Wall Street Finds Lucrative Market In Tax Liens When property taxes go unpaid, the debt gets sold -- sometimes resulting in a bidding frenzy between America's largest banks and hedge funds. Investigative reporter Fred Schulte says unpaid tax bills as low as $300 have resulted in homeowners losing their properties.
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Wall Street Finds Lucrative Market In Tax Liens

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Wall Street Finds Lucrative Market In Tax Liens

Wall Street Finds Lucrative Market In Tax Liens

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This is FRESH AIR. I'm Terry Gross.

(Soundbite of advertisement)

(Soundbite of music)

Unidentified Announcer: The following is a paid advertisement for John Beck's(ph) newly updated free and clear real estate system.

The average home in America now costs more than $219,000, but you're about to learn how you can start buying homes like these for just a few hundred dollars and own them free and clear, with no additional monthly payments

GROSS: So that's an infomercial promoting a system to teach you, among other things, how to buy tax liens, the property taxes people owe and have been unable to pay.

The idea is if a person continues to be unable to pay, and the house is foreclosed on, you may be able to take over the home, depending on what the local law is.

Buying tax liens has actually become a big business for some banks and hedge funds, who can make short-term profits by adding fees and boosting interest rates on homeowners with the possibility, in some cases, of eventually taking over the homes.

My guest, Fred Schulte, has been investigating how financial institutions, including some beneficiaries of bailout dollars, are creating new ways to profit from the financial distress of homeowners.

Schulte is a reporter with the Huffington Post Investigative Fund. He formerly worked for the Baltimore Sun and the South Florida Sun Sentinel. He's the recipient of a George Polk Award and three Gerald Loeb Awards.

Okay, so let's get back to that infomercial and how to profit from tax liens and tax deeds.

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(Soundbite of music)

Ms. MICHELLE BOUDREAUX: Hi, I'm Michelle Boudreaux(ph). The homes you just saw and the many examples you'll see throughout this program were all purchased for literally pennies on the dollar using the amazing secrets found in John Beck's free and clear real estate system.

The secrets behind John's system are strategies that most people don't even know exist. You need strategies that take full advantage of today's real estate market to purchase homes all across the country for as little as a few hundred dollars.

And John's strategies don't just apply to homes. They apply to all kinds of real estate...

GROSS: Well, Fred Schulte, welcome to FRESH AIR. So we just heard this infomercial for John Beck "Amazing Profits." Are there a lot of people who are offering classes or courses in how to invest in tax liens and take over properties cheaply?

Mr. FRED SCHULTE (Reporter, Huffington Post Investigative Fund): There are. There are many of these groups on the Internet. You can just Google them, tax lien, and tons of them come up, and they all are selling some sort of course or way to make a lot of money on tax liens.

GROSS: So what's the premise? How is an individual supposed to make money by buying tax liens?

Mr. SCHULTE: Well, a tax lien is an unpaid property tax or utility bill or something of that order. And in about 29 states, these liens are sold, usually on an annual basis, to investors. And you can, in fact, buy the right to collect that debt.

And in some states, that can mean that you can get 18, or even more, 18 percent interest on that debt. You can also attach a lot of legal fees and other charges onto the debt. So that's how you make money on it.

GROSS: So just so I understand this, so if somebody can't pay their taxes on their property or their home and the county has given up trying to collect the taxes from this person, they can sell the debt, they can sell the tax lien to an individual investor or to a bank, which we'll get into later. And then the person who's taken over the tax lien can raise the interest, add fees and start making money. So do I have that right?

Mr. SCHULTE: That's right.

GROSS: Okay, so the ad that we just heard, for John Beck "Amazing Profits," how to invest in tax liens, he's being sued, or his company's being sued, by the Federal Trade Commission. What for?

Mr. SCHULTE: Well, the Federal Trade Commission is alleging that Beck's course is misrepresenting the benefits of tax lien investing. And one of the premises is that for pennies on the dollar, you can buy these properties. And the position of the FTC is that you don't, in fact, buy properties for pennies on the dollar.

And some of this gets to the whole issue of the lien, purchasing the right to collect a debt, rather than the home. And some people don't quite understand the difference, and this has some tax collectors a little concerned because people think that they - may think that they're actually buying the home for the amount of the taxes. That's not what you're buying. What you're buying is the right to collect the debt.

