[Paslode]

In Cleveland, officials are beginning to express concern about the consequences of trusting the new tax collectors. Cuyahoga County canceled this year’s tax sale amid alarm that previous ones had contributed to an upsurge in home foreclosures and further decay in already marginal neighborhoods. "With the economy the way it is now, we won't have a tax sale for at least one year,” said Robin Thomas, Cuyahoga County's chief deputy treasurer. Her aim: To buy homeowners in Cleveland “a little more time" to get caught up with their property taxes.

Despite national reform efforts that have focused on debt collection, from credit cards and payday lenders to checking account fees, the fairness of tax sales to homeowners remains largely a local, unregulated matter. A new consumer protection bureau created by Congress has no explicit authority to watch over local tax sales.

“There is no oversight at all," said District of Columbia Attorney General Peter Nickles, who is suing a tax lien investment firm for charging homeowners what he alleges are exorbitant fees to get their homes out of hock.

In a separate matter, the U.S. Department of Justice’s antitrust division is investigating allegations of possible tax-sale bid rigging in two states. The ongoing probe began in Maryland, where three men pleaded guilty to criminal charges earlier this year. A federal grand jury in New Jersey has subpoenaed [5] [5]records [5] from several major tax lien investors, including a JPMorgan subsidiary, and a Virginia company that serviced the Bank of America tax lien portfolio in Florida this year. No charges have been brought in the New Jersey investigation.

Said Nickles of the tax lien business: “This is one of the areas that really needs a good scrubbing.”

Small Debts Grow Fast

Tax sales routinely place home ownership in jeopardy over relatively small sums, sometimes just a few hundred dollars, the Investigative Fund data analysis of hundreds of thousands of liens records shows. For instance, more than two of every five liens sold earlier this year in 31 Florida counties and in Maricopa County, Arizona (Phoenix), were for unpaid taxes of less than $1,000; more than 90 percent were less than $5,000. Results were similar in Toledo, Ohio.
Some jurisdictions such as Baltimore toss in unpaid water bills and other municipal fees of $250 or more. In May, the Investigative Fund reported [6] how an unemployed former mental health counselor with four children named Vicki Valentine lost her home even though the mortgage had been paid in full. She had owed $362 on an overdue water bill when investors took over and added thousands of dollars in legal fees she couldn’t afford. (In response, city officials are seeking statewide legislation [7] that would prohibit the sale of tax liens of less than $750.)

To be sure, many debtors eventually pay the mounting bill rather than lose property of greater value. And some states such as Florida give homeowners up to two years to pay off the debt before investors can force the sale of their property. But in other states, those who fail to pay can quickly find themselves in a thicket of escalating debt and in a costly – and often losing – legal battle to keep a roof over their heads.

Barbara Carpenter, a 58-year-old disabled Ohio retiree, found herself in such a situation. The former worker for the American Red Cross struggled to save her Toledo home from a JPMorgan entity called Plymouth Park Tax Services, which in recent years has been among the nation’s top buyers of tax liens.

“It’s a great neighborhood and the house is in good condition,” said Carpenter, who paid $67,000 for the one-story home in 2004. But she fell behind in paying her taxes and a certificate for $1,500 in unpaid taxes was sold off to Plymouth Park, which is based in New Jersey.

Carpenter’s lawyer, Joseph Westmeyer, said Plymouth Park routinely charges an upfront fee of around $1,500 as soon as it buys the lien and 18 percent interest on the debt. If they don’t get paid, they foreclose.

“It’s not a good deal for poor customers,” said Westmeyer. Carpenter wound up selling the house in August for less than half what she had paid. Plymouth Park received about $12,000 in legal fees and other charges, including some additional taxes, Westmeyer said, quoting from court records.

Andrew Neuhauser, an attorney with Advocates for Basic Legal Equality in Toledo, said his group believes the Lucas County tax sale, which reached a peak of about $5.4 million in liens during 2006, has led to hundreds of foreclosures. That, in turn, has partly eroded the tax base and had a “devastating effect” on some neighborhoods, he said. “It’s a short-term gain for the county that in the long term does harm,” Neuhauser said.

Gail Michaud, a 71-year-old retired real estate broker who lives in a $60,000 home in Dania Beach, Fla., recently fell behind on the property taxes. In June, Broward County sold collection rights to her unpaid bill – only $782 – to Bennu, LLC, the Bank of America arm named after the mythical bird.

Michaud, who said she receives food stamps, resents having to pay interest charges to the nation's mightiest bank – especially because when the bank was in trouble the government came to the rescue. "The taxpayers gave them their bailout money, and they are still doing the same thing they used to. They look their nose down at people and think they can do whatever they want," she said.

Florida Boom

Florida, the nation’s largest tax sale market and one of the few states where large transfers of liens can be tracked, shows how the collapse of a once-buoyant real estate market can be a boon for tax lien investors, especially banks and hedge funds.

This year alone, counties have offered more than $1.9 billion in tax liens and found eager buyers for nearly all of them. Buyers from across the U.S., the Cayman Islands, Bermuda and Panama bid alongside the banks and hedge funds that cater to wealthy investors.

In this year’s sale in Orange County, which includes Orlando, bank-affiliated companies or hedge funds gobbled up nearly 90 percent of the 24,000 tax liens sold. In the Fort Lauderdale area, officials sold more than a quarter of the liens to entities financed by Bank of America.

Bank of America made most of its purchases in Florida through four limited liability companies. LLCs can limit exposure to lawsuits and can shield the owner's identity. In Florida, Bank of America’s LLCs had the names Investments 2234, Bennu, and Ecru, and all used the same post office box in Atlanta as their business address, according to records on file in Florida counties.

In several Florida auctions, Bank of America’s interests were managed by MTAG Services, one of the largest tax lien servicers in the U.S. The Vienna, Va., company has been subpoenaed by a federal grand jury in New Jersey that is investigating alleged collusion in bidding at tax sales.

MTAG's president, James Meeks, said his company is "cooperating fully" with the federal investigation. He added that "everybody who bought any substantial amount of liens in Jersey was subpoenaed." Meeks said that his company, like others in the industry, favors creative names like Bennu for companies that bid on tax liens.

“There’s no rhyme or reason to the names,” Meeks said.

Tax officials in several counties said they had no idea the companies were affiliated with the Bank of America.

“I know nothing about these companies. I don’t have any background on them,” said Juanita B. Sikes, tax collector in Hernando County, Fla., north of Tampa, where the numbers of liens sold earlier this year was nearly double those from 2005. “It’s not on us to determine if they are a real person.”

Several hedge funds saw opportunity in the Sunshine state as well.

One was the Fortress Investment Group headed by Mudd, the former chief executive of Fannie Mae. While Mudd was at the helm, Fannie’s decision to take on more than $200 billion in risky loans crippled the mortgage giant and helped unravel the economy.

In only a few months, Fortress has purchased more than 30,000 tax liens in Florida counties using 17 different LLCs. Most registered for the tax sales using the 46th floor of an Avenue of the Americas skyscraper in midtown Manhattan – Fortress’ headquarters – as their address.

Contd.