The New Tax Man: Big Banks And Hedge Funds
First Posted: 10-18-10 08:28 AM | Updated: 10-18-10 09:40 AM
By Fred Schulte and Ben Protess
Huffington Post Investigative Fund
Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.
The Wall Street investors, which include Bank of America and JPMorgan Chase & Co., have purchased from local governments the right to collect delinquent taxes on several hundred thousand properties, many in distressed housing markets, the Huffington Post Investigative Fund has found.
In many cases, the banks and hedge funds created new companies to do their bidding. They gave the companies obscure, even whimsical names and used post office boxes as their addresses, masking Wall Street's dominant new role as a surrogate tax collector.
In exchange for paying overdue real estate taxes, the investors gain legal powers from local governments to collect the debt and levy fees. At first, property owners may owe little more than a few hundred dollars, only to find their bills soaring into the thousands. In some jurisdictions, the new Wall Street tax collectors also chase debtors over other small bills, such as for water, sewer and sidewalk repair.
Some states allow the investors to tack on as much as 18 percent interest and a passel of legal fees and other charges. When property owners fail to make full payment, the investors can sue to foreclose - in some states within as little as six months.
In June, Bank of America snatched up liens on properties in Florida owned by low-income residents and nonprofit public interest groups, including a Salvation Army shelter, a preschool and a wildlife rescue group involved in the Gulf of Mexico oil spill cleanup, the Investigative Fund found in its examination. Bank of America also bought liens on properties of the wealthy, including a professional basketball star with the Los Angeles Lakers, Lamar Odom.
Some observers of the financial services industry said they were surprised to learn that banks, some of which received billions of dollars in taxpayer-funded bailouts in recent years, were rushing to profit from homeowners having trouble paying their tax bills.
"This is not how I'd like to be making my money," said James Cox, a Duke University School of Law professor who specializes in corporate and securities law. "I would find it personally distasteful to foreclose or press a claim against individuals, many of whom have lost their jobs and are in tight economic straits."
Five big banks involved in the industry, known as tax lien investing, collected a total of more than $106 billion in bailout money through the government's Troubled Asset Relief Program, known as TARP.
Over the last year, Bank of America, which received $45 billion in these taxpayer funds in 2008 and 2009, has bought liens on properties in scores of municipalities in at least a dozen states. Bank of America repaid the government in 2009.
Still, noted Cox: "There's no bailout for people struggling to pay their taxes."
Years ago, the big banks left the buying of tax liens largely to local real estate specialists and small-time investors. These days, banks and hedge funds, stung by the failure of many speculative investments, see tax liens as a relatively safe option that can yield returns of around 7 percent.
Some banks also are packaging tax liens as securities - in a similar way to how unpaid home loans are securitized - and selling them to investors.
If mortgage holders fail to pay overdue taxes, an investor could waltz off with a home worth hundreds of thousands of dollars for the price of paying the owner's tax bill. Most homeowners eventually pay their debt.
Put it all together and it is makes for a solid investment, said Lloyd McClendon, an owner of realauction.com in Plantation, Fla., one of several companies that conducts online auctions in Florida and other states.
"There's an awful lot of new, big money in the sales this year," said James Powell, a longtime Florida investor who remembers a time when local investors flocked to live auctions at courthouses. Typically, they would bid for liens by holding up paddles. Powell is still one of the few in the liens business who makes purchases using his own name.
But the smaller investors, noted Powell, have been overtaken by well-heeled banks and funds that now bid online, and in volume.
Banks and hedge funds usually buy the liens through online auctions that permit them to bid in bulk, and they can use any name they want.
The giant Bank of America, for instance, has bid in Florida tax lien sales using colorful names such as Bennu, LLC, named after a mythical bird said to be the soul of the ancient Egyptian sun god. It also has bid as Osprey, LLC, and Ecru, LLC, named after the French word for a pale brown color.
Fortress Investment Group, a hedge fund run by former Fannie Mae chief Daniel Mudd, has bought tax liens under 17 different corporate names. Some evoke tranquil, bucolic settings, such as Pleasant Valley Capital, LLC and Travis Farm Investments, LLC.
Representatives of several prominent banks and hedge funds contacted by the Investigative Fund, from JPMorgan to Bank of America and Fortress Investment Group, declined to comment for this article.
Some banks purchased liens directly; others financed investment groups that did so. For example, Wells Fargo lends to a liens buyer. Deutsche Bank invests through a subsidiary. And BankAtlantic, based in Fort Lauderdale, is a longtime tax certificate investor in several states, buying liens under the names of several subsidiaries.
Though several mortgage lenders, including JPMorgan, recently suspended foreclosures amid concerns that some may have been done improperly, the slowdown is not expected to apply to foreclosures stemming from unpaid taxes.
The Investigative Fund identified major tax lien purchasers, many for the first time, through a computer-assisted analysis of more than 300,000 liens, municipal, corporate and court filings and other documents obtained from local government officials in four states and the District of Columbia. The Investigative Fund then traced these purchasers to the major financial institutions that oversaw them, invested in them, or lent money to their operations....
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