State & Local Reforms Urgently Needed for Tax Lien Laws

The National Consumer Law Center has a new report: The Other Foreclosure Crisis: Property Tax Lien Sales by NCLC attorney John Rao.

Advocates are urged to work with state and local governments to reform property tax lien laws to safeguard homeowners while still bringing in needed tax revenue to address this growing problem.

A tax lien sale may be started over nonpayment of a tax bill of only a few hundred dollars. A $200,000 home may be sold at a tax lien sale for $1,200 and then quickly resold for a huge profit. Homeowners may lose not only a homestead but also hundreds of thousands of dollars in equity, representing their sole savings and security for retirement.

• Populations most at risk: Low-income older and disabled homeowners who have fallen into default because they are incapable of managing their financial affairs, such as individuals suffering from Alzheimer's, dementia, or other cognitive disorders.
•  Most states and local governments need improvement but those known to be at high risk: States: Florida, Illinois, Iowa, Mississippi, New Jersey, New York, and Texas
  Cities: Baltimore, MD; Louisville, KY; and Washington, DC

Key State Recommendations

1. Make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions. The interest rate should seek to discourage speculation and promote redemption.
2. Place reasonable limitations on additional fees and costs. States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys' fees, and other fees.
3. Establish a tax sale procedure, with court supervision. States should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner.

Key Local Recommendations

1. Implement redemption payment programs. Local tax offices should collect redemption payments to eliminate the possibility that an unscrupulous purchaser may thwart the owner's attempt to redeem. The local tax office should accept partial and installment payments.
2. Adequate notice should be given at every stage of the tax sale process. Notifications should be used as a tool to avoid loss of homeownership Comprehensive notices should use plain language; include information about tax exemptions, abatements, and repayment plans; and note the consequences of each stage of the tax sale process.
3. Provide detailed notice of redemption rights. The notice should give all of the essential details on how the redemption right can be exercised, including the name and address to which the homeowner can remit payment; itemized costs; and the deadline for the redemption payment.

All state and local recommendations may be found in the full report.