Losing Your Home to a Small Tax Debt?
When a little old lady is thrown out of her home two weeks before Christmas because she didn't pay a $496 sewage bill, people take notice.
At least the Rhode Island General Assembly did, and five years later, the state says more than 2,500 homeowners are still in their homes largely because of the Madeline Walker Act. That 2006 law is named after the 81-year-old woman who was evicted and saw her home of 40 years sold at tax sale for $836 and then resold for $85,000.
“The economy is really, really difficult. People are struggling every day, trying to decide: Do I pay the mortgage? Do I buy food? Do I pay my real estate taxes?” says Leslie McKnight, director of loan servicing for Rhode Island Housing, the state housing agency responsible for enforcing the law.
Some consumer advocates point to the Rhode Island law as a model for other states for its consumer safeguards, including more notices to the homeowner before a tax lien sale can be held.
The term “property tax lien” can be confusing, in large part, because state laws vary widely on a process that allows local governments to sell the property to private purchasers or investors if the owner falls behind on paying property taxes.
As Madeline Walker's case shows, a tax lien sale may be started over an unpaid water or tax bill of only a few hundred dollars and then sold at a tax lien sale for the back taxes owed on the property. (A settlement was reached with the new owner that allowed the property to return to Walker.)
Most owners have a right to get back their property, but they also have to pay the interest, which can be as high as 24 percent in Iowa and reach as high as 50 percent in Texas, according to a new report from the National Consumer Law Center (NCLC), an advocacy group based in Boston.
John Rao, author of the report, says while he realizes state and local governments need the tax revenue, that outdated state laws are fueling “a second nationwide foreclosure crisis.”
Tax lien sales total some $15 billion across the country, he says, and that figure is expected to climb because of a weak job market, depressed home values, and an increase in mortgage foreclosures. Florida alone had nearly $2 billion in back tax liens and sold $1.8 billion of these liens in 2009, the group said in a report that includes a summary of state tax sale laws.
Advocates in Kentucky are pushing for legislative changes. “The main problem we have is that the tax liens are sold to third-party purchasers, resulting in higher costs and fees and sometimes resulting in foreclosures,” says Anne Marie Regan, a senior staff attorney with the Kentucky Equal Justice Center, an advocacy and research group. The group wants local jurisdictions to collect liens instead of selling them and would like to see more tax lien clinics to help homeowners understand their rights.
Some of those protections are in Rhode Island's law. The Madeline Walker Act requires cities, towns, and other taxing authorities to notify Rhode Island Housing of delinquent liens before the tax sales can take place. The agency is giving the first option to purchase residential tax delinquencies at the time that they may go for sale.
Of the 2,530 tax liens that the Rhode Island Housing has acquired, the state says 63 percent (1,603) of the liens the state purchased have been “redeemed” or bought back by the homeowners after the state worked with the homeowners to get their payments back on track. The state has reached out to more than 23,000 homeowners since the law was enacted, providing advice, financial assistance and education to keep them in their homes.
Many of the homeowners getting help are unemployed, underemployed or elderly people who are struggling financially, and those with ‘underwater mortgages' that leave owners with more debt on the property than the current market value of the house.
Indiana is another state that requires detailed notification to homeowners, according to the NCLC report. Pennsylvania's warning notices must be in 10-point type and clearly state that the property is about to be sold without the owner's consent for delinquent taxes, and that the property may be sold for a fraction of its fair market value. In Michigan, the county treasurer sends the initial notice of the tax foreclosure court action by certified mail.
The National Tax Lien Association, an industry group, has defended the process. “It is a financial service that benefits local governments with the funds needed to operate, the investors with a reasonable interest rate on annual returns, and often times benefits the delinquent taxpayers with a decreased interest rate than if the tax lien was never sold,” Brad Westover, the group's executive director, told the Wall Street Journal.