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How a $140 bill snowballed into foreclosure

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For Dominick Vulpis, a $140 sewer bill has become a $50,000 nightmare.

Vulpis didn’t know he had a big problem with the four-year-old bill until last December, he said, when he was served with papers notifying him that he had lost his Middletown, N.J., home to foreclosure. Neither he nor his wife were notified of the foreclosure process until the final judgment was granted last December, he said.

“It was never brought to my attention until it was too late and we were served with papers saying we had to move out of our house,” said Vulpis, a 60-year-old plumber. “I may pay a bill late, but I pay them. I’m not trying to beat anyone for $140.”

Incredibly, that $140 debt snowballed to the loss of his home after the town sold the lien on his property to an investor, an increasingly common practice as cash-strapped cities and towns try to raise badly needed revenues to close widening budget gaps.

Though situations like the one that ensnared Vulpis are still relatively rare, such tax lien sales are landing more people in foreclosure proceedings as the weak economy batters local government budgets and homeowners’ finances. A recent report by the National Consumer Law Center estimated that local governments raised some $15 billion with tax lien sales in 2010, the latest data available.

Until recently, the bulk of tax liens sales were for unpaid assessments on failed or unfinished commercial developments, according to Anthony Mercantante, the administrator for Middletown Township, which sold Vulpis’ tax bill.

“Now you’re seeing more and more single-family homes pop up on the tax lien list,” he said. “They’re owner-occupied homes with people who are having trouble keeping up with their tax payments."

Local governments have long used tax lien sales to offload the burden of collecting unpaid taxes and recoup cash from homeowners who missed payments. The rules governing such sales vary from state to state, but typically involve auctioning off past-due property tax bills.

Investors bid for the right to collect the debt plus interest that can run as high as 18 percent, attorney fees and other expenses that are not capped in some states. The rules typically give the homeowner a grace period to pay off the investor and reclaim their property. But the tough economy has made that harder to do.

“People who used to be able to rely on their kids can’t really do it anymore,” said Laura Newland, an AARP attorney in Washington, D.C., who helps defend homeowners in tax lien foreclosures. “The kids are unemployed and struggling themselves and don’t have the money to help out.”

If the homeowner can’t come up with the money, the investor can foreclose on the home and negotiate a larger settlement. Once the foreclosure is granted, they can claim the entire equity in the property -- a payoff of hundreds of thousands of dollars for buying a tax lien worth just a few hundred dollars.

“Investors will say to the grave, ‘We’re in it just for the interest: We don’t want to deal with someone’s house,’” said Newland. “For some of them I think that’s true. For others, based on their litigation tactics, that can’t be true.”

Critics of the practice argue that such outsized profits for third-party investors produce no added benefit to municipal tax coffers, despite the potentially devastating consequences for homeowners.

“Property tax collection procedures should encourage repayment rather than property loss,” said NCLC attorney John Rao, who prepared the recent report. “And they should not provide an opportunity for speculators to earn huge profits off of homeowner distress.”

Vulpis was eventually able to negotiate a settlement in which his mortgage company provided the $37,500 paid to the investor, which will be added to Vulpis’ mortgage balance, according to his attorney, who is now negotiating a loan modification with the lender. For the investor, the settlement represents a payoff of more than 260 times the cost of the original tax bill.

Vulpis said the investor, Approved Realty Group, doesn’t deserve such an outsized return.

“I think he stuck me up without a gun, this guy,” said Vulpis. “If he was a nice guy he could have said, ‘OK, I understand what happened, give me $5,000 for my troubles.’  But he wanted a lot of money.”

Approved Realty Group did not respond to phone calls requesting comment.

Combined with attorney fees and added interest for the higher mortgage balance, Vulpis’e total tab could top $50,000.

Attorneys who defend homeowners in these cases say they can be costly to fight.

“I have represented people for years,” said Newland. “Part of that is because the calendar is so full.”

Housing advocates note that among the hardest hit are elderly and unemployed homeowners who are most at risk of foreclosure. Subprime borrowers are also disproportionately vulnerable.  During the housing boom, many subprime lenders wrote loans to low-income borrowers without including the cost of tax payments to entice them with artificially low estimated monthly payments. Most prime loans require that a mortgage servicing company set up and manage an escrow account to accumulate property taxes and insurance premiums monthly and then pay those bills on the homeowner’s behalf.

Defenders of the practice selling tax liens argue that late payments are more than just an inconvenience for local tax collectors: They raise costs that will eventually have to be borne by homeowners who pay on time.

“If we have to make a quarterly tax payment to the board of education of $10 million but we’ve only collected $7 million because people are slow in making their tax payments, we would have to bridge that gap by financing it and paying interest on that,” said Mercante. “So all the other taxpayers are paying a penalty because someone else is paying their taxes. (Selling tax liens) seems a little bit cold, but taxes by their nature are a cold process.”

Moreover, they say, the vast majority of tax liens sold to investors are settled before a foreclosure judgment is granted.

“All of the protections that exist for the homeowners in foreclosure law continue to exist,” said James Brooks, program director at the National League of Cities. So selling a tax lien is not selling a deed to a property. The homeowner whose lien has been sold is still protected by all the relevant aspects of law.

But attorneys say homeowners often aren’t given proper notice to defend their home from seizure before it’s too late.

Two years ago, the District of Columbia sold a tax lien on the home Stanley Stefan lived in for nearly 40 years. The problem started six years ago, after district tax officials erroneously revoked a homestead exemption, which has since been restored, he said. But Stefan, a 68-year-old retired chauffeur, said he didn’t learn until this year that there’s still an unpaid balance on his tax bill, which an investor is now trying to collect, with interest. Stefan has hired an attorney to try to reverse the tax sale.

“I want my property and no payment: I don’t think I’ve done anything wrong,” he said. “I paid what I owed. I shouldn’t be held accountable for a mistake the district made.”

Some states and local governments have moved to protect homeowners from the harshest outcomes. Last year, New York City passed an ordinance that allows homeowners to work out payment plans when they fall behind, caps the rate investors can charge on uncollected tax bills and banned tax lien sales for debts of less than $2,000.  The law also made it easier for homeowners to apply for an exemption that prevents their liens from being sold.  As a result, the number of tax lien sales has dropped 24 percent so far this year, according to the New York City Comptroller's office.

"It helps to strike a balance between those two imperatives: the need for cities to raise more revenues and to make sure that actions the city takes are not creating further harm for lower income families that are already feeling the pinch,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, a New York group that lobbied for the changes.

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