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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.

By Julie Masis / January 22, 2010

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.

Rebecca Cook/Reuters/File

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Michael Rady worked at the docks for 15 years to pay off the mortgage on his Cleveland home.

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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.

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.

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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