Semiannual tax payments cut two ways

Escrow rebate helps, but deduction might cover just 6 months

`A one-time glitch'

Many lenders to give break to homeowners who use 1995 law

November 14, 1999|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Thousands of Marylanders who used a little-known 1995 law to switch their payment of property taxes from an annual to semiannual basis and get a substantial escrow rebate from their lenders may be in for a rude awakening when it comes to income tax time.

The law permits lenders to make the second payment in January. If lenders do so, homeowners who itemize deductions will be able to claim only six months' worth of property taxes on their tax returns.

The deduction, however, isn't permanently lost; homeowners will get the benefit of 18 months' worth of property tax to deduct next year.

"This is a one-time glitch in the system," said Ronald W. Wineholt, director of the state Department of Assessments and Taxation. "At this point in time there probably isn't a great deal that property owners can do about it, because they already have made their election."

"I think some people are going to get a surprise. They are used to deducting the full amount of tax in a year, and in some cases it just isn't going to happen," said Joel Schlanger, director of finance for the Baltimore County Office of Budget and Finance.

A spot check of several major lenders indicated they are more interested in satisfying customers than reaping the interest on funds held to the last possible moment.

MNC Mortgage, Norwest, Countrywide, Mercantile and Crestar all said their intention is to pay their customers' second installment before year's end.

"If you take a narrow interpretation of your role as a mortgage servicer, it would be in our best interest to wait until January, because we would hold those funds, and those funds as a banking institution have value to us. But the customer-service aspect is just too compelling for us to do that," said John Schwanky, a senior vice president with Mercantile Mortgage Corp.

Norwest Mortgage is the largest originator of mortgages in Maryland and services 79,000 loans in the state. According to Mike Sweklo, operations manager for Norwest electronic tax service, 11 percent of Norwest customers switched to semiannual payments last spring.

"We're focused on what is doing right for our clients. It wasn't a difficult decision as we played the scenarios out. The overriding factor here was customer impact," Sweklo said.

"We did not want to adversely impact the homeowner, so we went with a December installment payment date. And we are going to execute payment of that semiannual installment in December," Sweklo added.

Cheryl Nolda, a spokeswoman for Crestar Mortgage, said the company is having its tax-service provider "gearing up to get as many as possible done. We believe that we will be in good shape to do December payments for as many customers as possible."

But just because some lenders are willing to pay in December doesn't mean that all will be that accommodating.

"There is nothing in the law that is currently operative that requires anything to be paid before Jan. 1. So you would be jawboning and using your persuasive ability to get your lender or servicer to pay earlier," said Mary Louise Preise, head of the state's Division of Financial Regulation, which oversees the mortgage industry in Maryland.

Nevertheless, Al Ingraham, vice president of MNC Mortgage, advises homeowners to check with the lender or the company that services their mortgages to find out what their policy will be.

Ingraham said it might be in most lenders' best interest to pay out in December, since January is already a crunch time in getting out year-end mortgage statements to all customers.

The rush to semiannual payments came after the last General Assembly passed a law, effective next July, making semiannual payment of taxes the norm and making annual payment an option. That's the opposite of what it is today.

The legislation, pushed by the Maryland Association of Realtors and the Greater Baltimore Board of Realtors, effectively trimmed closing costs by reducing the number of months of property taxes a lender would require to be put into an escrow account.

A side benefit for homeowners with escrow accounts is that those accounts would become over-funded and they would be entitled to a one-time rebate -- equivalent to half a homeowner's annual property tax bill -- from lenders once the accounts were reanalyzed.

State officials estimated the average rebate at $697. The second installment due date was also changed to Dec. 1.

To accelerate the rebate process, many homeowners implemented the hitherto little-used 1995 law by this year's deadline of May 1. The number throughout the Baltimore area who switched was substantial. According to government finance officials, the increase in the number of people making semiannual payments this year is as follows: Baltimore City, which has the state's highest tax rate, a tripling to 18,125.

Baltimore County, from 7,000 to 31,000.

Anne Arundel County, a tripling to 17,000.

Howard County, from 1,800 to 10,000.

Harford County, up 7,000.

Carroll County, from 500 to 4,242.

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