Another Way Cities Can Protect Homeowners: End Tax Sales

Housing activists in Detroit got a surprise victory last month — and homeowners a welcome reprieve — when county officials announced they were suspending foreclosures on tax-delinquent homes and canceling their upcoming tax sale in the wake of the Covid-19 outbreak. Advocates have long called for a moratorium on these public auctions, which have stripped thousands of families of their homes, destroyed communities, and compounded the city’s racial and economic inequities.

With the coronavirus suspending business as usual in America, it should also lead us to ask whether laws that allow local governments to sell people’s homes to private investors over unpaid tax bills should ever be resumed.

Tax sales ostensibly serve as a tool for tax enforcement: If you don’t pay your taxes, you lose your home. But from their inception, these sales have been rife with injustices. In areas where land suddenly appreciated in value, land speculators (often in collusion with local officials) have manipulated tax-sale laws to steal people’s land. Writing in 1940, future Supreme Court justice Thurgood Marshall characterized tax sales as a form of racialized plunder, which he lamented, “is almost completely within the letter of the law.”

It remains so today. Currently, all states have laws that allow local governments to sell property for unpaid taxes and other charges. In 29 states plus the District of Columbia, local governments can also sell liens on tax-delinquent property, which allow investors to charge interest (in some states, as high as 50% annually) and additional fees on a taxpayer’s debt. And every year in America, scores of homeowners, often poor or elderly, lose (or nearly lose) their homes due to clerical errors, malfeasance, or chicanery, often over miniscule tax bills.

These laws have been challenged in the courts. In 1969, the crusading Chicago public interest lawyer Marshall Patner filed a lawsuit in federal court on behalf of a couple who had lost their home, valued at $16,000, to a tax buyer over a $500 missed tax payment. The homeowner, a disabled African-American war veteran, had fallen behind on his taxes after falling ill and losing his job. But while the federal judge in the case characterized the Illinois law as “oppressive,” he upheld its constitutionality, which the Supreme Court affirmed when it declined to hear the appeal.

Since then, tax-lien and foreclosure investors have continued to amass fortunes by exploiting property owners’ hardships and local governments’ increasingly desperate search for revenue. In the years following the housing market crash of 2008, property tax delinquency rates skyrocketed to levels not seen since the Great Depression.

Few cities were harder hit than Detroit, which experienced unprecedented numbers of mortgage foreclosures, soon followed by a sharp escalation in tax delinquency rates. In response, officials took aggressive measures to foreclose on tax delinquent properties. Since 2008, the county treasurer’s office has initiated tax foreclosure proceedings on one-third of all properties in the city. It did so in spite of evidence showing that property assessments were grossly and illegally overinflated, with owners of lower-value properties and racial minorities overtaxed the most.

During the Great Recession, as local governments teetered on the brink of bankruptcy, states and municipalities took similar measures to generate revenue through holding tax sales and adjusting laws to incentivize tax-lien investing, including removing caps on the amount of legal fees tax buyers could add to a property owner’s final bill. Baltimore, for example, aggressively sold liens on homes over unpaid water bills. In one case, a woman lost a home that her family had owned over for almost three decades over a $362 water bill.

While these sales generated modest returns for local governments, they allowed tax-lien investors to reap record profits. Indeed, tax delinquency laws have spawned a massive and lucrative tax-lien industry in America, which today generates over $10 billion in annual profits, and which thrives in hard times.

Whatever revenue local governments generate from tax sales is more than offset by the harm inflicted on citizens and local housing markets. A recent study found that in Detroit, 90% of roughly 120,000 properties the county auctioned for unpaid taxes went to speculative investors, leading to sharp increases in evictions and accelerated neighborhood decline. And many who lost their homes weren’t deadbeats or scofflaws, but low-income or elderly homeowners on fixed incomes who were unable to pay exorbitant tax bills, or the unwitting victims of lending schemes such as subprime mortgages and land contract sales.

With the coronavirus decimating local budgets, cities and counties will be more eager than ever to resume tax sales once the crisis is over. Tax-foreclosure and tax-lien investors, likewise, are licking their chops at the prospect of another recession. We should also expect to see more local governments seek to move these sales online, which, as a Center for Public Integrity investigative series found, has allowed major financial institutions and hedge funds to invest heavily in local tax liens.

We should instead take this moment to ask whether we should be incentivizing such predatory behavior through our laws — especially at a time when so many Americans are facing unprecedented hardship. Indeed, the extreme punitive measures aren’t just inhumane, they’re counterproductive. They have further destabilized urban housing markets, exacerbated housing insecurity among the poor, and contributed in no small measure to the racial wealth gap in America today, all in order to enrich private investors. We should end this cruel practice once and for all.

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