A recent report from the National Consumer Law Center (NCLC), The Other Foreclosure Crisis: Property Tax Lien Sales, makes the case for state and local reforms to help seniors and other homeowners save their homes from foreclosures related to tax lien sales.
A tax lien sale may be started over nonpayment of a single property tax or municipal bill (water, etc.). Although practices vary by state, the taxing authority typically auctions off the lien for the amount of the past-due bill. Private investors who buy tax liens have the right to foreclose, even if the tax delinquency is a small fraction of the owner’s total equity in the house. With cities and towns strapped for cash, more tax liens are being sold in this growing nationwide problem. In some areas of the country, tax foreclosures are up by nearly 300%. (Catherine Idzerda, "Property tax foreclosures come in record numbers." The Janesville Gazette (May 13, 2012).)
The NCLC found that low-income seniors and people with cognitive challenges, such as those with Alzheimer’s, dementia, or a mental disability, are most at risk. Seniors without mortgages face special challenges. While most mortgages include an escrow for property taxes, homeowners without a mortgage must independently budget for their annual tax bill. If a senior becomes incapable of handling their financial affairs, however, he or she may become delinquent on property tax payments, jeopardizing their home equity over a relatively small bill.
The story of Betty Museus highlights this problem. Ms. Museus had lived alone for many years in Missoula, Montana, in a home she owned. With no close family to assist her, she fell behind on her property taxes. Her home was purchased at tax sale by a private investment group for the $5,822.09 tax debt. Ms. Museus did not respond to letters sent to her by the investment group and she failed to redeem the property. Ms. Museus was evicted and she lost the remaining equity in her house, valued at $150,000. Another homeowner, 81-year-old Rhode Islander Madeline Walker, was evicted two weeks before Christmas from the home she had lived in for more than 40 years because she had fallen behind on a $474 sewer bill. A corporation bought her house at a tax sale for $836.39 and then resold it for $85,000.
Although some seniors without mortgages encounter challenges, the growth of reverse mortgages has also contributed to an increase in tax sales. The Department of Housing and Urban Development (HUD) provides reverse mortgage insurance through the Home Equity Conversion Mortgage (HECM) program. A HECM loan provides homeowners who are 62 or older with cash payments or a credit line based on the equity in their homes. Borrowers are not required to repay the loans as long as they continue to live in the home, though they are generally required to keep the property in good repair and pay property taxes and hazard insurance premiums in a timely manner. Reverse mortgages can assist older property owners in avoiding tax sales by making equity in the home available to pay outstanding property tax obligations, and in some cases even ongoing property tax bills. However, reverse mortgages generally have not included escrow accounts for future property tax bills and borrowers are expected to make these payments directly to the taxing authority. If the borrower fails to pay the property taxes, the servicer will usually pay them and that amount will be added to the loan principal, which may cause the loan to go into default if the loan balance exceeds the principal limit. Servicers attempt to avoid a tax sale by paying the taxes once they become delinquent, but often they are not actually paid until after the sale.
An August 2010 audit report by the Office of Inspector General (OIG) documented an increasing number of reverse mortgage borrowers who were in default because they had not paid property taxes. (Gerald R. Kirkland, "Audit Report Number 2010-FW-0003," Dep’t of Housing and Urban Development Office of the Inspector General (August 25, 2010).) The four mortgage servicers contacted by the OIG reported that they held almost 13,000 of these defaulted loans, and that the servicers had paid taxes and insurance premiums totaling more than $35 million on these loans.
While seniors may be particularly vulnerable to tax foreclosures, most states have programs that offer property tax exemptions or abatements for older residents. The exemption or abatement can be provided in a variety of forms. In some states, a dollar amount of the home’s taxable value is declared exempt. In other states, the homeowner receives a credit against the property tax or a refund for taxes paid. For example, in Maryland, owners over age 70 receive a credit, the amount of which is a percentage of their income with the percentage graduated by income level. Another form of exemption is a property tax freeze for older residents. In Tennessee, towns may freeze the tax assessment for persons over the age of 64.
Another approach that some municipalities find attractive is tax deferral, because it affects only the timing of receipt of tax revenue. For example, in addition to other forms of tax relief, property owners over age 65 in Illinois can apply for a deferral of all or part of the property taxes on their residence. The taxes and interest are then paid upon sale of the property or upon the death of the owner by the owner’s heirs, unless the heir is a surviving spouse. If the heir is a surviving spouse, the deferral can be continued. If the taxes are not paid after the death of the home owner or qualified surviving spouse, then the town can initiate the tax sale process.
The tax relief provided by these programs can be significant. Their benefits are not automatic, however. Most programs require that the homeowner apply for and submit proof of eligibility for the abatement or exemption. Application must usually be made within a short period before or after the issuance of the tax bill. These time periods are generally not extendable, and if an application is not made by the deadline, the right to the exemption may be lost.
By addressing tax affordability before payment problems occur, local taxing authorities can increase the stream of tax revenues, avoid collections costs, and avoid subjecting their homeowners to unnecessary tax sales. Often homeowners who stand to benefit most are not even aware of these existing programs until after they fall behind on payment. For some homeowners, an affordable tax bill can make the difference as to whether or not payments are made. For some older or disabled homeowners, a tax bill adjustment can make it possible for them to remain in the home. Local taxing authorities should take steps to ensure that these programs are effectively utilized.
Homeowner Protection Solutions
Among a slate of recommendations to reform state and local tax lien foreclosure process, the NCLC identified several solutions to protect older homeowners:
- Encourage enrollment in property tax abatement programs.
Many states operate programs to assist taxpayers. Every state has a special property tax abatement or exemption program which grants full or partial relief to taxpayers due to age, disability, income, or personal status. Most programs require the homeowner to proactively apply for the abatement or exemption. Local governments should publicize abatement and exemption programs at every stage of the tax assessment and collection process.
- Provide enhanced notice to at-risk homeowners.
In some states, once a property owner becomes delinquent, local social service agencies will reach out directly if records indicate the homeowner is elderly or disabled. Enhanced notice can help avoid property loss by individuals who may be at risk due to conditions affecting their ability to handle financial matters.
- Make pre-sale payment programs available.
Local tax collectors should adopt a formal installment payment program. Homeowners without an escrow account for taxes and insurance benefit from such payment programs and are able to maintain a budget to stay current on their taxes.
- Place reasonable limitations on additional fees and costs.
States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys’ fees, and other fees.
- Create redemption assistance programs.
Several states maintain small emergency loan funds for homeowners who face foreclosures. Other states allow housing agencies to acquire the property tax lien before private investors. The housing agencies work with the homeowner to avoid a loss of the home. Most of these programs target homeowners who are experiencing temporary financial difficulties. States should adopt an emergency assistance program to assist homeowners in exercising the right of redemption after a tax sale.