By Fred Schulte and Ben Protess
Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.
The Wall Street investors, which include Bank of America and JPMorgan Chase & Co., have purchased from local governments the right to collect delinquent taxes on several hundred thousand properties, many in distressed housing markets, the Huffington Post Investigative Fund has found.
In many cases, the banks and hedge funds created new companies to do their bidding. They gave the companies obscure, even whimsical names and used post office boxes as their addresses, masking Wall Street's dominant new role as a surrogate tax collector.
In exchange for paying overdue real estate taxes, the investors gain legal powers from local governments to collect the debt and levy fees. At first, property owners may owe little more than a few hundred dollars, only to find their bills soaring into the thousands. In some jurisdictions, the new Wall Street tax collectors also chase debtors over other small bills, such as for water, sewer and sidewalk repair.
Some states allow the investors to tack on as much as 18 percent interest and a passel of legal fees and other charges. When property owners fail to make full payment, the investors can sue to foreclose - in some states within as little as six months.
In June, Bank of America snatched up liens on properties in Florida owned by low-income residents and nonprofit public interest groups, including a Salvation Army shelter, a preschool and a wildlife rescue group involved in the Gulf of Mexico oil spill cleanup, the Investigative Fund found in its examination. Bank of America also bought liens on properties of the wealthy, including a professional basketball star with the Los Angeles Lakers, Lamar Odom
Some observers of the financial services industry said they were surprised to learn that banks, some of which received billions of dollars in taxpayer-funded bailouts in recent years, were rushing to profit from homeowners having trouble paying their tax bills.
"This is not how I'd like to be making my money," said James Cox, a Duke University School of Law professor who specializes in corporate and securities law. "I would find it personally distasteful to foreclose or press a claim against individuals, many of whom have lost their jobs and are in tight economic straits."
Five big banks involved in the industry, known as tax lien investing, collected a total of more than $106 billion in bailout money through the government's Troubled Asset Relief Program, known as TARP.
Over the last year, Bank of America, which received $45 billion in these taxpayer funds in 2008 and 2009, has bought liens on properties in scores of municipalities in at least a dozen states. Bank of America repaid the government in 2009.
Still, noted Cox: "There's no bailout for people struggling to pay their taxes."
Years ago, the big banks left the buying of tax liens largely to local real estate specialists and small-time investors. These days, banks and hedge funds, stung by the failure of many speculative investments, see tax liens as a relatively safe option that can yield returns of around 7 percent.
Some banks also are packaging tax liens as securities - in a similar way to how unpaid home loans are securitized - and selling them to investors.
If mortgage holders fail to pay overdue taxes, an investor could waltz off with a home worth hundreds of thousands of dollars for the price of paying the owner's tax bill. Most homeowners eventually pay their debt.
Put it all together and it is makes for a solid investment, said Lloyd McClendon, an owner of realauction.com in Plantation, Fla., one of several companies that conducts online auctions in Florida and other states.
"There's an awful lot of new, big money in the sales this year," said James Powell, a longtime Florida investor who remembers a time when local investors flocked to live auctions at courthouses. Typically, they would bid for liens by holding up paddles. Powell is still one of the few in the liens business who makes purchases using his own name.
But the smaller investors, noted Powell, have been overtaken by well-heeled banks and funds that now bid online, and in volume.
Banks and hedge funds usually buy the liens through online auctions that permit them to bid in bulk, and they can use any name they want.
The giant Bank of America, for instance, has bid in Florida tax lien sales using colorful names such as Bennu, LLC, named after a mythical bird said to be the soul of the ancient Egyptian sun god. It also has bid as Osprey, LLC, and Ecru, LLC, named after the French word for a pale brown color.
Fortress Investment Group, a hedge fund run by former Fannie Mae chief Daniel Mudd, has bought tax liens under 17 different corporate names. Some evoke tranquil, bucolic settings, such as Pleasant Valley Capital, LLC and Travis Farm Investments, LLC.
Representatives of several prominent banks and hedge funds contacted by the Investigative Fund, from JPMorgan to Bank of America and Fortress Investment Group, declined to comment for this article.
Some banks purchased liens directly; others financed investment groups that did so. For example, Wells Fargo lends to a liens buyer. Deutsche Bank invests through a subsidiary. And BankAtlantic, based in Fort Lauderdale, is a longtime tax certificate investor in several states, buying liens under the names of several subsidiaries.
