BILL ANALYSIS Ó AB 1090 Page 1 ASSEMBLY THIRD READING AB 1090 (Blumenfield) As Introduced February 18, 2011 Majority vote REVENUE & TAXATION 5-2 ----------------------------------------------------------------- |Ayes:|Perea, Charles Calderon, | | | | |Cedillo, Alejo, Gordon | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Donnelly, Harkey | | | | | | | | ----------------------------------------------------------------- SUMMARY : Establishes the County Deferred Property Tax Program for Senior Citizens and Disabled Citizens (County Deferred PTP) and allows each county to elect to participate in the program. Specifically, this bill : 1)Allows a treasurer, or other official responsible for the funds of a local agency, upon the adoption of a resolution by the governing body, and with the consent of the county treasurer, to deposit excess funds in the county treasury for the purpose of investing the funds in the newly created Property Tax Deferral Fund (Fund). 2)Requires the county treasurer to follow certain rules and procedures relating to the investments in the Fund. 3)Defines "claimant" as an owner of a residential dwelling, as specified, who applies to a participating county for deferment of property taxes, and meets all of the following requirements: a) Has a household income that does not exceed $35,500; b) Has attained eligibility for full Social Security benefits as of the last day of the filing period for that fiscal year (FY), or is blind and disabled, as defined, except in the case of retroactive deferment, as specified, in which the age of eligibility shall be 62 years old; and, c) Has equity value of at least 20%, meaning the amount by which the fair market value of a residence exceeds the total AB 1090 Page 2 amount of any liens or other obligations against the property. 4)Allows a participating county to require a claimant to provide an appraisal by a licensed or certified appraiser in support of the application, and provide for an alternate appraisal method in specified circumstances. 5)Provides that only one claimant per residential dwelling may have property taxes deferred pursuant to the provisions of this bill, at any one time. 6)Allows the treasurer or treasurer-tax collector to require a claimant to furnish evidence of the claimant's ongoing eligibility in order to continue participation in the program in a subsequent year. 7)States that if the claimant fails or refuses to furnish any information requested in writing by the county, or files a fraudulent claim, the claimant's application shall be null and void, and any record of a deferment payment on the tax roll shall be canceled, the tax or assessment shall be a lien as though no payment had been made, and the amount of the lien shall be increased by any penalties and interest resulting from property tax delinquency. 8)Authorizes a county to elect to participate in the County Deferred PTP by adopting a resolution indicating the county's intention to participate in and to administer the program, and provides that a participating county may defer a claimant's property taxes retroactively, for taxes due on or before February 20, 2011, and prospectively, as provided by this bill. 9)Requires a county treasurer or county tax collector to review the claimant's application for program eligibility, upon receipt of a claim for property tax deferment that is submitted within the filing period. 10)Allows the county treasurer or tax collector, if the claimant is eligible to participate in the program, and if there are sufficient funds within the county's Fund, to do all of the following: a) Defer the property taxes due on the claimant's residential AB 1090 Page 3 dwelling for that FY; b) Issue a subvention payment equivalent to the amount of the deferred property taxes, from the county's Fund to the county to be processed in the same manner as all other property tax payments; c) Direct the county auditor to apportion the subvention payment in the same manner as if the property taxes had been paid; and, d) Provide a letter or other written notice to the claimant with the relevant FY of participation for use as written confirmation of participation. 11)Specifies that if the claimant's property taxes are deferred, the participating county shall not charge the claimant any penalties, or undertake any collection actions with respect to taxes deferred. 12)Requires that the amount of property taxes deferred, plus any interest accrued thereon, be secured by a county property tax lien against the claimant's residential dwelling. 13)Requires the county recorder to index the lien according to the names of each record owner and the county. 14)Provides that the filing period for a claimant to apply under the program shall be from October 1 to December 10 of each year, but allows a county to grant a reasonable extension for filing a claim if it determines that good cause for the extension exists. No extension may be granted beyond the termination for the FY for which deferment is requested. 15)Provides for other specified requirements applicable to the county treasurer, the county assessor, the county tax collector and participating counties, in order to implement the provisions of the bill. 16)Specifies the circumstances under which all amounts owned by the claimant become due immediately. 17)Authorizes a participating county to charge a claimant an application fee upon that claimant's submission of an AB 1090 Page 4 application to participate in the program, and requires the application fees derived from all claimants in a participating county to offset that county's costs incurred in administering the program. 18)Requires a participating county to charge claimants interest on the amount of property taxes deferred and sets the effective annual interest rate at 7% or the rate of effective annual yield earned in the prior FY by the Pooled Money Investment plus 2%, whichever is higher, rounded to the nearest full percent. 19)Prohibits a lender from requiring a borrower to maintain an impound, trust, or other similar type of account with regard to property taxes, once the borrower has deferred these taxes pursuant to this bill, and has submitted to the lender evidence of tax deferment, except in specified circumstances. 