Now, when you collect the debt, you can add on all these fees, and you can get an interest rate that is set by law in the various states. So it can be a very profitable endeavor, but it's not quite the same as buying a house for, like, a $600 tax debt - to buy a $200,000 house for $600 isn't quite that simple.

GROSS: Now what you've been writing about isn't really the individual investor, the kind of person that Beck is addressing himself to, as much as, like, banks and hedge funds. That's what you've been focusing on. Why are banks and hedge funds starting to buy up massive amounts of tax liens?

Mr. SCHULTE: Well because there's a lot of money in it. And we have been looking more from the position of the homeowner and the person who actually has to pay all of these fees and things, not so much at the people that are investing, hoping to make money off of the woes of the homeowner.

But banks and hedge funds have, in fact, been in the tax lien investing business for some years, but with the advent of the online auctions that are being held in a number of states, most notably in Florida, there's a great opportunity for people who have access to very cheap money, which would be a bank, to come in and buy these debts.

And you're talking about, in Florida, hundreds of millions of dollars invested very, very quickly. So the banks have the opportunity to - I mean, they have the access to the money. They can buy these things quickly. Most people will redeem the debt fairly quickly at a decent interest rate, and so that's how the bank makes money.

GROSS: So most people, once the bank takes over the tax lien, pay back the debt, but...

Mr. SCHULTE: They do, they do, because, you know, a lot of times, you're talking about a debt that's $700 in property taxes or $800, and your home is worth $60,000 or $100,000, and obviously the economics are such that if you're the homeowner, you're going to try to come up with the money in order to keep your home.

So the bank knows that and expects a quick redemption. That's one strategy in buying tax liens.

There's another group of investors, and that's not so much the banks and the hedge funds, that are actually looking to get the property. And that can be a lengthy process, but you can, in fact, sue to obtain the property if your demands aren't met for the payment.

GROSS: So who are those investors that are looking to take over the property?

Mr. SCHULTE: Well, some of them are people that work in urban areas, and that are rehabbers and that sort of thing, that look for - I mean, that was one of the original ideas behind selling these tax liens is you have a piece of property, let's say in an inner-city, and it's not generating any taxes because the owners have abandoned it or they've walked away from it.

But the city, then, will say, well, you know, if we could sell this to a new investor, and they fix it up and resell it to somebody, then that property would be added to the tax rolls. That would be a good thing for the city. So there are people that are going out, looking for properties like this where the taxes are delinquent.

I think where we saw some problems was if you didn't have a mortgage on the home, let's say you'd owned the home for - and you've lived in it all your life or, you know, it was your parents' home and the kids are living there, and the kids are adults, and so there's no mortgage on the property, but you fall behind in taxes, then there's no mortgage company that's going to come forward to try to pay the taxes on your behalf in order to save the property. And in that kind of a situation, you're really vulnerable to losing the property over taxes.

We had a situation in Baltimore where a woman didn't pay a $300 water bill. Her family had owned the home for almost 30 years. There was no mortgage on the property. But she didn't pay this $300 water bill.

Well, over time, as she didn't pay it and didn't pay it, it escalated, and the legal fees kicked in, and then pretty soon, she owed thousands of dollars, and she couldn't pay it. And so she ended up losing the house.

GROSS: Well, whose legal fees kicked in?

Mr. SCHULTE: The legal fees from the - are because you can't just force somebody out of their house. You have to file a lawsuit against them to foreclose - they call it to foreclose on their right to redeem the debt. It gets a little technical and a little complicated, but essentially you sue to take the property from them.

And as that goes through the courts, the legal fees add up, there's title search fees, there's all these fees, and then you end up with a $300, $400 debt morphing into $4,000 or $5,000. And that puts - that sinks some of these property owners, and they end up losing the house.

GROSS: So in other words, those expenses are charged to the homeowner.

Mr. SCHULTE: Oh, they are absolutely, and that's...

GROSS: All the legal expenses that it takes to drive the homeowner out of their home are charged to the homeowner.

Mr. SCHULTE: Yeah, yeah they are.

GROSS: So let's talk a little bit about how banks are investing more than ever in tax liens. What's in it for the banks? And why are they investing more now than before?

Mr. SCHULTE: Well, for the Bank of America, I mean, the Bank of America came down into Florida and spent hundreds of millions of dollars buying these up. And that was in late May and early June, when the various counties around the state held these mostly online tax sale auctions.

