Philadelphia Wants To Crack Down On Tax Delinquents
PHILADELPHIA (CBS) – Philadelphia is actively pursuing a tax lien sale, as a way to recoup some of the nearly half-a-billion dollars it's owed in back taxes and penalties.
But some are urging caution, noting a similar effort 20 years ago, during the Rendell administration, ended badly.
"I'm very concerned about this," says attorney Monty Wilson of Community Legal Services, which helped dozens of homeowners avoid tax lien foreclosure, last time around, and more recently saved the home of an 80-year-old widow who's tax lien was sold to a hedge fund in a pilot lien sale last year. "We have tried that before and it didn't go very well in the end."
The RFP was announced at a City Hall news conference, last month, where Councilman Allen Domb, a real estate investor and the moving force behind the effort, talked about fairness for the 92 percent of property owners who do pay taxes, thus footing the bill for tax delinquents.
"Of the eight percent of the people who don't pay their taxes, forty percent don't live in the city of Philadelphia. And of that amount, 50-60 percent are commercial or investment property owners," he said.
A study prepared by the National Tax Lien Association estimated that $90 million to $120 million could be collected through a sale, plus $30 million more a year than the city's been collecting.
The details of how it would work have not been developed yet. The RFP asked the bidders to propose a method for the sale and compare it with other methods, which makes it hard to evaluate whether it would avoid the problems of the earlier sale.
"It's a concern, raised on the '97 experience," says city controller Alan Butkovitz, though he said there were positive factors this time around, including Domb's expertise in the area. "It's too early to tell."
But the NTLA study used a "securitization" model, which is the one the city used in 1997.
The liens were sold to a trust which issued a bond based on the value of the sale. At that time, the city estimated it could collect $106 million.
Initially, it did well, generating $70 million. But as the 2004 bond payment drew close, revenue had not kept up with expectations and lien holders stepped up collection efforts.
" We went from dealing with maybe one or two people a year coming to our office facing a tax foreclosure," says Wilson, "to 30 people in our waiting room, going 'I got this notice.'"
After that, city council imposed protections for owner-occupied homes, including income-based payment plans and a two-year grace period prior to foreclosure.
Wilson's concern is that, if the liens are sold to a third party, they won't be bound those safeguards.
Domb assures that they will.
"This is not about taking anyone's home," he says. "If you can't pay your taxes come to the city and get in a payment program but for those who decide not to pay us any taxes, we're going to go after them."
Wilson, though, represented a woman who got swept up in one of the two pilot lien sales the city did last year.
The pilot sales were considered very successful, garnering $17 million. Domb notes more than half was collected on the strength of the first notice, before foreclosure was necessary.
But for Wilson's client, it was a nightmare. He tells this story:
The 80-year-old missed one year of payments on the house she's owned for 40 years and owed the city $3,200. Her lien was sold-- apparently as an oversight-- as part of a package purchased by a hedge fund. The hedge fund tried to sell it back to the city but demanded an additional $3,000 in "costs." The city declined and the hedge fund began foreclosure.
"In fairness to the city, they eventually worked out the deal," he says. "But what if it hadn't been there? What if this is done not to one 80-year-old woman but to thousands of people? So the city and the mayor need to ask themselves, 'What are we going to do when, not if, but when the homeowners start to arrive who are now facing collection from private tax lien collectors?'"
