Tuesday, August 18, 2009

Tax Lien Foreclosures

The New York Times reports today that foreclosures are rising in some parts of the country, not because of homeowners falling behind on their mortgages, but because they have failed to pay their real estate taxes. This situation is somewhat foreign to us here in Massachusetts where the philosophy and the practice by municipalities is to encumber the property with a lien and then to wait until the present owner sells or refinances and brings the taxes current. In other parts of the country, however, governmental entities (usually towns or counties) routinely sell tax liens to private investors who charge interest of up to 18% and aggressively foreclose on homeowners who are in arrears. These investors are quite sophisticated (“you don’t get 18% return on a CD!”) and have their own organization - the National Tax Lien Association - complete with a sophisticated website.

The governmental entities find the practice of selling tax liens attractive because it results in a rapid infusion of cash into the treasury. But this practice also results in more foreclosed and vacant homes which causes further deterioration of the neighborhood. It would seem that a better approach would be to work with the homeowners to find ways to make the taxes current.

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