Say you’re a cash-strapped city, and scattered around town are houses where owners are behind on their property taxes.
Individually, the owners aren’t in arrears by much, but taken together, you’re talking millions. A city can try to collect those delinquent accounts. Or a city can put a lien on those properties, and then sell those tax liens to a third party.
Tax liens take priority over virtually every other lien on a property, including a mortgage. And since Connecticut sets the interest rate that accrues on taxes in arrears at a walloping 18 percent, tax liens offer a high-return, low-risk investment opportunity for buyers.
Sometimes, owners are in arrears because they’ve paid off their mortgages, and didn’t realize that their tax obligations -- the payment for which previously had been included in their monthly mortgage -- continue. They miss one payment, then two, and before they know it -- and sometimes without them knowing it at all -- there is a tax lien on their property.
Once those liens are sold to a third party, there’s not a lot of follow-up record-keeping on the part of the original lien holder (the city) to see how things play out. A third-party lien holder can start foreclosure proceedings immediately, and many of them do.
By the end of last year, Hartford’s property tax lien buyer -- Propel Financial Services, a Texas-based company that the Texas Observer magazine investigated and found wanting in July 2014 -- had 106 properties in foreclosure. Sixty-three of those properties in foreclosure had liens and fees that together amounted to less than $20,000. In addition, Propel held tax liens on more than 750 other properties throughout the city -- properties it could initiate foreclosure proceedings on any time it chooses.
This is a company, said the magazine, that engages in questionable business practices, and preys on the vulnerable.
Here’s where things get even more disheartening: From information compiled by the Hartford Community Loan Fund, a non-profit that provides and advocates for fair and affordable financial services for low-income Hartford residents, of the 15 residential neighborhoods where Propel owns tax liens, 38 percent of properties are in Hartford’s financially vulnerable North End: Blue Hills, Upper Albany, Northeast, and Clay Arsenal.
That’s just one of the third-party lien owners. The fund knows of at least five other companies which have bought Hartford’s tax liens since the city began selling them in 2007.
In fiscal year 2014, Hartford earned $6.75 million by selling tax liens, and $6 million last fiscal year. The Hartford mayor and the council have the authority to decide how many liens can be sold in the current fiscal year.
It is a legitimate way for investors to make money, but those tax liens are too often levied against the most financially vulnerable in a town: often older people of color who struggled to own their homes in the first place. The third-party owners of the liens can start foreclosure proceedings -- though some non-regulated predatory companies also offer tax liens refinance loans with prohibitively high interest rates. Desperate, homeowners often take those loans, which they can in no way repay, and they end up losing their homes anyway.
From there, the foreclosed house often sits, a blighted property that, in turn, brings property values down in the neighborhood.
Rosalind Cobb was born in Hartford and grew up in the North End. She and her husband built a three-family home there on Enfield Street. To afford the structure, they did some of the work themselves.
“You get out there with a hammer,” Cobb said. And you paint.
Four years ago, Cobb was laid off after 31 years at The Travelers Companies. A daughter who lived in one of the apartments got sick, and lost her job. Cobb fell behind in her mortgage. She worked with her mortgage company on payments, but in June 2013, she came home to find a foreclosure notice initiated by the tax lien investor.
Unbeknownst to Cobb, a tax lien had been placed on her Enfield Street home, and then that lien was sold to a Florida-based company, which in turn sold the lien to a Farmington-based group that had initiated the foreclosure. That notice, which Cobb found at her home in June 2013, started a year of intense effort on Cobb’s part to keep her home, she said. And she wasn’t the only one in her neighborhood, either.
“Everybody got hit up with this,” said Cobb. “A lot of people were losing their homes. I thought it was just me. I didn’t know there were other people involved with this.”
Cobb attended meetings, wrote letters, and spent hours on the phone talking to company representatives, with little satisfaction. She said attorneys she contacted told her trying to keep her home was fruitless, and there was no talking to the lien holder.
“The whole purpose was to put you out,” said Cobb. “It was horrifying.” She finally approached former mayor Pedro Segarra at a neighborhood function. She was introduced to the Hartford Community Loan Fund, where she got help refinancing the tax lien through a new mortgage with a more affordable interest rate.
Rex Fowler is executive director of the loan fund, and he has also served on the Hartford mayor’s blight committee. That group recently recommended the city stop selling tax liens. Beyond the impact on individual homeowners, selling liens complicates Hartford’s ability to work with the owners of blighted properties.
Meanwhile, the lien holder lets the interest rate accumulate at 18 percent, said Jeff Gentes, managing attorney at the Connecticut Fair Housing Center's Fair Lending and Foreclosure Prevention Project. And that usually all happens without the homeowner’s knowledge.
“We’re trying to figure out how to increase notice requirements,” Gentes said. He's also trying to learn how to decrease a lien buyer’s interest rate.
“We’re trying to do this mindful of the fact that cities that do this realize the tax proceeds sooner than by going through foreclosure” on the affected property, Gentes said. “We’re not trying to hurt municipalities’ funding streams.”
Not every city is so quick to sell liens. Gentes said New Haven handles its own liens. Washington, D.C., prevents the sale or foreclosure on any lien smaller than $2,500, and there’s a cap on attorneys’ fees. New York City gives applicants the option of an installment plan to pay off small bills for back taxes.
As Hartford’s new mayor, Luke Bronin, creates his budget, advocates are pushing for something similar, something a little easier on delinquent home owners. There’s also talk that advocates will begin to research just how many Hartford homeowners have lost properties to foreclosure initiated by third-party lien holders.
Cobb’s battle took a year -- “a whole year of fighting and doing paperwork, and going to the court and doing the petition and asking for expenses and the whole nine yards,” she said. “If you don’t fight for it, you’re just lost.”