Florida’s push to lower property taxes is being framed as an affordability measure for homeowners. But for mortgage servicers, the proposed change could have significant consequences for income generated from escrow custodial balances and, ultimately, for the value of mortgage servicing rights.
Florida Amendment 3, which will go before voters in November 2026, would increase the homestead exemption for non-school property tax levies to $150,000 in 2027 and $250,000 in 2028. The existing exemption for school district taxes would remain unchanged. If approved, the measure could eliminate a substantial portion of non-school property taxes for many full-time Florida residents.
That may provide welcome relief to homeowners stretched by rising housing costs. It would also reduce the property tax funds that servicers collect and hold before remitting them to local taxing authorities, potentially altering a meaningful component of MSR economics.
“This is an important issue that frankly hasn’t gotten enough attention,” said Mark Garland of SitusAMC. “If the tax component were cut significantly, that dramatically reduces the amount of funds available in those custodial accounts and the income the servicer makes from holding those funds.”
Why property tax reform matters to mortgage servicers
A mortgage servicing asset generates value through several sources, including servicing fees, ancillary income and custodial earnings. Custodial income comes from funds a servicer temporarily holds, including monthly mortgage payments, payoff proceeds and escrow collections for property taxes and homeowners insurance.
Taxes and insurance typically represent the largest share of these custodial funds. While funds are escrowed across the country, Florida and many other southern states are considering changing so that property taxes may be collected through escrow over the course of the year before being remitted to the taxing authority. During that period, the funds contribute to the economics of the servicing asset.
Florida Amendment 3 would not affect homeowners insurance premiums or school district taxes. It would, however, increase the exemption applied to county, municipal and other non-school property tax levies. Governor Ron DeSantis has estimated that the higher exemption could eliminate that portion of the property tax bill for roughly 60% of homesteaded properties by 2028.
The precise effect would vary by property, jurisdiction and portfolio composition. Still, a broad reduction in non-school tax collections could materially lower escrow custodial balances across Florida servicing portfolios.
For servicers with a large concentration of Florida loans, that decline would not be limited to a temporary change in cash flow. Lower expected custodial income could require changes to the assumptions used to determine MSR values.
Why Florida exposure could be particularly significant
Florida property taxes are not necessarily high compared with the rest of the country. The state’s rapid home price appreciation, however, has increased the dollar amount many homeowners pay even when local tax rates remain relatively stable.
Florida attracted strong population growth before and during the pandemic, pushing housing demand and property values higher. As assessed values rose, property tax bills followed. Servicers benefited from the corresponding growth in escrow balances and custodial income.
Amendment 3 could reverse part of that trend. Instead of assuming that property tax collections will continue rising alongside home values, servicers may need to account for a step-down in non-school tax obligations beginning in 2027.
That makes Florida exposure particularly important at the portfolio level. Servicers should evaluate not only how many loans they hold in the state, but where those loans are located, which borrowers qualify for the enhanced exemption and how much of each tax bill comes from affected levies.
The proposal primarily benefits full-time residents with homestead status. New Florida residents arriving in 2027 or later would receive a smaller exemption initially and would need to meet a residency requirement before qualifying for the full benefit. Second homes and investment properties would not receive the same treatment.
Modeling the potential effect on MSR values
The timing of the proposed change creates an immediate forecasting question. If voters approve Florida Amendment 3 in November, the first exemption increase would take effect Jan. 1, 2027.
Servicers would then need to determine when lower future custodial income should be reflected in MSR valuations. Depending on portfolio exposure and accounting policies, that could mean changing valuation assumptions, recording a reserve or recognizing a potential impairment before lower tax payments fully appear in custodial balances.
Servicers may also face operational considerations under the Real Estate Settlement Procedures Act. When a material change affects expected escrow disbursements, an off-cycle escrow analysis may be necessary to adjust a homeowner’s required payment. If 2027 tax bills are expected to decline significantly, servicers may need to respond during the first or second quarter rather than waiting until the annual escrow review.
SitusAMC is encouraging servicers to test a range of outcomes instead of relying on a single forecast. Scenario analysis could model property tax reductions of 20%, 50% or 80%, then examine the effect by county, city, borrower type and portfolio concentration.
“We can deliver bad news. We can’t deliver surprises,” Garland said. “Servicers should test what different property tax reductions could mean for their escrow funds so they understand the exposure before the change takes effect.”
Affordability benefits come with trade-offs
For homeowners, the proposal could reduce one component of monthly housing expenses. Yet property taxes are only part of Florida’s affordability challenge.
Homeowners insurance premiums in the state can substantially exceed annual property tax bills due to hurricane exposure, roof replacement costs and other climate-related risks. A homeowner paying $6,000 for insurance and $3,000 in property taxes, for example, would still face high annual housing costs even if the tax bill declined by $1,500.
The proposal also raises questions about funding for services supported by non-school property taxes, including public safety, infrastructure, parks and libraries. Local governments must balance their budgets, which means lost revenue may eventually result in service reductions, alternative taxes or locally approved levies.
Those outcomes may vary considerably by community. More affluent areas could have greater capacity to approve replacement funding, while lower-income jurisdictions may have fewer options. That could create uneven effects on services, local housing demand and property values.
Florida is just the first domino
The implications extend beyond one state. Policymakers in Texas, Georgia and the Carolinas are watching Florida’s property tax debate, according to Garland. If similar measures gain traction elsewhere, servicers could face a broader decline in escrow custodial balances and a more significant adjustment to MSR values.
Servicing income also contributes to the overall economics of mortgage production. If the value generated by servicing declines, lenders and servicers may have less capacity to offset origination costs, potentially affecting pricing across the mortgage lifecycle.
Florida Amendment 3 still requires voter approval, and its full impact will depend on implementation, borrower eligibility and local responses. But servicers do not need to wait for certainty before evaluating the risk. Portfolio-level scenario modeling, updated custodial assumptions and early operational planning can help institutions prepare for a change that could begin affecting balance sheets within months of the vote.