Wall Street's Sneaky New Way to Make Bank from Struggling Homeowners
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In Pinellas County, the St. Petersburg area, the tax sale used to draw 60 to 70 people. This year, the county processed 340 million electronic bids from tens of thousands of online bidders. Deputy tax collector McClelland said employees in his office were "shocked" to see 50,000 bids or more fly in on a property. At one point, the computers crashed under the strain and the auction had to be shut down temporarily, he said.
Yet for all the frenzy, there were not as many bidders as it appeared because a handful of deep-pocketed bidders--mostly tied to banks and hedge funds-- dominated, a computer-assisted analysis of sales data by the Huffington Post Investigative Fund has found. Most of the liens were awarded to a small group of interests.
County auctioneers start the bidding at 18 percent interest, the highest rate homeowners can be charged on their debts under state law. Bidders compete by agreeing to accept a smaller interest rate, which for desirable properties in many counties often ends up falling all the way to .25 percent. Tax collectors argue that this competition helps homeowners because lower interest rates reduce the amount homeowners must pay to satisfy the debt.
Florida law also guarantees a minimum 5 percent penalty, even if investors have agreed to accept a smaller interest rate. In past years, many homeowners or their mortgage holders have paid off the debt within a few months. That means investors often wind up with a quick 5 percent over a short term, which many find attractive in a flat economy.
Big investors gain an edge in the auctions by creating multiple corporate identities, in some cases thousands of variations of the same name, which bid on the same parcel over and over. Computer software randomly assigns ties among the bidders, so those able to place the greatest numbers of bids at the lowest rate stand the best chance of winning a tie. In some counties, ties decide who gets most of the liens sold.
County officials contacted by the Investigative Fund said it was generally acceptable and legal under current rules for a single underlying investor to create multiple corporate entities to make thousands of bids on the same property.
BANKS DENY COORDINATION
Bank of America and the Fortress hedge fund dominated this year's auctions in Florida's three most populous counties, Miami-Dade, Broward and Palm Beach using colorful aliases and similar bidding strategies, the Investigative Fund's data analysis shows.
Bank of America bid mainly through thousands of variations of Bennu, LLC, named for a mythical Egyptian bird, and Ecru LLC., named for the French word for a brownish-white color. Both Bennu and Ecru typically bid .25 percent multiple times on the same parcels, auction records show. So did Fortress, which had 17 identities with names like Citrus Capital, LLC, which used thousands of bid numbers. Such bidding had the effect of driving the interest rate down to the bare minimum; in Florida, that meant the winning bidders immediately can assess a 5 percent penalty.
On May 25, just after 10 a.m., the debt on Walker's $62,000 Pompano Beach home came up for sale. It promptly drew 8,031 electronic bids, auction records show, all but two dozen from Bank of America or Fortress entities.
The bidding for Walker's $768.25 lien ended in a tie, with "Bennu, LLC JA13B" winning collection rights, county records show. Like the thousands of other Bennu variations, it lists a post office box in Atlanta as its address. The Fortress companies listed the firm's midtown Manhattan headquarters.