They purchased the liens along with a Wall Street hedge fund, the Fortress Investment Group, and then they later put them into a securities package and resold them as a Wall Street bond deal.

GROSS: So if a bank invests in a tax lien, at what point are they allowed to take over the property if a homeowner hasn't paid the tax debt?

Mr. SCHULTE: That depends on the state. In some states, as little as six months after the sale. They can file a lawsuit six months after the purchase of the lien and attempt to take your house from you. In other states, it's longer and in, like, Florida, it's two years.

GROSS: So banks are now investing in these tax liens through Internet sales because the tax liens are sold in auctions on the Internet, as opposed to the way they used to be, which is auctions in a room where people would show up. So how has that changed the whole nature of investing in tax liens?

Mr. SCHULTE: Well, it's put the whole process on steroids. And when you have these banks doing this over the Internet, they're creating all kinds of corporate alter-egos and strange names and limited liability companies that are bidding on these things.

And, you know, like I said, they have access to a large amount of money, and they come in, and they really rev up the system. I mean, it used to be that there were just a few people sitting around in a room holding up paddles at these auctions. Now you have a situation where anybody in the world can be bidding anonymously, and millions of millions of dollars is changing hands here in a matter of minutes. And there's very little known about who the people are who are buying them.

But for the banks, they're able to dominate the process because they have a ready supply of money.

GROSS: Why would the banks need to come up with alter-ego names, with names of other companies just to invest online in these tax liens? Why can't they just invest in their own name?

Mr. SCHULTE: Well, we've asked them that. We never really got a satisfactory answer to that question. But, I mean, some people think that this is a business that they would rather not talk about. I mean, they want to get the money from it, but they really don't want to be publicly identified with a business that some people say is, you know, benefitting from the economic misfortune of others.

I mean, one of the things that we looked at also was that some of the banks doing this had been recipients of bailout money from the taxpayers. And so some critics were telling us, critics of this whole process, were saying, well, you know, these banks, when they were in trouble, the taxpayers bailed them out. And now here they are running down to Florida or one of these other distressed real estate markets and buying up liens on people that can't pay their taxes.

And, you know, it can be devastating to lose your home. I think if you're the person taking that home, I don't think it's something necessarily that you want everyone to know you're doing.

GROSS: So if banks are using aliases in some instances, and the counties don't really know who they're selling the liens to, should the county care? Does it matter?

Mr. SCHULTE: Well, they haven't really thought about it, I think traditionally. And I think some of them, in fact, are starting to care because any time you're selling millions and millions of dollars worth of liens and you have no idea who you're selling them to, it's just some, you know, blankety-blank LLC, and you have no idea who those people are, you have no idea who the funding source is for these people, you have no idea whether they're U.S. companies or not.

We had - in the recent Florida auctions, there were some from the islands, you know, the Cayman Islands, that sort of thing. And so some of the tax collectors are, in fact, getting a little concerned that they don't really know who is buying up these certificates. They call them tax lien certificates.

GROSS: My guest is Fred Schulte, a reporter with the Huffington Post Investigative Fund. We'll talk more after a break. This is FRESH AIR.

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GROSS: My guest is Fred Schulte. He's written a series of investigative articles about banks and hedge funds investing in tax liens and profiting from the distress of homeowners.

So who are the biggest players among the banks and the hedge funds investing in the tax liens now?

Mr. SCHULTE: Well, the Bank of America, JP Morgan, the Fortress hedge fund group. Those are three of the real big players.

GROSS: Now, the Fortress Investment Group, which is a hedge fund, is headed by Daniel Mudd, who used to be the head of Fannie Mae.

Mr. SCHULTE: That's correct.

GROSS: So what is interesting about that?

Mr. SCHULTE: Well, I mean, he's - it's a big fund. I mean, they manage billions of dollars, but I mean, I think that some critics have wondered why somebody that was involved on this, the government end of these mortgages, is now on the other end, taking advantage of people who can't pay their mortgages and potentially taking their property.

GROSS: You've been investigating homeowners whose tax liens have been sold. What are you learning about what homeowners are up against when their tax liens are sold to banks or hedge funds?

Mr. SCHULTE: Well, what they tend to be up against is a lot of fees and a very high interest rate. I think one of the things that homeowners need to understand is that if you're having trouble financially, you've lost your job, you must pay your property taxes because if you don't, you can be thrown into this web of fees and uncertainty. And you can, in fact, be sued and have your property taken from you for a debt that's only a few hundred dollars.

