I've banged out quite a few quick posts in the last 36 hours - in case you missed them:
- I've Got a Bad Feeling About This: Lamenting about Chinese generic herbicides
-ZipCars IPO good feedback from commenters on both sides of this one
- The Foreclosure Freeroll. I got a lot of intelligent feedback on this one on the SeekingAlpha version of my post - which inspired a barrage of comments - unusual for an article not about Goldman Sachs, gold, or HFT. I especially liked BennyProfane's summary of the situation in my comment thread there:
"It's actually pretty simple. These people are house sitting for the banks, who have no desire and are not capable of dealing with the inventory that would flood the market if foreclosures occurred at a normal rate. Just think of the cost to the banks to maintain and pay the taxes of all of these homes for the five to ten years they will be vacant."
Now a question for readers who may know: The people in the NY Times article I referenced who stop paying their mortgages only to have the banks NOT foreclose on them - they obviously still owe property taxes. Is it commonly expected that people continue to pay their property taxes (assuming they can afford to, even though they are strategically defaulting on their mortgages) - and do the municipalities take any sort of action on delinquent property tax payments, like accelerating eviction? Or do they just attach liens to the property? Basically, what I'm getting at is that I would expect that there are more consequences (with respect to RECOURSE) for not paying property taxes than there are for not paying mortgages. Here's a good answer from commenter "Conventional Wisdumb" on my Seeking Alpha thread:
"In FL, Back taxes are senior liens against the property which means they get paid before anyone else gets a dime including the mortgagee. Generally when a back tax is unpaid the county sells the liability as a "tax certificate" to private investors. This allows the county to continue to get paid the taxes they are owed while creating a new senior lien against the property.
The "tax certificate" is auctioned at a publicly advertised location for bidders. The rate of return starts at 18% and is bid down to the lowest rate to clear the certificate. The property owner is on the hook to pay this interest cost plus the principal to the owner of the certificate - if the bank owns it they must pay it. If the property owner does not redeem the certificate within 2 years from the date of sale of the certificate, the holder can apply for a tax deed and force a public auction sale of the property - the county can be the owner of the certificate if there is no private investor. The holder of the certificate at minimum will get title to the property if the proceeds of the sale are less than the amount owed.
They seem to be an interesting investment vehicle for people that understand them. Bottom-line is that taxes always get paid first."
-Shadow Inventory : three more failed projects
and two low content posts:
-KD
13 comments:
interesting. wouldn't this be a reason for banks to avoid foreclosure if they can't quickly sell the property -- eg to minimize the amount of time the deed is in their name? that way the tax liability stays with the current owner?
yes Babar - exactly. it was given as a reason why they don't want to foreclose. if they foreclose, THEY eat the tax liability, they probably still can't sell the property, and they run the risk of it falling into a state of "disrepair."
thus, extend and pretend goes on...
Banks weren't foreclosing in Detroit because they'd have to pick up the tax liability. It's the "owner" that accrues the liability. By the way, if you really think anyone who isn't paying their mortgage IS paying their property taxes then I have a Greek bond I'd like to sell you. When it goes back to the bank so does the tax liability.
I don't know about the business of buying tax liens. That was a big trend in the 90s. All of these city gubmints that couldn't collect back re taxes packaged them and sold them for pennies on the dollar to companies formed for the purpose of collecting on them. Great idea? Think again.
If anyone has read Confidence Game, there is a section that deals w/MBIA's foray into this business. Apparently, private companies were no more successful than municipalities at collecting. It turns out that the axiom "if you can't get blood from a stone, just squeeze harder" didn't apply.
And yes, the tax liability stays w/the property and most municipalities are slow to sell off delinquent properties, so folks who don't pay the mortgage have zero incentive to pay the re taxes.
Probably another reason is that the taxes were set at inflated valuations. If the home is worth a fraction of what it used to be the tax is just an added insult when the bill comes.
and if the banks are handling the tax escrow then I guarantee the taxes aren't being paid.
so my guess is no one is paying.
only difference is there are a lot more tools to recovering the tax money! good luck walking away from the sheriff!
ocbear, sneakattacker, Yangabanga - but the holder of the tax lien can force a sale of the property eventually (i'm sure the length of time they must wait varies by state) - so even if the banks won't foreclose, it makes sense for the homeowner to pay the property taxes - or at least some of the property taxes - so they can continue their mortgage freeroll. right?
I owned a lot of property in Phila for years and used to attend sheriff sales for tax liened properties, so I can just speak for that municipality. Yes, a sale can be forced, but there are also very simple ways of delaying this sale by years. Usually, it involves no more than just contacting the tax bureau and letting them know you're working on it.
Having said that, it could be completely different in more well-to-do suburban communities. They might move very quickly to auction off your property.
My own guess is that for the 18 months to 2 years some of these folks want to stay in their houses w/o paying a mortgage, the tax issue would not be a problem.
Hi KD,
I enjoy your blog, so I'm saying this with appreciation...but isn't re-linking to articles that you just wrote within the past few hours/day and a half kind of like a band releasing a Greatest Hits album as its 2nd album? Is scrolling down on a computer screen so hard on your readers that you had to re-link to your "I have a bad feeling about this" article that you wrote < 12 hrs ago? Does 12 hrs count as an eternity nowadays?
Or are you incentivized (somehow)to churn out new posts?
Sent with love,
Anon
anon. hah. yeah - i understand where you're coming from. well, there's no "incentive" at all on this blog - i don't get paid by anyone for anything, save for the generousity of readers donating to my tip jar, so it's certainly not a goal of mine to just click the "publish" button.
in fact, it's kinda the opposite. when i write a post i like, I want to not "post over it," because, contrary to the fact that it is very easy to scroll down the page, or to get every post in Google Reader, i think i have a lot of readers who just check in once or twice a week, and may not take the time to scroll.
so, i like to highlight posts that I think are worth reading. and i think the "I've Got a Bad Feeling About This," post was funny, intelligent, and worth reading.
I may have read over this, but I would imagine that most of these in foreclosure were paying taxes through an escrow in their monthly payment and not getting a separate tax bill. So when they stop paying the monthly bill, they therefore aren't also paying taxes and insurance. Right?
Along those lines, what's going to happen if one of these burns down if the insurance isn't being paid?
Regarding Tax Liens, the exact mechanics vary wildly from state-to-state. Some (such as Florida) are highly progressive/aggressive with their collection efforts (auctions totaled $1.2 Billion this year) with generous terms (up to 18%) and rights (superior lien position, right to foreclose after 2 years). Other states offer far less attractive terms, less rights, or refuse to sell liens at all (California). Some states are even more aggressive: in South Carolina or Indiana you can lose title to your property in one year. Iowa offers rates up to 24%. In theory the process benefits savvy investors and the local governments, but the general lack of uniformity in approach dampens some investor interest in all but the most desirable (New Jersey, Florida) states. And, as noted, some states will not sell liens at all. Mortgage companies hate them and lobby against them (having large first liens can wreck even more havoc with your LTV's) but the local governments can really benefit from having the cash on hand.
Another angle on delinquent mortgages that I haven't heard mentioned (although I'm sure it has been somewhere) is the boost to consumer spending this must be creating. Much of the money that would normally be sent to the banks to pay the mortgage is now instead being spent on consumer goods. I don't have the economic chops to figure out what exactly the impact is, but with nearly 5mm mortgages delinquent/in foreclosure, and the average monthly mortgage payment above $1k, it must be significant.
yes anon - that phenomenon was cited a lot about a month ago as a source of strength for the retail stocks - cause people were spending on goods instead of mortgages. it's kinda hard to really show conclusive data on it though
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