Some cities in Massachusetts are cashing in on homeowners who have failed to pay tax bills by running auctions that pull in thousands of dollars more than they’re actually owed in taxes.
At Worcester’s annual auction last May, small tax lien debts of just a few hundred dollars routinely set off bidding wars from private investors who paid the city far more than a homeowner actually owed in unpaid taxes. The process may also make it more likely the homeowner will wind up in foreclosure.
City records show that private investors have paid Worcester more than $2.6 million in premiums in the last three years. Worcester only keeps that extra cash when the homeowner gets foreclosed on, and records from the city show Worcester has a balance of more than $900,000 in premiums paid to the city.
Lowell and Pittsfield keep premium payments from investors no matter what happens to the property after an auction. In 2012, Lowell got paid an extra $96,000 on top of what it was owed for the tax liens it sold. Investors paid Pittsfield $145,000 in premiums over the course of two city-sponsored auctions, one in 2015 and the other last October.
After the auctions, the pay-offs that investors demand from homeowners snowball because of high interest rates, fees and legal costs, making it more likely the property will fall into foreclosure.
Critics say the practice creates an incentive for municipalities to align with private investors and stack the odds against homeowners who’ve fallen behind on taxes.
“Whose side are they on? I want to see the city working with homeowners, not with the investors,” said Janice St. Amand, a foreclosure prevention counselor at NeighborWorks Home Ownership Center of Central Massachusetts in Worcester. “If we can work with these homeowners, isn’t it about community and keeping homeowners in their home?”
Hundreds of property owners caught in tax lien troubles end up defending against foreclosure in State Land Court each year. A recent study by Ralph Clifford, a professor at the University of Massachusetts School of Law, found more than 15 percent of such property owners lose in tax lien foreclosure cases.
Over the last decade, more than 100 property owners in Worcester or their heirs have lost their homes and other property to tax lien foreclosures that all got their start at auctions run by the city, according to documents at the Worcester Registry of Deeds and State Land Court analyzed by the New England Center for Investigative Reporting.
Roughly three dozen cities and towns in the state auction off tax lien debt to private investors who can then collect the debt at high interest rates and even foreclose on homeowners. It’s not clear how many municipalities — beyond Worcester, Lowell and Pittsfield — have collected a premium on those sales.
Unlike mortgage foreclosures, where homeowners lose their houses but can keep any remaining equity they have in the property, a tax lien foreclosure allows municipalities and investors to take everything, including equity.
The practice has drawn criticism in recent years from the State Attorney General, lawmakers and housing advocates, citing the high penalty to homeowners. But city leaders have argued that the auctions are an effective way to get tax revenue needed to fund public services.
The fallout can be harsh for low-income homeowners. Michelle Cook, a lifelong Worcester resident, was laid off a decade ago during the recession and fell behind on local taxes for the East Worcester duplex that had been in her family for three generations. She raised her two daughters there and inherited the house in 2001.
A dozen years later, Cook’s tax bill of $2,000 had tripled with interest and fees imposed by the city.
When Worcester auctioned off a lien on her home, a bidding war shot up to $22,000 — meaning the city got paid $15,000 more than it was actually owed. Three years later, Cook pleaded in State Land Court in Boston for more time to get a mortgage to pay off the investor, but she was too late.
“It really felt like they stole my house,” said Cook.
The judgment in Land Court was a windfall for the investor that bought her lien, Stage One Investors, which turned around and sold what was once Cook’s home for $132,000. For the city of Worcester, it meant a $15,000 profit.
Cook could have sold her house to pay off the debt, but she couldn’t bring herself to sell it, largely because of the connection she felt for the home and the neighborhood.
“The house was paid off and that's why I fought so hard, because I'm thinking, your home is your life,” she said. “I knew my neighbors. The kids had their friends there. You've lived there so long that you find yourself driving and you go there because that's your home and you realize, oh, you don't live there anymore.”
Worcester officials said they send numerous notices to delinquent taxpayers explaining that tax liens can result in the total loss of a home. City Manager Edward Augustus blamed taxpayers for not communicating with the city.
“We don’t want to go through this process,” said Augustus. “But if nobody is communicating with the city and just ignoring the 12 notices that they're receiving, what is the city to do? Say everybody else has to pay that share of the bill?”
Most cities and towns in the state don’t sell property liens to investors to solve their tax collecting problems. Randolph, a town of more than 34,000 south of Boston, intentionally avoids putting its taxpayers in that situation.
“I don't think government is here to put people out in the street and take their homes and take their home equity,” said David Murphy, the outgoing town manager in Randolph.
Murphy said what he calls a more compassionate approach assumes that behind most delinquent tax bills is a financial or medical hardship.
In Worcester, tax lien trouble for Pauline Desrosiers started in the midst of an illness — a bout with pancreatitis. The 78-year-old missed paying a $400 water and sewer bill, and three years later was fighting to hold onto her home.
“For one small water bill, they’re going to take all that away without really letting us know?” said Desrosiers, who actually thought she had paid off the overdue bill.
She said her first notification of a problem was a letter from a company trying to loan her money. In fact, Desrosiers was already facing foreclosure in Land Court, threatening to take the home where she lives with two adult daughters who have cerebral palsy.
Desrosier’s other daughter, Melissa Ladroga-Dow, got help from Community Legal Aid, whose lawyers convinced Land Court to lower the payoff amount to investor Stage One from $25,000 to $10,000. Ladroga-Dow, a hospice nursing assistant, scraped together the money.
“My sisters were having nightmares. They’re thinking they’re going to get kicked out of their home,” said Ladroga-Dow. “I’m thinking, 'How can this be legal?'”
Ralph Clifford, at UMass Law, is asking the same question. He tracked a random sample of tax lien foreclosure cases in Land Court and published a study last year that found more than 15 percent of property owners lost their cases.
Those outcomes, according to Clifford’s study, handed cities, towns and private investors $56 million in profit in one year, based on the properties’ assessed value compared to the original tax lien debt.
“It’s an outrageous windfall for municipalities taking it. It's an outrageous windfall if a private entity is taking it, but the outrageous windfall is because the system is bad,” he said. “It's the law. The law is nuts.”
Clifford called for changes to the law or a legal challenge to its constitutionality. After failing in earlier attempts in recent years to enact any changes, some lawmakers on Beacon Hill will try again this year to retool the law to give homeowners more protection and even a stake in their equity if they lose a foreclosure case.
K. Sophie Will contributed to this report.
Chris Burrell is an investigative reporter with the nonprofit New England Center for Investigative Reporting, a WGBH news partner.