Predators Target Homes of Older Americans

Foreclosures tied to delinquent tax payments are a growing crisis for older homeowners

Bill Hogan

AARP Bulletin

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Published March 25, 2014

Melvin Phillips (right), 63, and his brother, Steven, almost lost their house over an $8,000 debt. They started falling behind on their property taxes, though neither of them realized it.

Ashley Gilbertson/VII

Melvin Phillips remembers with great clarity the day in September 2011 he walked into a courtroom in the District of Columbia without knowing whether he would have a place to live when he walked out.

Phillips, a 63-year-old security manager and retired Army captain, still wrestled with demons left over from combat duty in Vietnam. Now he found himself in battle again, fighting to save the house that he and his brother Steven had lived in for decades.

In 2009, Melvin and Steven started falling behind on the property taxes on the home, though neither of them realized it. "We thought we were current," Melvin says today. But then came a tax lien on the house and, in July 2011, a sale of the tax lien to Elm Capital LLC of Jericho, N.Y., a debt-collection operation that sometimes snapped up more than 100 liens at a time at the D.C. tax auction. Elm Capital had moved to seize the Phillipses' home through foreclosure.

Melvin recalls thinking that, once in Judge Joseph Beshouri's courtroom, he and his brother might be able to work out some kind of payment plan for their tax debt of about $8,000. But the grim reality of the situation set in when an attorney for Elm Capital approached him and asked, "Are you prepared to pay $15,000 today?"

A growing crisis

Although most foreclosures are triggered by homeowners falling behind on their mortgage payments, the number of foreclosures tied to delinquent tax payments is rising, according to the National Consumer Law Center, a nonprofit advocacy group. In what it brands "the other foreclosure crisis," the NCLC has estimated that U.S. property tax delinquencies may total $15 billion.

In 30 states and the District of Columbia, city or county governments have the legal authority to sell property-tax liens to private debt collectors, which can not only charge interest rates as high as 50 percent on the outstanding balances but also add legal fees and other costs they claim to incur in dealing with delinquent homeowners. If a homeowner doesn't settle up for the back taxes, penalties and fees within a certain period — from, say, six months in D.C. to up to four years in South Dakota — many jurisdictions allow the tax-lien holder to file suit to begin the foreclosure process to take ownership of the properties and resell them.

And, in some communities, it's not just property taxes that cause problems. Unpaid water, sewer and municipal fees lead to liens, which in turn can trigger foreclosures. And some municipalities add other fees — from "nuisance abatements" (when a city crew cuts weeds or mows overgrown grass, for example) to annual stormwater assessments — to property tax bills.

Some cities even off-load their tax debts to private firms for cash.

Last August, for example, the city of New Britain, Conn., agreed to sell all of its delinquent water, sewer and property taxes in a lump-sum deal with American Tax Funding Servicing, which paid the city with a wire transfer of $6.6 million.

Profit from pain

For all the heartaches that tax-lien sales have heaped on homeowners, they've proved a bonanza for some public officials.

SYRACUSE, N.Y.: Calvin James paid $9,877 in back taxes and was thrown out of his house for a lien of $936.

©Ashley Gilbertson

Consider the case of Arthur Ferdinand, the long-time tax commissioner of Fulton County, Ga., which includes Atlanta. In 2010, citing a state law that dates to the Great Depression, Ferdinand set up a controversial collection system that puts a 50-cent fee in his own pocket every time a tax lien is paid off — either by a private collection firm or by the homeowner.

The fees, an investigation by the Atlanta Journal-Constitution found, pushed Ferdinand's annual earnings in 2012 to $383,000. Critics say that the arrangement is a blatant conflict of interest, but Ferdinand, who's the highest-paid elected official in Georgia, complains that "more time has been spent discussing my salary … than my collection rate and job performance."

Snapshots From the Battle Lines

In Schenectady, N.Y., Linda Hart, 54, is fighting to keep a home she owns outright that has been in her family for three generations. Hart began to fall behind on her property taxes after she lost her job in 2007. The city sold her tax liens to American Tax Funding Servicing of Jupiter, Fla., which describes itself as "the nation's leading bulk sale purchaser and servicer of delinquent property tax liens." Although Hart has paid the firm a total of $15,000 — more than her accumulated back taxes — it foreclosed on her home and maintains that she still owes an additional $19,000. Hart's attorney, Anthony Pietrafesa, argues that the city's tax-lien sales were illegal and that the 21 percent interest Hart has been charged violates state law.

In some states, tax-lien sales also seem to have been a breeding ground for crime and corruption.

