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Wall Street Quietly Creates a New Way to Profit From Homeowner Distress


Large bank and hedge fund bundle small tax debts into private investments.

Editor's Note: This article by Fred Schulte was originally published on The Center for Public Integrity.

When Florida retiree Gladys Walker fell behind in paying taxes on her modest Pompano Beach home, she had no idea one of America's biggest banks and a major Wall Street hedge fund engaged in frenzied bidding for the right to collect her debt -- all $768.25 of it.

"I just couldn't come up with the money," said Walker, 67, a former hotel worker who makes do on a monthly Social Security check.

Barely more than a year after a taxpayer bailout of major financial institutions, Bank of America (BAC) and the hedge fund, Fortress Investment Group (FIG), spotted a fresh money-making opportunity -- collecting the tax debts of tens of thousands of people like Walker. The bank and hedge fund can add interest charges and fees, and they bundled the debts as securities for investors.

In late May and early June, proxies for the two institutions quietly bought hundreds of millions of dollars in homeowners' property tax debts in Florida by bidding at a series of online auctions held by county tax collectors. They didn't use their names but donned multiple other identities, dominating the auctions and repeatedly bidding on the same parcels -- in the case of Walker's small home, more than 8,000 times.
Then, in September, Bank of America's securities division packaged $301 million worth of the tax liens it and Fortress had acquired into bonds pitched privately to major investors. The anticipated return -- estimated at between 7 to 10% -- is possible because buyers of tax debts can assess a panoply of interest charges and other fees. When the debt goes unpaid long enough, the liens buyer can seize properties through foreclosure.

Because the bonds were sold privately, there's no public record indicating who purchased them, the prices paid, or the anticipated return. Moody Investment Services spokesman Tom Lemmon said the type of offering, known as a tax lien securitization trust, is fairly uncommon. Bank of America, he added, may make additional offerings in future years.

A Bank of America spokesman, while otherwise declining comment, said that the bank and Fortress had not acted together in bidding in the auctions.

Bank of America spokesman William Halldin said by email: "Our bids were made independent of any other organization. Any suggestion that they weren't independent is simply incorrect."

Fortress, which is headed by former Fannie Mae chief Daniel Mudd, had no comment.

The Florida securities deal illustrates how financial institutions, including some beneficiaries of federal bailout dollars, are actively creating new ways to profit from the financial distress of homeowners. Acting as surrogate tax collectors, they can help local governments quickly and efficiently bolster their budgets by tens of millions of dollars and in some cases find new owners for dilapidated property. Miami-Dade County, for instance, took in more than $374 million in June 2009 from the sale of about 60,000 property tax liens.

Yet no one is looking out for property owners who suddenly find themselves in debt to the new Wall Street taxman. The growing $5 billion tax lien market goes largely unwatched and unregulated because rules haven't kept pace with the industry's flourishing growth in economic hard times, the Huffington Post Investigative Fund has found in a review of the industry.

While federal officials have recently tightened regulations to protect consumers from a variety of debt collection tactics, private tax collectors aren't on their radar. Meanwhile, many county tax officials say they simply lack the manpower to police the sales and collection process more closely.

"There's an opportunity for sophisticated investors to come in and make a lot of money until the law is able to catch up. That's the reality of what's been happening," said Robert Lawless, a law professor at the University of Illinois and expert on consumer credit issues.

Government officials often don't even know who their new tax collection partners are. Many buyers of liens hop from state to state participating in fast-paced, online auctions without revealing their connections to Wall Street or registering their operations, even though the process grants them special foreclosure rights. In some instances, tax lien buyers have used drop boxes and empty offices as their addresses.

Officials routinely conduct millions of dollars in tax-sale business with limited liability companies that give little clue to their owners' identities. All that's required to get in is cash -- in recent years a very big pile of it -- and a tax identification number, which a buyer can apply for online.

"The regulations probably have not kept up with the technology as much as they should," said W Dale Summerford, Gadsden County (FL) tax collector. "There's always something new you can't keep up with."

In Florida and other states in previous years, authorities occasionally have alleged other bidders in tax sale auctions may have colluded. In one such scheme in Florida eight years ago, more than a dozen firms paid more than $604,000 to settle civil allegations they fixed bids by acting together to keep interest rates high. Some collectors argue that online auctions, in which thousands of bidders sign on, are less likely to be tainted, however.

Many laws governing tax lien sales were written decades ago in hopes that they would encourage investors whose restoration of delinquent buildings would return them to the tax rolls. But some urban planners and legal experts question whether those laws now make sense, given today's distressed property values and economic hard times. After all, buyers of homes that have greatly declined in value have less incentive to fix them up.

Communities might be worse off. John Pottow, a commercial law expert at the University of Michigan, predicts growth in private sales of tax liens will "result in a lot more foreclosures." County tax collectors traditionally might have been more forgiving of citizens, and willing to work out debt repayment terms rather than see people forced out of their homes. "Banks won't care about that," said Pottow.

Some consumer advocates react more viscerally. They said they were dismayed to hear that institutions such as Bank of America, rescued by taxpayers, have rushed to cash in on homeowners in tax trouble. The bank accepted and later repaid more than $45 billion in taxpayer bailout money.

Even so, "if they are profiting off people in distress, it certainly isn't consistent with what large banks say they do," said John Rao, an attorney with the National Consumer Law Center in Boston.

In Florida, where tax-lien sales are the nation's busiest, several tax collectors said they were unaware until a reporter called that Bank of America and Fortress had snared such a large cache of property liens using corporate aliases, or that the bank and hedge fund later pooled the debts to create a new investment opportunity for Wall Street.

Homeowners like Walker have no idea, either. Rather than risk losing their homes, most debtors eventually pay, along with penalties and interest, to the usual county tax collectors, who then forward the money to investors who own the lien. Walker said she took out a new mortgage to secure a roof over her head.
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