An eye-opening report sheds a harsh light on the growing trend of sales of property tax liens to unscrupulous profiteers, all too often forcing the elderly and impoverished out of their homes due to outstanding tax debts.
The report, from the National Consumer Law Center, found that some homeowners who owe as little as a few hundred dollars in unpaid property taxes are losing their homes at the hands of investors who specialize in buying up liens. The report warns that the practice could lead to a second foreclosure crisis.
“The tax sale procedures in most states are exceedingly complicated and are generally understood only by investors and purchasers,” wrote NCLC attorney John Rao in the report. “Inadequate notice and a lack of judicial oversight over the process leave many homeowners in the dark about steps they can take to avoid a home loss. Homeowners most at risk are those who have fallen into default because they are incapable of handling their financial affairs, such as individuals suffering from Alzheimers, dementia or other cognitive disorders.”
Tax lien sales have proven to be a good investment for those who are tempted to take advantage of “get rich quick” schemes. While most banks currently only provide interest rates on deposits of less than 1 percent, some states are allowing the purchasers of tax liens to earn interest rates as high as 20 to 50 percent, the report noted. That’s one reason why tax lien sales are frequently promoted on the Web and though late-night TV infomercials.
Meanwhile, homeowners can lose huge amounts of the equity they have paid over the years just because they have neglected to pay a tax lien or misunderstood an arcane notice they received in the mail. A tax lien sale can begin even when a homeowner only owes a few hundred dollars. A $200,000 home can be sold at a tax lien sale for just $1,200, the report noted.
The bidding procedures, which are often biased against homeowners, can mean they end up losing not only their home but also thousands or even hundreds of thousands of dollars in equity that represent their only savings for retirement. Tax lien sales can destabilize communities, and few states have procedures in place to protect owners’ equity interests or avoid windfalls to purchasers.
Before a home can be foreclosed upon, owners are supposed to have a right to redeem their property by paying the purchaser of the tax sale the purchase price along with any interest, penalties and costs within the time period allowed by statute, the report points out. The failure to redeem then leads to foreclosure. However, investors and financial firms that purchase the tax liens sometimes tack on expensive legal fees and neglect to tell homeowners that they can buy back the tax lien without paying all the legal costs.
While tax lien laws allow local governments to recoup the tax revenue they need to provide services for taxpayers, states only rarely update their laws to reflect current economic conditions or make certain that they have the necessary safeguards in place to avoid the loss of homes.
The report cites the case of a Baltimore homeowner whose home was sold because of a $362 unpaid water bill. When she could not come up with the $3,600 she needed to redeem her home after interest, penalties and legal fees were added to the redemption costs, she was evicted from her home.
In another case, an 81-year-old Rhode Island homeowner was evicted two weeks before Christmas from the home she had lived in for over 40 years just because she fell behind on paying off a $474 sewer bill. A corporation bought her house at a tax sale for $836.39 and then resold it for $85,000.
In some cases, the tax lien bidders work together to make sure the interest rate is as high as possible on the tax liens they bid upon. There have also been cases where they were worked with corrupt local officials. The report cites the case of a former county treasurer in Illinois who received tens of thousands of dollars in campaign donations from tax lien investors from 1998 to 2009. In turn the interest rates for tax certificates averaged 18 percent in his county, compared to 2 percent in nearby counties. And some of the same banks that were involved in the last financial crisis are also making a big profit off of tax lien sales.
The report includes some key recommendations for states and localities to follow to make the process fairer for homeowners. For example, the NCLC recommends that state laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions, in order to discourage speculation and promote redemption. “States also should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated,” said the report. “State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys’ fees, and other fees.”
States also should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser, the report suggests. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner.
Local tax offices should also collect redemption payments to eliminate the possibility that an unscrupulous purchaser may thwart the owner’s attempt to redeem. The local tax office should accept partial and installment payments. Adequate notice needs to be given at every stage of the tax sale process. Notifications should be used as a tool to avoid loss of homeownership. Comprehensive notices should use plain language, include information about tax exemptions, abatements, and repayment plans, and note the consequences of each stage of the tax sale process.
In one example cited in the report, a notice issued in New Castle, Del., was called a “praecipe for monition.” The notice needs to provide all of the essential details on how the redemption right can be exercised, including the name and address to which the homeowner can send the payment, along with the itemized costs, and the deadline for the redemption payment.
These seem like reasonable guidelines to make sure the property tax lien process works fairly and does not encourage unscrupulous investors to take advantage of impoverished homeowners. Otherwise we could see a repeat of the mortgage crisis.
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