In November 2013, a federal grand jury in Newark, N.J., indicted several individuals for conspiring, over more than a decade, to rig the bidding at municipal tax-lien auctions in the state by agreeing in advance which liens each of them would bid on — by flipping coins, drawing numbers out of a hat or drawing from a deck of cards. The long-running scheme forced many property owners to pay higher interest rates than if their tax liens had been purchased "in open and honest competition," prosecutors alleged.

Even some public officials have been caught in the Justice Department's net. Last year, a former county treasurer in Illinois was convicted of rigging tax-lien auctions over a four-year period in exchange for campaign contributions; he was fined $20,000, sentenced to 30 months in federal prison and stripped of his pension.

Help for homeowners

Barbara Morgan, 80, found that the Washington, D.C., home she owned with husband Al since the 1960s had a property tax bill that had already been sold to FutureGen Capital, a local company that had initiated a foreclosure action. By the time the Morgans found themselves in court, they were being asked to pay an amount more than double their $2,390 delinquent tax bill.

AARP Legal Counsel for the Elderly, which provides free legal and social work services to D.C. residents who are 60 and older, helped the Morgans negotiate a favorable settlement. In the process, LCE's lawyers discovered that the Morgans hadn't even been receiving D.C.'s property tax reduction for senior citizens, which could have cut their bill in half.

WASHINGTON, D.C.: Bennie Coleman, who has dementia, was evicted after failing to pay a $134 property tax bill.

Ashley Gilbertson/VII

"We were just fortunate we could come up with the money," Barbara Morgan says. "But what about people who can't come up with the funds?"

Joanne Savage, a senior legal aid attorney with LCE who worked on the Morgans' case, says: "We see this too often. Many of our clients end up in over their heads with taxes, because they are not receiving the exemptions they are entitled to."

The Washington Post found numerous older homeowners victimized by tax-lien foreclosures in the nation's capital, including Bennie Coleman, a 76-year-old retired Marine Corps veteran with dementia who was evicted from the $197,000 brick duplex he'd owned for 20 years because he hadn't paid a $134 property tax bill.

But some jurisdictions have shown that it's possible to maintain property tax collections while protecting older or disabled homeowners.

PROVIDENCE, R.I.: Madeline Walker was evicted for failing to pay a sewer bill of $496. New owners have since renovated the property.

Charlie Mahoney/Prime

But some jurisdictions have shown that it's possible to maintain property tax collections while protecting older or disabled homeowners.

Eight years ago, lawmakers in Rhode Island passed the Madeline Walker Act, named for an 81-year-old Providence woman who was evicted from her home just before Christmas because she had unknowingly failed to pay a sewer bill of $496. Investors scooped up the lien, foreclosed on her house and eventually resold it for $125,000.

The law requires cities, towns and other taxing authorities in the state to notify the Rhode Island Housing and Mortgage Finance Corp. of delinquent liens well in advance of tax sales. Rhode Island Housing then works with homeowners to help get tax payments back on track so they can stay in their homes.

Snapshots From the Battle Lines

In Syracuse, N.Y., Calvin James, 61, is renting the two-bedroom bungalow he once owned after it was foreclosed on in December for back taxes. James, a retired bus mechanic, had paid the city $9,877 in back taxes over the previous six months but still had a $936 lien in place from 2011. "I'm not against what the city is trying to do," he says, "but for $936 you're going to throw me out on the street after I've paid more than $9,000?" Kerry Quaglia, the executive director of Home HeadQuarters, a nonprofit serving central and upstate New York, says: "There needs to be some kind of safety net to help people in this type of situation. Keeping senior citizens in place is so less expensive than the alternatives."

Tax-lien landscape and law protection

In response to abuses, other jurisdictions have put protections in place. New York City won't allow tax liens to be sold on homes owned by low-income seniors, people with disabilities and veterans. Some counties in Michigan have done away with tax-lien sales and instead offer struggling homeowners payment plans. Maryland caps legal fees in tax-lien cases at $1,500.

And in D.C., Legal Counsel for the Elderly has been pressing for a new law that would, among other reforms, ban the sale of tax liens under $2,500 on primary residences, cap the legal fees and expenses that can be charged to homeowners at about $2,200 and establish an ombudsman to help distressed homeowners.

It was also through LCE's intervention that the Phillips brothers rescued the home they grew up in. Melvin recalls imagining his neighbors saying, "There's Captain Phillips … did you hear that he lost his house?"

But Phillips was luckier than many Americans. He and his brother have kept their house, and fixed it up. "It looks beautiful now."

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