When Cities Partner With Predatory Financial Ghouls
When people fall behind on property taxes, this shouldn’t become an opportunity for private profiteering. But that’s precisely what happens in tax lien sales, where city governments collude with financial predators to extract wealth from struggling people.
Tax lien sales perversely turn the civic project of collecting funds for the public sector into a bonanza for predators in the private sector. (Jim Franco / Albany Times Union via Getty Images)
“Taxes,” the Supreme Court justice Oliver Wendell Holmes once said, “are what we pay for civilized society.” Ensuring that citizens pay their taxes is thus a matter of public priority. But when people fall behind on property taxes, this shouldn’t become an opportunity for private profiteering — as is the case in New York City and thousands of other cities and counties across the United States today.
On May 20, New York City will place the fate of tens of thousands of properties — including over ten thousand one- to three-family homes with outstanding property taxes, water and sewer bills, and building code violations — in the hands of Wall Street investors and private debt collectors. New York is one of twenty-nine states in the US that permit or require local governments to sell delinquent property taxes, and the right to collect on that debt (known as a lien), to private bidders. Tax lien sales like these perversely turn the civic project of collecting funds for the public sector into a bonanza for predators in the private sector.
Beginning in the 1990s, the financial industry devised new mechanisms for commodifying cities’ debt, brokering bulk sales and securitization deals with scores of counties and cities that gave the lion’s share of proceeds to private investors and placed debt servicers in charge of collecting public debts. Local tax lien sales today power a multibillion-dollar industry that wields considerable influence in state legislatures and among the county and municipal governments it does business with.
In New York City, a special trust created by the city annually purchases a pool of liens at a discounted amount, then markets that debt to investors in the form of collateralized securities. The profits from these investments come from the discounted price of the liens themselves, the late charges, interest, and fees charged to the delinquent taxpayer, and the foreclosure sales of the properties that generally follow.
Proponents and industry spokesmen pitch tax lien sales as a creative form of public financing and deterrence for would-be tax scofflaws. But in practice, tax lien sales have principally served as instruments for extracting wealth and property from low-income, elderly, and black and Latino people (often in combination) and for fueling the kinds of rent-intensifying development found in gentrifying cities. Rather than address the underlying causes of tax delinquency in urban housing markets, this policy turns it into an opportunity for the rich to get richer through predation and displacement.
Vultures Circling Overhead
Tax liens generate profit in one of two ways: by being attached to a property whose owner wants to retain it and would pay any price to do so, or if the property’s market value far exceeds its debts.
Smart tax buyers thus avoid buying liens on properties with heavy debts and little value. Instead they set their sights on properties whose debts were small relative to their value, or that held great value to their owner.
As one attorney whom I interviewed for my book The Black Tax: 150 Years of Theft, Exploitation, and Dispossession in America described it to me, when it comes to residential properties, tax buyers “want live bodies inside.” That means that, ideally, the tax delinquent property is someone’s home, providing all the leverage a tax lien investor needs to extract payments. And if the delinquent taxpayer proves unable to, a low lien-to-value ratio means that the property will, upon foreclosure, net a handsome return on the open market.
The longer it takes a delinquent taxpayer to pay off their debts, the more profitable a tax lien becomes: the more interest and fees they have to pay, and the more likely they will simply be unable to pay. In Illinois, the interest rate doubles every six months a tax lien debt remains outstanding. In New York City, the default interest charge on delinquent taxes is 18 percent compounded daily, on top of the trust’s servicer fees and charges.
Tax lien sales also spawn other predatory practices. Knowing their indebted status, speculators harass owners on the tax lien sale list, offering cash for their homes at well below market value. Others target homeowners on the tax lien sale list for deed theft.
Low-income, elderly, and black and brown homeowners are the most vulnerable to falling into tax delinquency. These groups are more likely to own their homes outright or have financed their purchase with an unconventional mortgage or installment contract. In either case, they — not their mortgage lender through an escrow account — are responsible for saving for and paying their real property taxes on time. Elderly homeowners, in particular, are more likely to live on fixed incomes or experience financial hardships from unexpected medical or household emergencies.
Compounding matters, property taxes are functionally regressive in over 97.7 percent of all US counties, meaning that lower-value properties are assessed at a higher percentage of their market value than higher-value properties. Residents of predominantly black and Latino neighborhoods, meanwhile, are overtaxed regardless of value — by the latest estimate, an average of 10–13 percent higher than properties in predominantly white areas.
Once they fall into tax delinquency, these groups also find it harder to climb out. With fewer resources to draw on, black and Latino, elderly, and low-income homeowners tend to take longer to pay off tax lien debts and are more susceptible to losing their homes to tax foreclosure. Because of this, low-income and racial minority neighborhoods have not only historically supplied a greater volume for tax lien investors, but they also generate higher profits. In 1970s Chicago, tax liens purchased on properties in predominantly white neighborhoods netted, on average, a 23 percent return on investment. By contrast, tax liens on properties in predominantly black areas generated a nearly 38 percent return on investment.
Tax Ghouls
While tax lien sales exemplify the privatized, market-oriented governance associated with neoliberalism, most state statutes permitting localities to auction off their tax debts to private parties date back to the early to mid-nineteenth century. And for much of that time, they have been controversial.
One early twentieth-century former tax lien investor compared the practice to “picking pennies off a dead man’s eyes.” Another got out of the business because, as he put it, “I began to have a problem looking at my face in the mirror every morning.” Muckraking journalists referred to the men who flocked to these auctions as “tax ghouls.” Calling for their abolishment, the editors of the Milwaukee Journal in 1933 asked, “Is there anything constructive about handing [public debts] over to private individuals who hope to collect heavy interest charges or seize the properties of home owners or business men?”
