How To Prevent A New Foreclosure Crisis

(Opinion)—Many families are struggling to make ends meet right now. Property taxes — already a source of strain for many homeowners — may be particularly challenging to pay.

Of course, these taxes are needed to support the city government’s budget. But what happens when families can’t pay those bills?

In Connecticut, municipalities like New Haven and sewer authorities like the Greater New Haven Water Pollution Control Authority, or GNHWPCA, are able to foreclose on homes for small amounts of unpaid taxes.

The GNHWPCA can foreclose on a home for as little as $1,000, while municipalities are free to place liens on (and later foreclose on) property for any amount due.

Some cities will go as far as selling the delinquent taxes in bulk to third-party debt buyers, who can also then foreclose. (While New Haven does not, other Connecticut cities like West Haven and Hartford continue this practice.)

Throughout this entire process, municipalities and the debt buyers are able to collect an 18 percent annual interest rate, which is otherwise considered usurious under Connecticut law. They can also collect significant fees. Sometimes, the amount owed in interest and fees outweighs the principal of the delinquent taxes owed.

Right now, as the economic crisis worsens and municipal budgets are slashed, many Connecticut cities will be tempted to collect on delinquent taxes by foreclosing on homes or by selling delinquent taxes in bulk. Doing so would put homeowners — particularly elderly, disabled, and low-income ones — at risk at a time when governments should instead protect and support those groups.

The good news is that New Haven has taken some steps to reduce this potential burden.

In April, the Board of Alders adopted two measures, newly authorized by an emergency executive order from the Governor’s office, to help struggling homeowners.

First, homeowners who have suffered financially from the Covid-19 crisis and who apply for relief from the city by June 30 will get a 90-day extension on all property tax bills. Second, all homeowners in the city will benefit from reduced interest rates — down from 18 to 3 percent annually — on any overdue tax payments.

These emergency relief programs are necessary — though on their own likely insufficient — to address the current financial crisis facing many low- and middle-income homeowners in the city. But they are important first steps. And, perhaps most significantly, they do bring necessary attention to the problem of tax foreclosures — an often under-the-radar crisis that displaced homeowners around the country in the wake of the Great Recession, and that is poised to do the same as the Covid-19 crisis unfolds.

Tax foreclosure is a practice with an ugly history. Writing in 1940, future Supreme Court justice Thurgood Marshall, then at the NAACP, described tax sales as ​“a practice … in the South of depriving Negroes of their property through subterfuge” that was ​“completely within the letter of the law.” Then, city officials would hide or obscure the amount of property taxes a Black homeowner might owe. Once the taxes were past due, the property would be sold at a tax sale without notice to the homeowner.

Tax sales continue to extract wealth from communities of color and low-income communities across the country today.

In Baltimore, one woman lost her home over a $362 unpaid water bill — a bill that eventually racked up $3,600 in legal fees and other charges.

Foreclosures like this one have led to the displacement of homeowners and decimation of family wealth, harming communities and cities. In particularly hard-hit cities, large percentages of the housing stock — more than a quarter of properties in Detroit — were foreclosed on for nonpayment of property taxes over the past decade.

In many cities, outdated property assessments contributed to significant overcharges, meaning homeowners lost their homes over debts they should have never owed. Often, the buyers of these properties — the new holders of this wealth — were not other families or local landlords, but large-scale investors.

In 1995, New Haven became one of the first cities to experiment with the bulk sale of tax liens. The city sold off the rights to collect $23 million in back taxes to Breen Capital (Editor’s note: No relation to Independent Managing Editor Tom Breen).

Breen collected taxes or foreclosed on properties for which doing so was easiest — often targeting elderly residents. And while that enabled the city to boost its tax collection rate from 84 to 93 percent, the company let the hundreds of buildings languish while the 18 percent interest rate made it so the tax debt far exceeded the value of the homes. Breen refused to relinquish control of hundreds of blighted properties — even when investors or nonprofits were interested in renovating the buildings — slowing New Haven’s development at a critical time.

