WSJ - tax liens triggering foreclosures

A report released this week by the National Consumer Law Center (NCLC), says 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 proxy 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. 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.