Though several mortgage lenders, including JPMorgan, recently suspended foreclosures amid concerns that some may have been done improperly, the slowdown is not expected to apply to foreclosures stemming from unpaid taxes.
The Investigative Fund identified major tax lien purchasers, many for the first time, through a computer-assisted analysis of more than 300,000 liens, municipal, corporate and court filings and other documents obtained from local government officials in four states and the District of Columbia. The Investigative Fund then traced these purchasers to the major financial institutions that oversaw them, invested in them, or lent money to their operations.
Business 'Needs Scrubbing'
Local governments, faced with tight budgets and the challenges of collecting debt from property owners, strongly endorse online auctions because tax collectors can easily and rapidly recoup millions of dollars. Miami-Dade County, for instance, took in more than $374 million in June 2009 from the sale of about 60,000 local property tax liens.
Tax collectors defend the practice by pointing out that property owners can avoid added fees or the risk of losing homes by paying their bills on time. The threat of losing property often compels tardy homeowners to pay off just before the deadline; without severe penalties many people would simply ignore their obligations to pay property taxes, collectors say.
Some two dozen states and the District of Columbia allow tax sales, which spare the governments from added expenses of hiring their own debt collector, or foreclosing and becoming a landlord. Local governments generally require minimal identification - for instance, a Social Security number. They allow bidders to choose whatever names they wish, and don't check to see if bidders are using multiple identities.
The few investors willing to talk about the tax lien business with the Investigative Fund argue that they are playing a vital role in helping cash-strapped local governments plug holes in budgets and, in some cities, helping rehabilitate older buildings. That returns the properties to the tax rolls, and can help revive beleaguered neighborhoods, they say.
"Budget-challenged cities are using the proceeds from their [tax lien] sale as an important source of funding," said Gabriel Boehmer, a spokesman for Wells Fargo Bank, which lends to companies that buy tax liens.
Critics aren't so sure. "If your only goal is to maximize your rate of return, this is a nice industry," said Frank Alexander, a law professor at Emory University with expertise on tax sales. "The question becomes: Do you mind being a vulture and preying on people?"
Alexander argues that when local governments privatize tax collection duties they "wash their hands of all responsibility" for ensuring property owners are treated fairly.
In Cleveland, officials are beginning to express concern about the consequences of trusting the new tax collectors. Cuyahoga County canceled this year's tax sale amid alarm that previous ones had contributed to an upsurge in home foreclosures and further decay in already marginal neighborhoods. "With the economy the way it is now, we won't have a tax sale for at least one year," said Robin Thomas, Cuyahoga County's chief deputy treasurer. Her aim: To buy homeowners in Cleveland "a little more time" to get caught up with their property taxes.
Despite national reform efforts that have focused on debt collection, from credit cards and payday lenders to checking account fees, the fairness of tax sales to homeowners remains largely a local, unregulated matter. A new consumer protection bureau created by Congress has no explicit authority to watch over local tax sales.
"There is no oversight at all," said District of Columbia Attorney General Peter Nickles, who is suing a tax lien investment firm for charging homeowners what he alleges are exorbitant fees to get their homes out of hock.
In a separate matter, the U.S. Department of Justice's antitrust division is investigating allegations of possible tax-sale bid rigging in two states. The ongoing probe began in Maryland, where three men pleaded guilty to criminal charges earlier this year. A federal grand jury in New Jersey has subpoenaed records from several major tax lien investors, including a JPMorgan subsidiary, and a Virginia company that serviced the Bank of America tax lien portfolio in Florida this year. No charges have been brought in the New Jersey investigation.
Said Nickles of the tax lien business: "This is one of the areas that really needs a good scrubbing."
Small Debts Grow Fast
Tax sales routinely place home ownership in jeopardy over relatively small sums, sometimes just a few hundred dollars, the Investigative Fund data analysis of hundreds of thousands of liens records shows. For instance, more than two of every five liens sold earlier this year in 31 Florida counties and in Maricopa County, Arizona (Phoenix), were for unpaid taxes of less than $1,000; more than 90 percent were less than $5,000. Results were similar in Toledo, Ohio.
Some jurisdictions such as Baltimore toss in unpaid water bills and other municipal fees of $250 or more. In May, the Investigative Fund reported how an unemployed former mental health counselor with four children named Vicki Valentine lost her home even though the mortgage had been paid in full. She had owed $362 on an overdue water bill when investors took over and added thousands of dollars in legal fees she couldn't afford. (In response, city officials are seeking statewide legislation that would prohibit the sale of tax liens of less than $750.)
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