Second Foreclosure Crisis Looming On the Horizon

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With millions of homes currently foreclosed upon nationwide, there is potentially a second foreclosure crisis looming that could deteriorate the housing industry even more: the tax lien sale.

In a report published by the National Consumer Law Center called “The Other Foreclosure Crisis: Property Tax Lien Sales”, the National Tax Lien Association said that annual property tax delinquencies have been on the rise during the financial crisis and now amount to approximately $15 billion. Furthermore, an unnamed industry participant cited that $5 billion of the total tax liens are sold to investors at tax sales each year.

Due to a weak job market, depressed home values and in increase in mortgage foreclosures, these tax lien delinquency values are currently rising every year too.  

According to the report, Florida had nearly $2 billion in back tax liens in 2008 and sold $1.8 billion of these liens in 2009. A county in Mississippi doubled the number of properties in its annual tax sale in recent years between 2008 and 2010. Other states especially at risk of a surplus of delinquent tax bills include Illinois, Iowa, New Jersey, New York and Texas.

“Homeowners throughout the nation 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, an attorney for the National Consumer Law Center who was the author of this report.

“Our report is a wakeup 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,” Rao continued.

Individuals who are most at risk to lose their home due to a small delinquent tax bill (some owing as little as $400) are those who have fallen into default because they are incapable of handling their financial affairs, the elderly and people who suffer from cognitive disorders such as Alzheimer and dementia. 

A tax lien sale may be started by a governmental agency over nonpayment of a tax bill on real estate and then sold at an auction for simply the back taxes owed on the property. If the homeowner fails to buy back the property, the purchaser or investor acquires the home for very little. For example, a $200,000 home might be sold for as little as $1,200 and then resold for a huge profit by the purchasers.

Meanwhile, all states have laws that permit local governments to sell property through a tax lien foreclosure process if the owner fails to pay their municipal charge. Prior to foreclosure, owners have a right to redeem their property by paying the sale purchaser the purchase price plus interest, penalties, and costs within the time period allowed by the statue, but many states have not regularly updated these to reflect current economic conditions or to ensure that proper safeguards exist to avoid unnecessary loss of homeownership.

Although banks currently provide interest on savings accounts at less than 1%, many states permit tax sale purchasers to recover interest rates of 18% or more, even as high as 20% to 25%, the NCLC said. Because of these higher rates, tax liens are promoted on websites and television advertisements as “get-rich-quick” schemes for investors. Meanwhile, these excessive penalties make it impossible for some homeowners to save their homes from foreclosure.  

The tax sale procedure in most states is very complicating for homeowners, but not for investors and purchasers who are used to this process. 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.

In order to preserve homeownership and ensure prompt payment of local taxes, the NCLC made some recommendations in the report on how states can update their tax lien laws.

First, states should make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate for redemption amounts based on current economic conditions. The interest rate should seek to discourage speculation and promote redemption.  

A second recommendation is to place reasonable limitations on additional fees and costs. For example, once the foreclosure process has been started, states should not allow investors to increase their profits by charging homeowners excessive fees once the foreclosure process has been started. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys' fees, and other fees.

“Property tax collection procedures should encourage repayment rather than property loss and they should not provide an opportunity for speculators to earn huge profits off of homeowner distress,” Rao said in the report.

Lastly, the NCLC endorses that states establish a tax sale procedure with court supervision over the final stage. The nonprofit advocacy organization believes states should also limit the initial tax sale to the sale of tax lien certificate, rather than granting an entire interest in the property to a purchaser.

If a homeowner fails to redeem the property, state law should require the purchasers to seek a court order authorizing final sale of the property. Additionally, the court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are punctually paid to the homeowner.

“The consequences of homeowners not understanding their rights or the process of a tax lien sale is devastating for individuals, families and communities,” Rao said in a press release. “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.”