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Wall Street's Sneaky New Way to Make Bank from Struggling Homeowners

Major financial institutions have spotted a sneaky, fresh money-making opportunity: profiting from the debts of distressed homeowners.

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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 (Fla.) 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.

A THRIVING TRADE
While sales data and corporate filings show that banks and hedge funds often capture the lion's share of the market, many other players are being drawn to tax lien investing. The allure includes the potential in some states to charge property owners as much as 18 percent interest and a slew of other fees. Tax lien holders can foreclose in as little as six months in some states, though others give homeowners more time to climb out of debt.

 
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