20)Forbids a lender or other person authorized to take sale on real property to file a notice of default based solely on a borrower's failure to pay property taxes, if the borrower provides evidence of participation in the property tax deferment program. 21)Defines the terms "household income," "income," "owner of a residential dwelling," "participating county," "property taxes," "residential dwelling," as specified. 22)Makes legislative findings and declaration regarding the importance of the Senior Citizens and Disabled Citizens Property Tax Postponement (PT Postponement) Law and its suspension in February 2009. FISCAL EFFECT : Unknown. Committee staff, however, estimates that this bill may result in moderate costs to the General Fund (GF) due to the provision allowing county tax collectors to cancel delinquent penalties and interest, for K-12 schools under Proposition 98. In addition, the State Controller's (SC's) Office notes in its analysis of this bill that granting locally operated property tax liens priority over existing SC's Office loan liens would result in GF losses since some SC's Office loan liens may become uncollectible. COMMENTS : AB 1090 Page 5 Author's statement . The author states that, "The Senior and Disabled Citizens Property Tax Postponement Program was suspended with no warning in 2009, leaving program participants no time to find alternative funding to pay property taxes. AB 1090 will help elderly and disabled Californians stay in their homes and grants previous program participants extra time to find vital property tax financing by establishing a 5-year moratorium on foreclosures and impound accounts. This mirrors the existing county waiting period for tax sales. As a county opt-in program, AB 1090 provides a way for counties to care for their most vulnerable citizens." Arguments in support . The proponents of this bill state that this measure provides a "needed alternative to the state property tax postponement program" and will "help thousands disabled individuals and older Californians remain in their homes by permitting counties to defer their property taxes." The proponents cite their own research showing that 28% of all foreclosures or delinquencies involved homeowners age 50 and older, and argue that this bill will help reduce foreclosures for older and disabled Californians. The proponents also maintain that counties "strongly endorse the priority lien as a long-standing practice for collecting local taxes and assessments." Arguments in opposition . The opponents object to the provision in this bill that "grants super lien status in favor of a participating county." They believe that the granting of super-priority lien status is unnecessary, because of this bill's requirement that program claimants maintain a minimum of 20% equity in their properties, and the measure's 7% interest rate on deferred amounts. They argue that the creation of a super lien status for the payment of delinquent property taxes against the underlying property would cause the County Deferred PTP participants to violate the terms of their mortgage contracts. The opponents state that this bill would limit the ability of a lender/servicer "to enforce performance of the contract by precluding the commencement of non-judicial foreclosure through the filing of a notice of default," and as such, would impair the obligation of the mortgage contract in violation of the state and federal constitutions. Finally, the opponents believe that this bill would negatively impact a County Deferred PTP participant's ability to "seek future financing secured against the residential real property," and would likely result in defaults, compelling AB 1090 Page 6 counties to foreclose in order to recover the debt. Purpose of this bill . According to the author, as the result of the PT Postponement program's suspension, many senior and disabled homeowners are delinquent on their property taxes. Many of those homeowners have mortgages on their houses and are concerned that the lenders will start initiating foreclosure proceedings. While the number of foreclosure proceedings is unknown, a number of former PT Postponement participants are currently being pushed out of their houses by their lenders. This bill is intended to create a uniform County Deferred PTP program that is modeled after the suspended state program but with tighter eligibility requirements and a new source of funding for the County Deferred PTP loans. It is designed to help seniors and disabled individuals as well as to alleviate the negative impact of the program suspension on local government revenues. The proposed "County Deferred PTP" program . The suspended PT Postponement program was funded exclusively by GF moneys. In contrast, the County Deferred PTP program, proposed by this bill, would be self-financing and not reliant on an annual GF appropriation. It would be funded by a participating county through a Fund to be established within its treasury. Upon adoption of a resolution by the county's governing body, and with the consent of the county treasurer, excess county funds would be deposited in the Fund for the purpose of providing PT Postponement loans to qualified claimants. This bill establishes uniform statewide eligibility criteria for the claimants and certain rules and guidelines for a County Deferred PTP program. The counties are authorized to charge claimants a specified interest rate on the property tax loans and an application fee, which will be used exclusively to cover the costs of administering the program. Furthermore, counties are allowed to grant retroactive relief for individuals who could not obtain deferment when the Legislature de-funded the original PT Postponement program in 2009. Under the County Deferred PTP program, the property tax loans, i.e., the amount of property taxes deferred, plus interest accrued, would be secured by a tax lien against the underlying residential dwelling, with the same super-priority status as other property tax liens. In the case of a residential dwelling that is taxed as part of a larger unit, the lien shall be against the entire tax parcel. The lien will constitute constructive notice to subsequent purchasers, lessees, and other lienholders. The AB 1090 Page 7 county auditor would continue to allocate the county revenue to other local agencies - cities, special districts, and school districts - as if the tax had