIBIT A
- First Year (1999) -- tax not paid
- Second Year (2000)
- January 1 - February 1
- Mortgagee may submit list of mortgaged properties and pay $1.00 fee per parcel to receive list of tax delinquent property for prior year (1999).
- March 1
- Unpaid tax returned as delinquent to county treasurer for collection.
- June 1
- First Notice to taxpayer and mortgagees who paid the $1.00 annual fee.
- September 1
- Second Notice to taxpayer and mortgagees who paid the $1.00 annual fee.
- October 1
- $15.00 fee added to each parcel.
- Third Year (2001)
- February 1
- Third Notice to taxpayer and mortgagees (whether the latter paid the $1.00 fee or not).
- March 1
- $175.00 fee added to each parcel and interest rate on delinquent taxes goes from 1% to 1.5% per month, retroactive to March 1, 2000.
- June 15 - December 31
- Fourth Notice with dates of show cause hearing and circuit court foreclosure hearing.
- Fourth Year (2002)
- January 1 - January 23
- If Fourth Notice with dates of show cause hearing and circuit court foreclosure hearing not sent previously, it must be sent during this period.
- July 14 - February 22
- Show cause hearing conducted.
- January 30 - March 1
- Foreclosure hearing conducted.
- March 1 - March 11
- Judgment of foreclosure will be entered.
- March 22 - March 31
- Redemption rights end 21 days after entry of circuit court judgment. At the conclusion of the redemption period, any interests the property owners or mortgagees had in the property is completely extinguished.