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Can a Municipal Deed Foreclosing on User Fee and Sewer Rent Wipe Off the Mortgage? Real example!

Many municipalities can not only put a lien against the property, but also have the power to foreclose on the property, as well. A municipal lien can range from water/sewer liens to city permits, property maintenance and compliance liens. Some municipal liens are recorded in county records while some are not. The example we will provide is related to an unrecorded lien by the city of Buffalo, NY that would remove any liens including the mortgage from the property, except for unpaid taxes which always take first lien priority. The city of Buffalo has an additional User Fee and Sewer Rent payment system that has the same priority as real estate taxes. The payments from the city residence will be used by the Buffalo Sewer Authority to maintain the sewer systems in the city. If you are the servicer, these payments must be maintained and tracked together with tax payments to the city. The foreclosure deed in New York is called a Referee’s Deed, and in the case of municipal foreclosure, the referee is typically a Director of Treasury and Collection of the city.
Prior to the foreclosure deed, the city typically files a Petition and Notice of Foreclosure to allow the city to sell the property at the referee’s auction to a third party. In some cases, the city does not service the interest holders at all, knowing that the lien has the highest lien priority. The city doesn’t have large budgets to run title reports and notify the lien holders; therefore, the servicer should proactively monitor lien and tax statuses against the property. The city of Philadelphia is one of the cities that come to mind when the tax collector does not notify anyone of a tax lien foreclosure.
Once the property is sold, the referee’s deed is typically non-redeemable. Some clients tried to raise the no serving issue as a legal argument, but got dismissed because the municipality follows the local established laws and legal processes to foreclosure without recourse.

In this example, there was a loss of about $500,000 to the investor. The investor is a large note portfolio buyer. This is just one loan in the full portfolio acquired; however, if the township search for unrecorded liens had been ordered, the loan would’ve been dropped from the sale. I cannot stress enough the value that unrecorded lien searches plays in distress asset acquisition.

ProTitleUSA designed an industry leading portfolio analysis dashboard to fully integrate tax/title results together with municipal liens making it easier for investors to check both results in a combined reporting structure with single exception report for the seller rebuttal process.