been paid until the house is sold and the lien can be satisfied. The amount secured by the lien will be reduced by the amount of any payment, and will be increased to reflect interest accrual or subsequent deferral for the claimant. Payments shall be applied to the oldest deferral amount in order of lien recordation date. If the lien is paid in full, the county tax collector will be required to record a release, evidencing the satisfaction of all amounts secured by the lien, and remove specified information from the secured roll and assessment records required when property taxes are postponed. The property taxes will be immediately due and payable if the claimant: a) ceases to own the building due to sale, conveyance, or condemnation; b) ends his/her permanent residence dwelling; c) experiences a fall in equity value below the program's eligibility criterion; d) refinances existing loans on the property; or, e) was erroneously granted deferment because he/she did not meet eligibility criteria. Finally, similarly to the suspended PT Postponement program, this bill precludes lenders from requiring a borrower to maintain an impound, trust, or other type of account with regard to taxes established after 1978, if the borrower chooses to postpone taxes, unless required by federal law or if the prohibition would impair the express obligations of a loan agreement. This bill also prohibits a mortgagee, trustee, or other person authorized to take sale on real property because of the mortgagor or trustor's failure to pay property taxes from filing a notice of default, if the borrower shows evidence of participation in the County Deferred PTP program. In summary, this bill provides a county with an option to defer property taxes for homeowners residing within the county, but may leave many low-income homeowners without assistance in counties that choose not to participate in the program. "Super Liens ." There are many differences between the former, state-run program and the county-run program proposed by this bill, the most significant of which is the lien priority given to PT Postponement loans. Under existing law, a county may issue a tax lien against property AB 1090 Page 8 when an owner is late on paying property taxes. Generally, tax liens are payable in the order in which they are recorded. The tax lien is removed when the property tax is paid or the property is sold to satisfy the lien. Upon sale, tax liens are paid out of proceeds in the order recorded. For instance, if the Internal Revenue Service files a lien against a home for a taxpayer who is delinquent on income taxes, the lien is repaid after the lien filed by the mortgage company if the property owner fell behind on his/her mortgage payments first. However, property tax and special assessment liens have priority over all other liens, regardless of the time of its creation, so-called "super-priority" lien status. This preferred status ensures that the county will be repaid first when the house is sold. This bill confers a similar favorable treatment to liens that would secure a claimant's deferred property taxes under the proposed County Deferred PTP program. Are "Super Liens" problematic ? The suspended PT Postponement program was operated by the SC's Office, which is still required to collect on outstanding PT Postponement loans. Under that program, PT Postponement loans were assigned "judgment lien" status, which placed them in line to be paid off relative to other liens on the property, based on the date they were recorded relative to the other liens. In other words, they were in line to be paid off after the liens recorded before them, but before the liens recorded after them. As noted in the SC's analysis of this bill, currently, the SC's Office manages approximately 8,000 PT Postponement accounts, with about $95 million in outstanding PT Postponement loans. These liens would be subordinate to the new County Deferred PTP liens. Arguably, the "super-priority" status of the new liens would put many of the SC's PT Postponement loans at risk and may potentially result in GF losses. The SC's Office suggests that, in order to minimize the risk to GF, repayment of PT Postponement loans granted by the SC's Office be given priority over repayment of any locally operated County Deferred PTP loans. The opponents of this bill are also concerned with the super-priority lien status of new County Deferred PTP liens, because they believe that it will force a violation of many mortgage contracts and pose constitutional contract impairment issues. They assert that standard mortgage contracts require the borrower to promptly discharge any lien that has priority over the mortgage. Uniform mortgage instruments used by Fannie Mae and Freddie Mac specifically require the borrower to pay all taxes, AB 1090 Page 9 assessments, charges, fines, and impositions attributable to the property, which can attain priority over the mortgage. Arguably, by creating a super-priority lien that is statutorily assigned priority over a homeowner's primary mortgage or deed of trust, this bill would place borrowers in violation of their mortgage contracts. But at the same time, this bill would prohibit financial institutions from recording a notice of default, due solely to a borrower's failure to pay property taxes and, as such, may violate Article I, Section 9 of the California Constitution and Article I, Section 10 of the United States Constitution that prohibit the enactment of laws that impair the obligation of contracts. Application fee . This bill requires a payment of an application fee upon submission of the claim for property tax deferment. Under the suspended PT Postponement program, the fee was paid only upon approval of the claim. As pointed out in the SC's analysis, the homeowners applying for property tax assistance are low-income, and requiring a payment of the fee upon submission of the application may deter many needed applicants from applying for deferment. Technical amendment . On page 5, line 25, strike out "Code. Except" and insert "Code, except" On page 10, line 14, strike out "they" Related legislation . AB 1718 (Blumenfield), introduced in the 2009-10 legislative session, was identical to this bill and was vetoed by Governor Schwarzenegger. Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0000392