Despite the clear evidence that tax lien sales and foreclosures are unjust for homeowners and harmful to communities, many localities continue this practice. Because city governments have tight budgets and few potential sources of revenue, they are often under pressure to use this practice to plug holes in the budget. In the 2010s, as many city and state governments faced budget shortfalls and debt crises, they aggressively pursued tax lien sales and foreclosures — so much that it eventually became known as ​“the other foreclosure crisis.”

Right now, New Haven is entering another budget crisis — with a projected $13.3 million deficit by the end of the fiscal year leaving alders to look for ways to make ends meet.

Although the city has not published records on its foreclosure practices, the threat of displacement is real: in fiscal year 2018 alone, well before the current crisis, New Haven had 2,400 unpaid real estate liens.

Contrary to the suggestion of some commentators, in the coming crisis the city must resist any efforts to address property tax delinquencies through foreclosures or the sale of tax liens to third-party debt buyers.

Although tempting to inject fast-cash into city coffers, such efforts will hurt the city and its residents in both the medium- and long-term — and risk repeating the mistakes of the 1990s.

Rather, the city should follow the lead it has already set by voluntarily participating in both tax-relief programs Governor Lamont authorized by executive order this spring.

A recent report we at Yale Law School’s Jerome N. Frank Legal Services Organization released on reducing housing displacement in the city outlines a full suite of policy proposals that the city should implement and advocate for to reduce the impact of tax delinquency and foreclosure on struggling homeowners.

The city should offer payment plans to homeowners, who may have fallen behind due to an economic shock and be unable to make a lump-sum payment to save their homes.

The city should also avoid trying to recover delinquent taxes until a time when it would least impact families — such as when a homeowner sells their home.

Further, the city should try to limit the impact of tax foreclosures on struggling families and communities by limiting the attorney’s fees it charges for foreclosure filings and prioritizing non-residential or non-owner-occupied properties.

And, though the city does not have direct control over the GNHWPCA, the city should use its votes on the board of that body to push the water authority to avoid foreclosing on homes with delinquent water and sewer bills. Importantly, these liens take priority over any other claims on a property — that, in combination with a high interest rate, means the liens will very likely enable the city and GNHWPCA to collect those taxes in the future. Neither risks permanently losing that revenue, and, in fact, may gain revenue by waiting.

Many of the most significant changes that would help property-tax-burdened homeowners during the Covid-19 crisis require action by the Connecticut General Assembly or other actors in the state.

The recent Covid-19 programs — taking up the governor’s authorization to offer tax deferral and reduced interest rates — are two examples of such programs. These options should be made mandatory across the state, and they should kick in whenever an economic crisis occurs.

Other necessary changes at the state level include allowing tax deferrals and abatements for long-standing homeowners, and forbidding cities from selling tax liens to corporate debt buyers.

Any budgetary boost cities receive from tax foreclosures and tax sales is unwarranted given the permanent damage to homeowners, communities, and the local economy. New Haven and Connecticut have powerful tools to prevent these harms: they should not wait until a foreclosure crisis takes hold to start working to protect homeowners.

This is the second in a series of columns addressing displacement, all based on a report by the Housing and Community and Economic Development Clinics at Yale Law School. A past entry addressed how New Haven and Connecticut can protect tenants, and a future entry will address the City’s shortage of affordable and market-rate units.

Stephanie Garlock is a recent graduate of Yale Law School. Isabel Echarte is a third-year law student of Yale Law School. Isabel and Stephanie are law student interns with the Jerome N. Frank Legal Services Organization’s Housing Clinic — Mortgage Foreclosure Track. This op-ed does not necessarily represent the positions of Yale University or Yale Law School.

Click here, here, here, here, here, here, here, and here for part of the previous Independent coverage of GNHWPCA foreclosure controversies and their impact on a previous New Haven foreclosure crisis.