Tax lien foreclosure sales are causing a second economic crisis in America by allowing savvy investors to jack up redemption penalties on homeowners who owe property taxes, the National Consumer Law Center said in a new study.
Most state laws escalate the problem by making it difficult for tax defaulters to save their homes in time, the agency contends. Tax liens in virtually every state maintain top priority over other liens, giving lien holders a strategic chance to obtain properties far below their market value.
Tax liens are not new to the real estate market, but NCLC believes it's time for states to update their tax lien laws to ensure investors do not enjoy windfall-type profits on these transactions.
"A tax lien sale may be started over nonpayment of a small delinquent tax bill for a few hundred dollars, and then sold at a tax lien sale for simply the back taxes owed on the property," NCLC said in a report. "If the homeowner fails to buy back the property, the purchaser acquires the home for very little. Thus a $200,000 home might be sold for as little as $1,200, and then resold for a huge profit."
Annual tax lien sales are currently valued at $15 billion nationwide, NCLC says.
The agency claims investment companies and tax sale purchasers -- including Bank of America (BAC) and JPMorgan Chase (JPM) -- have a history of using the process to generate huge returns while eliminating all of the homeowner's equity.
The consumer agency is against the current practice of states allowing tax lien buyers to charge homeowners high interest rates and redemption fees as they try to save their properties. Redemption penalties in the states of Georgia, Iowa, Mississippi, New Jersey and Texas can run as high as 20%.
NCLC wants more structure in place to keep homeowners advised of the risks and to ensure borrowers have a real chance at redemption.
To do this, the organization is advising states to keep redemption profits reasonable through legislation. The agency also wants states to limit the maximum interest or penalty rates that can be charged by using current market conditions in their calculations.
"The interest rate should seek to discourage speculation and promote redemption," NCLC said.
Other steps that could prevent abuse would be limitations on fees and costs and a maximum fee schedule using reasonable market rates for title searches, attorneys fees and other expenses, according to the agency.
In addition, NCLC wants courts in all states to supervise the sales process by implementing an official redemption and sales procedure.
The organization believes the initial tax lien sale should involve only the certificate of the lien, rather than an entire interest in the property. That way if a borrower fails to fix the tax lien problem, the lien's purchaser will have to obtain a court order before obtaining a full sale.
In addition, the organization wants a court to be the final authority in reviewing a tax lien sale to ensure the price is fair and any surplus funds are paid to homeowners.
NCLC claims borrowers should also have proper notice throughout the entire process.
Other recommendations from the NCLC study include a structure that would allow local tax offices to collect redemption payments to ensure lien purchasers do not get in a borrower's way.
NCLC also wants states to consider partial or installment payments on tax liens.
Click here to read NCLC's complete report on the issue.