In the decades following World War II, growing numbers of counties and municipalities concluded that there was not. Following a series of scandals, New York City stopped holding tax lien sales in the 1950s and instead placed government officials in charge of tax collection and enforcement. In 1971, Suffolk County followed suit, replacing its tax lien sale with a government-run system. Throughout that decade, several high-profile cases of struggling black families and elderly people losing their homes over small tax debts amplified calls to abolish a practice that critics described as cruel, barbaric, odious, and unconscionable.
But during these same years, cities saw their revenue needs grow while their fiscal capacities shrank. The steady exodus of people and businesses due to suburbanization and deindustrialization decimated cities’ tax bases. By the mid-1970s, New York City teetered on the edge of insolvency.
The fiscal crises of the 1970s were followed by federal funding cuts and state-imposed tax limits during the 1980s. The Reagan administration eliminated revenue-sharing programs and slashed federal funding for cities. At the same time, numerous states placed statutory limits on local tax rates and enacted preemptive bans on local income taxes. To make matters worse, budget cuts forced cities to lay off staff and scale back or end programs that assisted homeowners struggling to pay their taxes.
Homeowners’ struggles and local governments’ desperation became Wall Street’s next lucrative venture. Through the alchemy of securitization, investment banks promised to turn cities’ unpaid tax obligations into cash. Rather than an expensive, tedious public sale with uncertain returns, local governments could partner with an investment bank to securitize a package of tax liens and sell them as bonds, with a private debt-servicing company rather than public officials in charge of pursuing delinquent tax payments. In 1994, Jersey City, New Jersey, took the plunge, selling $31 million in securitized bonds backed by $44 million in uncollected taxes. Two years later, New York City under Mayor Rudy Giuliani created a special trust that annually purchased and securitized a preselected package of tax liens from the city.
To make these bonds attractive to investors, though, cities had to make tax delinquency costlier for debtors. Cities raised the interest rates and increased the number of fees that debt collectors could charge. The firm Plymouth Park (founded by former New Jersey governor Jim Florio) slapped a $1,500 up-front fee onto every tax lien included in its securitized package, in addition to the standard fees and statutory interest it already charged. The trust that managed New York City’s tax lien securities applied a 5 percent surcharge on each tax lien, piled on administrative and advertising fees, and compounded interest daily. A 2016 analysis by NYC’s Coalition for Affordable Homes found that interest and fees increased the median debt on a lien by 65 percent. After eighteen months, the total cost of redemption was often double the amount of the original debt.
While financialization tapped new veins of profit in the tax lien market, the source remained the same: poorer, often elderly, and disproportionately black and Latino neighborhoods. A 2022 report from the Coalition for Affordable Homes found that residents of nonwhite-majority areas were 1.48 times more likely to have a lien sold on their place of residence, residents of majority-senior areas 1.54 times more likely, and residents of lower-income regions 1.59 times more likely. Fifty-seven percent of all of the tax liens sold at the city’s 2021 tax lien sale (the last one the city held) were in majority-nonwhite neighborhoods, and 19 percent were sold in census tracts where over 40 percent of all residents were seniors. Of the tax liens New York City is poised to sell later this month, a high percentage are on properties in historically working-class black and brown neighborhoods in Brooklyn. If past sales are any indication, high rates of displacement of these neighborhoods’ most vulnerable residents will follow.
Whether sold individually or packaged as securities, tax lien sales exacerbate all of the inequitable features of housing markets today. In gentrifying neighborhoods, tax lien sales force properties onto the market and into the hands of rent-intensifying developers, driving up housing costs, displacing existing residents, and widening urban inequality. In Brooklyn, for instance, nearly half of the tax liens sold at the city’s 2011 sale resulted in a change in ownership. In Washington, DC, institutional investors dominate the city’s annual tax sale, buying liens almost exclusively on properties in gentrifying areas, with an eye toward foreclosing and reselling. One recent study found that, following tax sales, these targeted areas experienced a sharp increase in housing prices and equally sharp decrease in the number of properties purchased and owned by minorities.
Government-Sponsored Predators
In 2020, New York City halted its tax lien sale in the midst of the pandemic, and in 2022, the city council declined to reauthorize the securitization program, seemingly spelling its demise.
Yet despite opposing tax lien sales when he ran for mayor in 2021, last fall Eric Adams and the city council reauthorized the program. They also created new programs to protect and assist financially distressed and at-risk homeowners — but like similar measures adopted elsewhere, these programs place the onus on property owners to apply (and reapply each year) to remain eligible. Results thus far give little indication that they will prove effective. The city’s much-touted Easy Exit program for low-income homeowners has thus far received only 168 applications, and of those, fewer than half have been approved.
We shouldn’t need to create a government program to protect citizens from government-sponsored predation in the first place. All manner of enterprises in America today exist solely to exploit others’ mistakes and misfortunes for gain. Our governments should be tasked with rooting them out; they shouldn’t be in the business of creating and supporting one such industry, much less depending on it for revenue. But that’s exactly what New York City and other cities and counties across the country do when they market their unpaid tax obligations in this manner.
Whatever immediate benefits cities gain from selling their debts for cash are more than offset by the devastating costs these sales inflict on their residents. Replacing this wildly unjust, predatory, and counterproductive system of tax collection with one that serves the public’s interest is long overdue.