Monday, October 18, 2010

Wall Street's Newest Crime: Tax Lien Investing

Just when you think it can't possibly get any worse. . .

The New Tax Man: Big Banks And Hedge Funds
by Fred Schulte and Ben Protess, Huffington Post Investigative Fund

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.
Read more.


  1. This comment has been removed by the author.

  2. I think that your view of tax lien investing is a little skewed. I am a tax lien investor and I teach individual investor how to invest in tax lien certificates because it's a safe alternative to the stock market. Individuals can invest in tax lien certificates with money from their IRA or 401(k) and it's a much safer investment than speculative securities. As an individual investor I don't like the competition from the big banks, but you've got your fact wrong. The banks do not add interest and fees to the tax lien. They simply get what the county or municipality would normally charge the tax payer.

    You make it sound like they are adding 18% or more to the lien, but the fact is that is what the municipal or county government charges for property tax delinquency - that is the maximum rate that the county charges and if there was not tax lien auction the property owner would always be charged that rate. But because the tax lien certificates are auctioned and the interest rate is bid down at the tax sale, the rate is actually lowered for the property owner. It is the competitive nature of the tax sale that lowers the interest rate that the delinquent tax payer must pay. In some states the interest on the certificate amount is lowered at the auction to zero or close to zero. Then if the owner doesn't pay the subsequent tax, the investor can pay the subsequent taxes and make the maximum interest rate on the sub taxes, but that is exactly what the county would charge.

    Also the investor cannot go after the property owner for payment. In most states, the property owner must pay the tax collector, not the investor in order to redeem the lien. the tax collector notifies the investor collects the tax lien certificate from the investor and forwards a check from the county (or municipality) to the investor. It is all controlled by the local or county government. In most states, there is a generous redemption period in which the delinquent tax payer has to pay a tax lien, usually 2-3 years depending on the state.

    This really is a good system for all concerned the county gets the money they need to meet their budget, the investor gets a better deal then they would at the bank in a safe - though not liquid investment, and the homeowner gets more time to pay their taxes - it's as if their getting a loan without having to qualify for one, though it could be a high interest loan. But think of what the alternative would be. States that do not sell tax liens to satisfy unpaid taxes just sell the property right out from under the owner. Which would you prefer if you were the homeowner? The one thing that I've learned from this business is that you have to pay your taxes!