Loan recording mess costing Va.
Thursday, November 4, 2010
Countless homeowners in Virginia are getting a tax break for which they don't really qualify because a mortgage documentation mess makes it hard to determine who qualifies, officials say.
The loss of tax revenue for local governments and the state is another result of the lending industry growing so fast and becoming so complex during its go-go years that it outstripped its paper trail.
Because the problem involves blind spots in official records, no one can say how much revenue is being lost. But the amount could be significant.
"I'm trying to do my best to follow Virginia law here," said John T. Frey, clerk of the Fairfax County Circuit Court, but "people are getting the break that aren't eligible."
When Virginia homeowners refinance their mortgages, they are required to pay a recordation tax. On a loan of $400,000, the tax would typically total $1,333.
The state's portion of recordation taxes soared to $669.8 million in fiscal 2006 and declined by more than half to $298.4 million in fiscal 2009. Those numbers include taxes on deeds, mortgages to buy homes, and other recorded documents, not just refinancings. Extrapolating from the state figure, in fiscal 2009, roughly $100 million more would have gone to localities.
In a refinancing, if the lender issuing the new loan is the same as the lender holding the old loan, the borrower is exempt from the tax.
The trouble is figuring out who holds the old loan.
After issuing mortgages to homeowners, banks routinely sell the IOUs to other banks or institutions such as Fannie Mae and Freddie Mac. Huge volumes of mortgages have been packaged into securities and sold on Wall Street.
Unbeknown to the borrower, the note can change hands again and again - at least electronically - while the bank that issued the loan continues to collect the monthly payments on behalf of the new owner.
The buyers of the mortgages were not required to record the note assignments in county courthouses, and, as the lending business sped up, many transfers went unfiled, county clerks say.
As a result, the clerks who process claims for the tax exemption are ordinarily unable to tell whether the lender whose name appears on the paperwork owns the loan or is merely servicing it, officials say.