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The New Tax Man: Big Banks And Hedge Funds

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You need to read the whole article online. It's too long to post in full.

http://www.huffingtonpost.com/2010/10/18/the-new-tax-man-big-banks_n_766169.html

By Fred Schulte and Ben Protess

Huffington Post Investigative Fund

Interactive StoryPowered by StoryRiver Media

Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.

The Wall Street investors, which include Bank of America and JPMorgan Chase & Co., have purchased from local governments the right to collect delinquent taxes on several hundred thousand properties, many in distressed housing markets, the Huffington Post Investigative Fund has found.

In many cases, the banks and hedge funds created new companies to do their bidding. They gave the companies obscure, even whimsical names and used post office boxes as their addresses, masking Wall Street's dominant new role as a surrogate tax collector.

In exchange for paying overdue real estate taxes, the investors gain legal powers from local governments to collect the debt and levy fees. At first, property owners may owe little more than a few hundred dollars, only to find their bills soaring into the thousands. In some jurisdictions, the new Wall Street tax collectors also chase debtors over other small bills, such as for water, sewer and sidewalk repair.

Some states allow the investors to tack on as much as 18 percent interest and a passel of legal fees and other charges. When property owners fail to make full payment, the investors can sue to foreclose - in some states within as little as six months.

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This is a bit more diabolical that it appears on the surface.

You see, before a foreclosed property can be sold, it needs a clean title. In order to clear the title, the lender has to pay the outstanding liens (taxes). If they did this outright in their own name, then they have to eat it as a cost.

If they start buying the tax liens while the property is distressed but not yet foreclosed, then the liens are still in the consumer's name. And they will be able to go after the consumer after the foreclosure to recover the costs needed to clear the title...and even collect statutory interest in the process.

NASTY.

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This is nothing new. In many states, the local governments are allows to sell tax lien certificates to investors on property where the taxes are in default. IA, FL, and WY are 3 states that do that off the top of my head. The only difference now is that Wall Street has decided to get involved but it is still perfectly legal. For more reading, I think "The 16% Solution" could get you started in understanding the process and reasoning.

Now, if a mortgage is in default and so are the taxes, the bank has the right to pay the taxes to protect their investment. Whether it is through the purchase of these certificates or through an escrow account, that is the business of the bank. That is because tax liens are on top and hence, a sale of the property for only the taxes owed would wipe out the mortgage.

I really see no issue in this. Has been happening since the 70s as far as I can see.

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Now, if a mortgage is in default and so are the taxes, the bank has the right to pay the taxes to protect their investment. Whether it is through the purchase of these certificates or through an escrow account, that is the business of the bank. That is because tax liens are on top and hence, a sale of the property for only the taxes owed would wipe out the mortgage.

I really see no issue in this. Has been happening since the 70s as far as I can see.

Where the problem lies, as I read this, is that banks are now buying the tax liens before the foreclosure is completed...so they can pursue the tax lien debt against the debtor even after they have reposessed and disposed of the property. Essentially this allows the lender/servicer to get around, at least in part, any restriction a State may have against going after deficiency balances and, possibly, even bankruptcy discharges since most taxes are not dischargeable.

If they buy the tax liens after the foreclosure is completed, as was prior practice to protect the interest in the property, then that would not be something they could pursue the debtor over since the tax liens were obtained after the title was transferred out of the prior owner's name.

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