So I think when it's your house, you really need to pay that first and foremost.

GROSS: It's easy to see why cities and counties would want to sell the tax liens because if the homeowner isn't paying the tax, it means that the city or county isn't getting that money. And the more people who can't afford to pay their taxes, which is the kind of situation we're in now, the less money the city or the county makes. And this is especially bad at a time like we're in now, when cities and counties are really hurting for money.

So in the short term, it makes sense that they'd want to sell these tax liens and get the money that they're owed. But in the long term, are there questions down the line that you think might come up that might make things not so great for cities and counties whove sold a lot of tax liens?

Mr. SCHULTE: Well, there are. I mean, obviously the city or the county gets immediate cash by doing this. In Dade County, Miami-Dade County in Florida, in 2009, over $300 million came in the day of the tax sale. So that was all money that they would have had to go out and collect some other way. So obviously, there's a quick infusion of cash.

Down the road, what does this mean? Well, some people think that it increases foreclosures. In Cleveland, for example, they decided not to hold a tax sale action this year because the previous ones had resulted in a lot of foreclosures.

And they figured, well, wait a minute. This is making the foreclosure rate even worse. So that can be one of the problems that you get with the sale of these liens. If a lien owner buys a lien on it, and let's say it's an abandoned building, then they don't keep it up and it gets run down. And so neighborhoods can deteriorate.

So some people are thinking, well, you know, it might have been smarter to figure out a way to get those taxes paid on a payment basis or find some other method to try to get the homeowner to pay, rather than just selling it off and then not knowing who's going to buy it and what's going to happen.

GROSS: To do this story, you've probably spent a whole lot of time with public records, going through them?

Mr. SCHULTE: Yeah, yeah. Well, and lawsuits. I mean, I think that's how you do this kind of a story. I mean, data analysis was critical to this and also a lot of time in the courthouse because these cases always end up in court. And in court, people can't be anonymous, they have to be a real person.

As far as the online tax-sale auctions, all that data is available online. And so you can download it, and you do that, and you can see the patterns and who's buying them.

And then what we had to do was figure out who, in fact, they were. We kept seeing these, you know, names, like you'd see, like, Benu LLC(ph) and Ecru LLC and all these different LLCs. And so it's a whole other research job to try to figure out who, in fact, Benu and Ecru are. And that took a long time, lots of phone calls, lots of requests for public records.

GROSS: Who were they?

Mr. SCHULTE: The Bank of America.

GROSS: And you found that out by how?

Mr. SCHULTE: By - well, we traced it to a - or I traced it to a post office box in Atlanta, which is the official address that they use for conduct of business. And I called and made information requests with tax collectors all over Florida and eventually got enough information in to see that, in fact, the contact person for these companies was - I was able to link that person to Bank of America.

GROSS: You've invested a lot of time into researching this story on the sale of tax liens and how that's affecting homeowners who can't afford to pay their city or county taxes. This is obviously a really important story to you. What makes it that important to you?

Mr. SCHULTE: Well, I think that the issue is fairness. I mean, and everybody would like to have a home and own a home, and some people that have owned a home for generations want to keep it. And I think that the issue is that how do you balance society's needs to collect taxes with the rights of the property owner not to be just tossed out?

And the other issue is, of course, does the penalty fit the crime? I mean, I think that's one of the big things with this, not that this is a crime, but a debt. If you have a debt of a few hundred dollars, should that debt be able to morph into thousands and thousands of dollars, which de facto sinks you and causes you to be chucked out of your house, particularly a house that you've owned free and clear for years?

And I think that's the tension in the story for us. And so it is kind of like, well, we know that the county or the city has to collect its money, but does it have to do it in such a way as that it imposes thousands of dollars in these fees and really damages people? And then if that happens, who walks away with that money? And is it right, is it fair that some bank walks away with thousands of dollars here over your inability to pay your taxes and/or walks away with your house?

GROSS: Fred Schulte, thank you so much for talking with us.

Mr. SCHULTE: My pleasure.

GROSS: Fred Schulte's of articles about how banks are profiting from homeowners' distress are published by the Huffington Post Investigative Fund.

I'm Terry Gross, and this is FRESH AIR.

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