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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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Two other bank operations, a subsidiary of JP Morgan Chase & Co. and BankAtlantic, a longtime tax sale investor based in Fort Lauderdale, and some other big investors also bid using multiple identities. But Bank of America and Fortress overwhelmed competitors with the volume of bids it lodged, so much so that some bidders who had planned to spend millions of dollars buying liens came away with little to show for it.

James Cox, a Duke University School of Law professor who specializes in corporate and securities law, said the domination of auctions by a few underlying entities using multiple names and bids "always raises questions" about whether all bidders competed on a level playing field.

About half the 78,698 liens in the bond deal are on property in the state's three most populous counties. The liens average just under $5,000 each, but many debts were no larger than a few hundred dollars. They range from debt on mansions fronting Biscayne Bay in Miami Beach to modest condominiums and commercial buildings. Most are far below the property's assessed value, county records and sales data show.

Because the bonds were offered privately, there's little public record of how much they are expected to earn. Issuers of securities typically collect fees and can profit from a rise in the prices of the bonds. New York City, which has issued bonds backed by tax liens since 1996, is one of the few jurisdictions to do so.

The consequences for property owners are yet to play out. Under Florida law, the tax lien holder can foreclose if the homeowner doesn't pay the bill with interest and fees within two years, but aren't allowed to contact them about the matter until then. Most people will eventually pay off the debt rather than risk losing their homes.

NO FEDERAL POLICING
Federal consumer regulators don't record complaints about tax lien sales, so little is known about the impact on investors or homeowners. "That's not an area we've been particularly active in," said Monica Vaca, assistant director of the Federal Trade Commission's division of marketing practices.

That leaves jurisdiction over collection practices for these debts to local authorities, some of whom are starting to complain about the consequences for citizens and neighborhoods. Tax lien investing has proven contentious in cities such as Cleveland, which canceled this year's sale amid concerns that previous ones had contributed to an upsurge in foreclosures. That, in turn, caused further decay in marginal neighborhoods, housing advocates say. Cleveland has relied on a subsidiary of JP Morgan to handle these duties.

In Maryland, three Baltimore area men were sentenced earlier this year after pleading guilty to criminal charges of bid rigging in a U.S. Justice Department antitrust case. A federal grand jury in New Jersey also is investigating tax lien investing, though no charges have been filed.

Many firms were subpoenaed in the New Jersey probe, which does not appear to involve Bank of America. One firm subpoenaed was Mooring Tax Asset Group, a Virginia company that has helped service Bank of America's tax liens, including those pledged in the investment package. Mooring denies any wrongdoing and said it is cooperating fully with the investigation.

Officials in Maryland and the District of Columbia have struggled for years to rein in tax certificate investors who pile fees--sometimes thousands of dollars worth--on homeowners, who can lose their property as a result. DC officials are facing off in court with one investment group to try and find out the owners' identities and halt what they consider excessive legal fees charged to homeowners.

 
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