Consumer Rights Group: Outdated Laws Are Causing Second Crisis
By: Tory Barringer
Outdated state laws are fueling a second foreclosure crisis-this one affecting the elderly and the disabled, according to a report from the National Consumer Law Center (NCLC).
The report, titled The Other Foreclosure Crisis: Property Tax Lien Sales, reveals that laws in many states allow local governments to sell property through a tax lien foreclosure process if the owner falls behind on property taxes. In some cases, owners owing as little as $400 lose their homes.
A tax lien may be started over nonpayment of a small delinquent tax bill and then sold at a tax lien sale for the back taxes owed on the property. If the homeowner fails to buy back the property, the purchaser may acquire the home for very little and then resell it for a huge profit.
Currently, tax lien sales total approximately $15 billion annually, and they are increasing due to a weak job market, depressed home values, and an increase in mortgage foreclosures. Florida had nearly $2 billion in back tax liens and sold $1.8 billion of them in 2009, and a Mississippi county doubled the number of properties in its annual tax sale in recent years. Other states identified in the report as “especially at risk” are Illinois, Iowa, New Jersey, New York, and Texas.
The report noted that homeowners most vulnerable are those who have fallen into default because they are incapable of managing their financial affairs. These people include those who suffer from Alzheimer’s, dementia, or other cognitive disorders.
“Homeowners throughout the nation, particularly elderly and people with cognitive challenges, have lost or stand to lose family homes along with long-term equity which may represent their sole savings and security for retirement,” said John Rao, NCLC attorney and author of the report. “Our report is a wake-up call for states to reform tax sale laws to keep speculators from reaping huge windfalls at the expense of fragile citizens while still ensuring local governments receive much-needed tax revenue.”
In addition, a government study found that property tax foreclosures in New York City in 2011 were highly concentrated among low-income communities with large black and Latino populations. These groups are also targeted often by subprime mortgage lenders. Tax lien sales may increase the number of vacant and neglected properties, bringing down tax revenue further and destabilizing communities.
The report noted that many individual tax sale purchases and investment companies such as Bank of America and JPMorgan Chase have used the tax sale process as a profit center. Tax liens can yield a rate of return as high as 50 percent, and many state laws permit lien purchasers to charge homeowners high interest rates and fees to redeem their property. In states like Georgia, Iowa, Mississippi, New Jersey, and Texas, these fees exceed 20 percent.
Often, investors take advantage of the fact that the tax sale process is not largely understood by homeowners. Furthermore, most states do little to inform homeowners about what they can do to avoid foreclosure. Almost no states have updated tax lien laws to reflect current economic conditions or to ensure that there are safeguards to protect homeownership.
Based on these findings, NCLC recommended steps for states to adopt which would reflect the goal of preserving homeownership while ensuring payment of local taxes: Firstly, state laws should be reformed to limit the maximum interest or penalty rate on redemption amounts. Secondly, states should not permit investors to increase their profits by charging unreasonable fees to redeem after the foreclosure process has started. Finally, establish a tax sale procedure that involves court supervision to ensure that the sale price is fair and that surplus funds go to the homeowner.
The report also suggested steps that cities and towns could take, including the implementation of redemption payment programs, arrangement of adequate notice at every stage of the tax sale process, and greater effort to provide information on redemption rights.
While some states have adopted improved laws to protect homeowners, NCLC said these measures aren’t enough.
“The consequences of homeowners not understanding their rights or the process of a tax lien sale is devastating for individuals, families, and communities,” says Rao. “To date, states have done very little. Will legislators and policymakers now reform their laws to help keep elderly and other homeowners from losing their homes due to a small property tax delinquency? We certainly hope so, and the sooner they act to head off this swelling problem, the better.”
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