People are losing their homes over unpaid tax bills that, in some cases, add up to just a few hundred dollars.
Outdated state laws that allow local governments to sell tax liens on delinquent properties to investors in order to more quickly collect on overdue property taxes is sparking a second "foreclosure crisis," a report from the National Consumer Law Center said Tuesday.
When homeowners don't pay property taxes or other municipal bills, like water or sewer fees, local governments have less money to maintain services like schools, police and fire departments and road maintenance. By selling tax liens, those governments can collect on what it is owed.
Investors, in return, effectively own a claim against the property until the homeowner pays the county or municipality back or until they default on the debt entirely. The investor can either collect interest on the taxes owed from the homeowner. Or, if the homeowner fails to pay up, the investor can take possession, or foreclose, on the home.
"It's a win-win for investors," said John Rao, a consumer credit and bankruptcy attorney and the author of the report. Either the investor gets their investment back with interest or they get the home -- typically, for a pretty sizable discount to what the home is worth.
The report cited a case of an 81-year-old Rhode Island woman who fell behind on a $474 sewer bill. A corporation bought the home in a tax sale for $836.39. The woman was evicted from the home she had lived in for more than 40 years and the corporation resold the place for $85,000, the report said.
Most investors, however, buy tax liens for the interest. That's because many states allow investors to charge rates of 18 percent or more on the outstanding debts. And, in some cases, as much as 20 percent to 50 percent, the report said.
"It is for this reason, that tax lien sales are often promoted on websites and late-night television advertisements as 'get-rich-quick' schemes," the report said.
Many states sell tax liens in auctions where investors bid on the interest rate that will be paid on the debt. In some auctions, there are so many investors competing against one another that the rates don't always hit those staggering double-digit rates. Investors may get more like 7 percent to 10 percent interest on the liens.
Sometimes, however, they can sell at or near the maximum, making it nearly impossible for the homeowner to afford the payments and the balance soon balloons.
The elderly are particularly vulnerable: As a result of high unemployment and declining home values, property tax delinquencies have increased to about $15 billion a year, according to the National Tax Lien Association.
And while many people are able to pay off their debts and reclaim their homes, a growing number of people are becoming vulnerable to tax lien foreclosures. Most at risk are the elderly, particularly those suffering from cognitive disorders such as Alzheimer's or dementia, said Rao.
"The process is incredibly confusing," said Rao. "The notices are in legalese that no one can understand. Some states do little to help. The concept of a 'right to redeem' is lost on many homeowners."
One elderly Montana woman, who lived alone and had no close family to help her, fell more than $5,000 behind on taxes, the report said. After she failed to respond to letters from the company that bought her home in a tax sale, she was evicted from her Missoula home. As a result, she lost about $150,000 in equity in the property, according to the report.
Fixing the 'other foreclosure crisis': The extent of the problem is difficult to determine. The cases occur at the local government level and no one agency or organization aggregates the data for the whole country, as they do for bank foreclosures, according to Rao.
To prevent outstanding debts from becoming insurmountable for homeowners to pay off, the National Consumer Law Center recommends that states lower the maximum interest rates allowed and limit other costs and fees. Rao also believes tax lien sales should be conducted in a two-step process with a court supervising the final property seizures.
State and local governments should also establish programs where property owners can pay off back taxes over time, instead of having to come up with a big lump sum, he said, and notices should be written in clear, easy-to-understand language. The procedure in Delaware, for example, begins with the filing of a "praecipe for monition" in the "office of the prothonotary."
Finally, the center is recommending that procedures be put in place where homeowners are adequately informed of their risks and status all through the process. Homes are lost because homeowners simply don't know what's going on until it's too late.