Sorry we foreclosed your home. But thanks for fixing our budget.
This is what desperation looks like. A no-frills community center. Volunteers unfolding extra chairs for the parade of poor people who come clutching envelopes of tax documents in hopes of saving their homes.
They’re people like factory worker Merneesha Chears. She is in the front row waiting to meet with a counselor. She needs to enter a payment plan soon on the $2,000 she owes in back taxes to prevent her foreclosed home from being sold at auction.
Chears watches the clock. Her three young children are in the car outside. They don’t know what’s happening.
“All they know is that I’m taking care of some bills,” says Chears, who fell behind because she has limited hours at work.
The scene inside the west side Detroit community center is as depressing as it is mundane.
That’s because misery is monetized by counties across Michigan, and no government relies on money from tax foreclosures as much as Wayne County.
In recent weeks, nonprofits have hosted workshops before the June 7 deadline for owners of tax-foreclosed homes in Wayne County, which includes Detroit, to agree to repayment plans. If they don’t, the homes will be auctioned this fall.
The nonprofits’ efforts are altruistic: saving homeowners from losing their properties. But an investigation by Bridge Magazine and Detroit public radio station WDET reveals that tax foreclosures have paid off big-time for Wayne County and are crucial to its financial turnaround.
High-interest rates imposed on residents re-paying back taxes – as well as money made by the county on the sale of foreclosed homes – have poured $421 million into Wayne County’s coffers since the financial meltdown. Indeed, it appears the county now relies on property owners’ misfortune to balance its budget.
The delinquent tax revenues helped erase a $22.5 million deficit in 2014 that forced the county into a consent agreement with the state to monitor its finances. Last year, the state relinquished oversight, and the county’s turnaround plan estimated it will collect $286 million from 2015 to 2019 from back taxes, fees and auctioned properties.
“Foreclosing on people’s homes shouldn’t be a policy to sustain yourself,” said Robert Ficano, who was Wayne County’s executive for 12 years until 2014.
“From a policy perspective, you hope it dries up. You don’t want to have to keep foreclosing in order to balance the budget.”
County leaders say they aren’t benefitting from foreclosures and have worked hard to provide relief to homeowners, knocking on doors of 6,000 residents facing foreclosure and advocating for recent changes to state law that reduced interest on back taxes.
“We would much rather have people stay in their homes paying their property taxes,” said Tony Saunders, Wayne County’s chief financial officer.
By state law, properties are foreclosed after three years of unpaid taxes. Counties from Oakland to Marquette also make money off late tax fees. But the issue is more profound in Wayne County, which has foreclosed on more than 160,000 properties since 2002.
That’s more foreclosures in one county than banking giant JPMorgan Chase executed across the country over the same time, according to RealtyTrac, a California-based mortgage data firm.
Profits from foreclosures?
Fees from late taxes don’t generate many headlines. But they’ve had a profound impact in a state whose homeowners and local governments are still reeling from the aftershocks of the foreclosure meltdown that began in 2006.
Tax collection plummeted as home values tanked. Wayne County alone lost more than $100 million per year. But revenue-starved Michigan counties discovered that as tax delinquencies soared, there was good money to be made off collections.
Here’s how it works: Every March, all cities and townships turn over the collection of delinquent taxes to their home counties, rather than try to collect themselves. Counties buy the debts and forward municipalities money they are owed, making them “whole.” For Wayne County, that’s approached $400 million in a year.
In order to pay that money to its local governments, the county borrows it from banks and other investors at low interest rates. It then charges the delinquent property owner an administrative fee of 4 percent on top of all unpaid taxes and between 12 and 18 percent a year in interest. That rate has dropped in recent years to 6 percent for many homeowners.
Profit comes from borrowing at 5 percent or less and getting up to a 22-percent return on delinquent taxes, creating the surplus controlled by the county treasurer.
The county program is hailed by advocates as a lifeline for small communities incapable or unwilling of getting into the business of debt collection.
Before the delinquent tax program began in 1977, some communities had tax collection rates of less than 50 percent and undoubtedly would be insolvent now, said former Wayne County Treasurer Raymond J. Wojtowicz, who lobbied for the state law that created the program.
“They were on the verge of it (bankruptcy) for quite a while. It was up to elected officials and administrators of local governments to take the initial steps (to collect taxes) and somehow, they just didn’t do it,” said Wojtowicz, who retired in late 2015 after nearly 40 years as treasurer.
