No Mortgage and You Think You Own Your Home? Think Again.

  • The number of foreclosures tied to delinquent tax payments is climbing. 
  • Rising tax-lien problems stem from two overlapping trends associated with the weak economy: To close budget deficits, some local governments are increasing property taxes to raise additional revenue. But a growing number of homeowners, many unemployed or living on fixed incomes, are finding those tax bills—even before rate increases—a strain.

Tax Liens Trigger More Foreclosures

Weak Economy Cited as Local Property-Tax Increases—Needed to Balance Budgets—Strain Homeowners’ Ability to Pay

 By KELSEY GEE
When Elsa Dabreo inherited a house from her late father, she thought it was the best thing that ever happened to her. But now she is struggling to keep it.
The house, in a suburb of Boston, was mortgage free and valued at about $330,000 when she received the deed in 2005. However, it was saddled with $20,000 in back taxes which Ms. Dabreo, now 54 years old, couldn’t pay. In 2010, after the taxes and penalties had ballooned to $42,000, the city of Weymouth, Mass., sold the debt at a tax-lien auction. If Ms. Dabreo can’t pay the debt, she could be subject to foreclosure.

Relatives advised her to sell the home and pay off the debt, but she refused. “I wouldn’t be honoring my father’s memory if I sold the home that he worked so hard to buy,” said Ms. Dabreo, a former child-care worker who is now unemployed. She recently filed for bankruptcy and hopes to keep living in the home—which has fallen in value to $296,000.

A report released this week by the National Consumer Law Center, says Ms. Dabreo’s situation isn’t unusual. Although mortgage default is behind most home foreclosures in the U.S., the number of foreclosures tied to delinquent tax payments is climbing. The NCLC, an advocacy group, estimates that $15 billion of tax-lien foreclosures happened in 2010, the latest year for which data are available.

Rising tax-lien problems stem from two overlapping trends associated with the weak economy: To close budget deficits, some local governments are increasing property taxes to raise additional revenue. But a growing number of homeowners, many unemployed or living on fixed incomes, are finding those tax bills—even before rate increases—a strain. When homeowners fail to pay, municipalities have the legal authority to foreclose or auction off the tax lien to debt collectors, who can charge interest rates as high as 50% on the outstanding balances. If the homeowner doesn’t pay—the deadlines to do so vary across the nation—many states allow the tax-lien holders to take ownership of the properties and resell them.

Brad Westover, executive director of the National Tax Lien Association, an industry group, 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,” Mr. Westover said.

While the sales are causing distress for some homeowners, they reflect hard fiscal realities at the state and municipal level.

“Cities and towns are facing their own budget problems and of course need homeowners to make prompt tax payments,” says John Rao, an NCLC attorney who wrote the report. Homeowners are slipping on tax payments for the same reasons they are falling behind on mortgage payments, Mr. Rao said: “They’re unemployed, or underemployed, expenses have gone up, and you don’t have enough money.”

Advocates for the elderly and the unemployed, the groups most at risk of losing their homes, say it isn’t uncommon for consumers with homes valued at hundreds of thousands of dollars to lose the properties after failing to pay a few thousand dollars in taxes. “The system is really counterintuitive,” said Laura Newland, an attorney with AARP, an advocacy group for people age 50 and older. “Some of the properties that are most vulnerable are the ones without a mortgage.” (Local taxes on homes with a mortgage are often paid by the mortgage lender, which collects taxes from homeowners in their monthly payments.)

Frank Alexander, a professor who specializes in tax-law foreclosures at Emory University’s law school, said municipal governments selling tax liens are being shortsighted. “It creates short-term cash, but generates long-term problems,” he said, pointing out that tax-lien sales and tax foreclosures often spark legal challenges that can last for years and prove costly for homeowners and municipal governments.

Some states have different approaches. In Rhode Island, a 2006 law to protect taxpayers from losing their homes was named after 81-year-old Madeline Walker, who was evicted after falling behind on paying a 2001 sewer bill totaling $150. Investors bought her house at a tax sale for $836 and eventually resold it for $125,000. The event drew media attention and inspired former governor Donald Carcieri to advance a bill to protect Rhode Island residents from similar tax-sale foreclosures.

Since the Madeline Walker Act went into effect, state tax authorities are required to notify Rhode Island Housing and Mortgage Finance Corporation, a public agency, when homeowners fall behind. The agency works to help them get their tax payments back on track. In 2011, Rhode Island Housing sent notices to 4,000 homeowners at risk of a tax-lien sale. That tally is up 18% from 2010; the agency expects the number to rise again this year.

Fred Pontarelli, a 67-year-old retiree, nearly lost his Johnston, R.I., home in 2008 and again in 2011 because of property taxes. In 2004, Mr. Pontarelli paid off his mortgage on the $220,000 home. But he had trouble keeping up with property taxes, which climbed between 2006 and 2011.

After receiving a tax-sale notice in November 2008, he heard from Rhode Island Housing, which offered to purchase his liens and allow him to repay the debt over a five-year period.

The assistance was just what Mr. Pontarelli needed to catch up on his payments. “You work all your life and when it comes time to retire, I don’t think I should never have to pay taxes,” he said. “I should reach a point where I feel comfortable.”

Write to Kelsey Gee at kelsey.gee@wsj.com

http://online.wsj.com/article/SB10001424052702303644004577523020991281452.html

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