Recently, the National Consumer Law Center issued a widely distributed and negative report regarding tax lien foreclosures that was lacking in accuracy, balance, and national perspective.  The report chose rare situations focused on only one side to those stories and then attempted to extrapolate that information into a nation-wide crisis.   We would like to take this opportunity to present some information that we believe depicts the true nature and purpose of the delinquent tax sale process.

Real estate property taxes are, as they have been for over a century, the primary local revenue source for the nation’s municipal governments.  Currently, there are about 3,000 counties, 36,000 municipalities, 37,400 special districts, and 14,600 public school systems in the United States (Congressional Budget Office, www.cbo.org).  These local governments are dependent upon the full collection of property taxes in order to operate properly.

The property tax base of the entire United States is approximately $426 billion (based upon data from the Department of Commerce, Census Bureau).  These funds are used for a wide variety of services and programs, including:

·       Education: in most states the largest portion of property taxes goes to local school districts

·       Public Safety: police, fire, and corrections

·       Public Health: health inspections and health department services

·       Infrastructure: construction and maintenance of roads/bridges/and other projects.

·       Culture and Recreation: park maintenance, libraries, children and senior citizen recreation programs

·       Local Government: planning and zoning, local court system, information services, operational costs, and waste management.

While local governments need the cash from property taxes immediately, unfortunately there are some property owners who are unwilling or unable to pay their taxes timely.  Florida is the largest market for tax lien sales and among the quickest to sell its delinquencies; therefore, it has a higher than average ratio of liens sold as a percentage of total levy.  Palm Beach County is one of the largest counties within the state and the data table below shows its delinquency pattern.

Each uncollected dollar represents a commensurate reduction in funding for crucial local government services.  Currently, 28 states permit local governments to transfer and assign these liens to private investors.  By selling tax certificates, local governments can exchange nonperforming assets for immediate infusions of cash without the risks, costs, or potential losses that they would experience from borrowing against these collections.

Thus far in 2012, tax lien investors have provided more than $1.5 billion to local governments across the country.  Through the competitive bidding processes, delinquent taxpayers have saved millions in interest charges.  For example, roughly half of all tax liens sold in Florida (50% * $1.1B = $550mm) will be outstanding for more than one year; if those liens were to redeem at exactly one year, the delinquent taxpayers would save over $70 million thanks to the competitive bid average interest rate of 2.37 percent versus the statutory rate of 18 percent .  Such low interest rates are the norm throughout the country – not the 20 percent to 50 percent “windfalls” referenced in the report.

During the recession and downturn of the real estate market, there were increases in tax sale and tax foreclosure volumes.  However, the numbers show no indication of a “crisis.”  In fact, the tax lien sale volume has reduced the past few years.  Interestingly, the annual number of tax foreclosures in Palm Beach County is only a few hundred parcels, largely vacant land, whereas in the past year alone there were 9,907 scheduled bank mortgage foreclosures, primarily single family residences (http://www.mypalmbeachclerk.com).

Although tax liens are sold to the private sector, the delinquent taxpayer still has the same rights and protections as when the lien was held by the local government.  State statutes govern the tax certificate programs and all of them include protections for property owners.  In fact, tax liens have a redemption time period, which varies by state, during which the property owner cannot be foreclosed upon and has time to reorganize finances or make other arrangements to pay off the lien.  This is contrary to the immediate foreclosure process of mortgages.

After years of nonpayment of property taxes and numerous notices to the owners and interested parties of record, the final legal recourse is to foreclose upon and sell the property to satisfy the delinquency and restore the delinquent property to the performing tax rolls.  Tax foreclosures occur on a small percentage of properties as shown in the Palm Beach County data, and on very few owner-occupied homes.  Most properties in the tax lien process avoid foreclosure because of action by the property owner, a family member, or the mortgage holder.

The taking of real property by way of a tax lien foreclosure is governed by state statutes, most of which have been tested and revised for more than 100 years.   The state procedures are in-turn governed by the 14th Amendment to the U.S. Constitution and subsequent U.S. Supreme Court case laws, notably: Mennonite Board of Missions v. Adams (462 U.S. 791 [1983]), Mulane v. Central Hanover Bank & Trust Co., (339 U.S. 306 [1950]), and most recently Jones v. Flowers (547 U.S. 220 [2006]).

Our members have no interest in stripping property from people.  We generate income by helping communities fund short-term cash shortages at market determined rates.  As part of the process, some foreclosures are necessary, as is true with any sort of lending.  Our members strive to ensure that foreclosures are done only when absolutely necessary and that they are done with compassion.  Without enforcement tools property tax collection would be like a criminal justice system without jails.

The reality is the entire community benefits from the tax sale process:

1.      Local Governments

a.     Dependable cash flow for funding operations, balanced budgets

b.     Transfer of costs of collections

c.     Increased collections without raising taxes or increasing debt

d.     Decrease in future delinquency rates and better bond rating

e.     Private investment in the renovation of abandoned and/or blighted properties 

2.     Delinquent Taxpayers

a.     Same protections as when the local taxing jurisdiction held the lien

b.     Redemption periods that allow them to pay off the lien before any threat of foreclosure

c.     Collection and notification procedures controlled by state statutes and federal laws

d.     Payment plans provided when legally permissible. 

e.     In many cases, the total amount due is less than if the local government had retained the lien

3.     Nondelinquent Taxpayers

a.     Decreased risk of future tax increases

b.     Reliable funding for government services

c.     Property values protected by improving blighted properties

4.     Tax Certificate Investors

a.     Earn interest and penalties as provided by law

b.     Investment secured by first priority lien on real property

We hope that you have found this letter informative.  We remain open to you as a resource and we welcome thoughtful ideas for improving the tax sale process.