Cities, not just banks, are pursuing foreclosures, too

Desperate for revenue, more cities and counties are proceeding with tax foreclosures when residents fall several years behind on their property taxes.

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    An empty home seen in a well kept neighborhood where a house was listed on the auction block during the Wayne County tax foreclosures auction of almost 9,000 properties in Detroit, Michigan, October 22, 2009.
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Michael Rady worked at the docks for 15 years to pay off the mortgage on his Cleveland home.

But when Mr. Rady was injured and could no longer do physical labor, he couldn’t find a job and had to live off savings and credit cards. Soon, he owed Cuyahoga County close to $8,000 in property taxes, and the county treasurer sent him a foreclosure notice: His house would go to auction in February.

Nationwide, many counties and cities faced with declining revenues are turning to tax foreclosures – when a homeowner is evicted due to unpaid taxes rather than an unpaid mortgage. For the most part, local officials see tax foreclosures as a necessary evil. But in some cases, tax foreclosures appear to be spiraling out of control, threatening the health of cities. Cuyahoga County, for instance, has recently reversed course and imposed a moratorium on tax foreclosures for the first time since the Depression.

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In pursuing tax foreclosures, “We’re lowering the prices [of homes] and contributing to wealth destruction,” says Treasurer Jim Rokakis.

It can be a wrenching decision. One Maine town is allowing delinquents to stay in their property penalty-free to avoid throwing people out of their homes. But, in many cases, it is local politics that rules the day: Tax foreclosures are most common in municipalities where treasurers are appointed.

“If you’re elected, are you going to foreclose on people who voted for you?” says Kathleen O’Donnell, a tax-title attorney in Boston.

Historically, tax foreclosures rise when mortgage foreclosures do, says Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies. Typically, delinquent residents pay off back taxes by selling their house, but that can be hard in today’s housing market.

No one currently tracks tax foreclosures nationwide, though a new nonprofit called the Center for Land Reform in Flint, Mich., was started last year for that purpose.

Anecdotal evidence from across the United States suggests that tax foreclosures are rising.

•Tax foreclosures are up in three-quarters of Washington State’s counties, says Bob Lothspeich, president of the Washington State Association of County Treasurers.
•In Michigan’s Ingham County, where Lansing is located, the number of people who face tax foreclosure almost doubled, from 822 in 2008 to a record 1,506 in 2009, says Treasurer Eric Schertzing.

•Shirley, Mass., reinstated tax foreclosures after cuts in state aid forced it to lay off more than half its firefighters and shift town employees to a four-day workweek. The last time Shirley made tax foreclosures was 50 years ago. Now, 130 taxpayers in a town of 7,904 owe more than $1.3 million in back taxes and interest, some going back to the 1950s, says Treasurer Kevin Johnston.

“We’re going broke,” adds Shirley selectman Enrico Cappucci, who supports tax foreclosures.

In most jurisdictions, people have several years between defaulting on their taxes and facing eviction. In Washington State, taxpayers have to be delinquent for three years. In Massachusetts and Michigan, it is approximately two years. The rules vary by state, county, or city.

Millinocket, in central Maine, does not evict anyone. The number of people who lost titles to their homes because they did not pay their taxes doubled or tripled in recent years, says Town Manager Gene Conlogue. But the town did not throw anyone out.

“We have a policy that requires them to pay rent, but we generally waive that,” Mr. Conlogue says. “We’re not trying to add to people’s problems.”

Neither is Mr. Schertzing of Michigan’s Ingham County. But tax foreclosures are necessary, he says. The best he can do is make it gentler than a mortgage foreclosure. “I go to some of these homes, I knock on the doors, and I talk to the families,” he says.

In Ohio’s Cuyahoga County, sheer numbers preclude that approach. The county prosecutor filed 2,000 tax-foreclosure cases in 2009 – a 400 percent increase from five years ago. Tax foreclosures in the county accounted for 13 percent of all foreclosures.

This year, the prosecutor expects to file some 2,400 cases.

But delinquent Cuyahoga County home-owner Rady and 160 other residents set to have their houses auctioned in February have gotten a temporary reprieve. Treasurer Mr. Rokakis instituted a six-month moratorium on tax foreclosures a few days before Christmas. “Adding more foreclosures to the thousands of properties that have already been foreclosed is not helping,” Rokakis says.

The decision made Rady, who lives on Social Security, feel “somewhat relieved.” He has to raise $8,677 in six months. “I don’t know how much I’ll be able to come up with,” he says. “I’m going to try.”

Why It Matters: Cash-strapped cities and counties need to recoup back taxes, but in some places, foreclosing on delinquent residents is making a bad housing market worse. Localities have to walk a fine line between fiscal responsibility and housing-market ruin.

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