It was a modest program for years. Then, in 2004, Wayne County began to collect Detroit's delinquent taxes, doubling the county’s surplus of fees and interest from delinquent taxes to an average of $33 million from $15 million per year.
A few years later, the market crashed. Delinquencies skyrocketed as the Great Recession gutted jobs and income. Wayne County’s surplus soared to an average of nearly $48 million per year, peaking at $64 million in 2013.
That was more than triple Oakland County’s $19 million tax surplus that year, even though Oakland has 33 percent more taxable value than Wayne County. In comparison, the surplus that year was $10 million for Macomb County, $7 million for Genesee County and $4.5 million for Kent County.
Late taxes, big money
Most counties in Michigan have grown surpluses in funds paid by fees and interest in delinquent taxes. Here are a few of the largest counties in the state and how their funds did in the 2013-2014 fiscal year. As a portion of total value, Wayne and Genesee counties, which struggle with high rates of poverty, saw the biggest surpluses. The first number represents the population, the second is the delinquent tax surplus as of 2014.
|Population||Delinquent tax surplus (2014)|
Source: Each county's 2014 comprehensive annual financial report
Since 2012, Wayne County’s treasurer has pumped an extra $382 million into the county’s general fund through delinquent tax surpluses, according to budget documents.
This year, the $48 million collected in fees and interest from people trying to save their homes was 9 percent of the county’s $535 million revenues. The money nearly matched the state revenue sharing payments of $50 million to Wayne County.
The late tax payments are more than enough to pay for the county’s $30 million budget for parks and roads this year – and still have $18 million left over.
As tax misery rose, so did Wayne County surplus
Wayne County's delinquent tax fund saw record surpluses as tens of thousands of people failed to pay their taxes on time, raking in hundreds of millions in fees and interest ‒ money the county now relies upon to balance its budget. From 2006 to 2012, the county treasurer's office held onto $182 million in surpluses. Critics say the money could be used to protect neighborhoods, homeowners and tenants.
Source: Wayne County financial records
To critics, that’s simply immoral.
Data guru Jerry Paffendorf, who campaigned unsuccessfully to be appointed treasurer after Wojtowicz retired mid-term in 2015, said the county’s reliance on late tax payments to balance its budget creates an incentive to foreclose on homes, rather than helping the residents government is supposed to serve.
This year, the county has foreclosed on 25,000 homes, 18,000 of which are believed to be occupied, records show. Outreach efforts to get residents in payment plans is expected to drop that number to about 8,000, which will be sold at auction.
About half of those homes are occupied by renters, most of whom would be displaced because their landlords didn’t keep up with taxes, Paffendorf said.
Paffendorf said he meets regularly with city and county officials about the issue. He’s pitching a plan to suspend the auction of occupied homes. Instead, the properties would be deeded to nonprofits, which would work with occupants to become owners or renters.
“This is egregious, and once you see how bad it is, you can’t let it go. We are clearly not doing enough to stop foreclosure. This goes beyond negligence,” said Paffendorf, who is co-founder and CEO of Loveland Technologies, a Detroit-based data company.
He said it’s absurd that the county auctions all foreclosed properties “to strangers,” regardless of whether they’re “burned-down smoldering piles of rubble” or the homes of “grandmas” who have lived in the city for years and fallen on hard times.
The surplus comes from interest paid by people like Chears, the single-mother factory worker, and Annie Perry, an 83-year-old who has struggled for years to pay taxes on a three-bedroom bungalow in Northwest Detroit that she called her “empire.”
Perry was at a tax payment plan workshop in late May sponsored by the United Community Housing Coalition, a Detroit nonprofit that reached out to occupants of thousands of tax-foreclosed homes before the June 7 payment plan deadline.
Known as “Mother Perry,” she keeps candy in her pocket for strangers, and says she has struggled since her husband died several years ago. She lives on Social Security. Taxes are $1,400 per year, about a tenth of her income.
Perry said she has gone into bankruptcy, in part because of a tax debt county records show has grown to $4,566. More than a quarter of that, $1,208, is from interest and fees.
“Oh Jesus, I’ve been going through this for so long,” Perry sighed.
Her face brightened when she discussed her home near Fenkell and Greenfield. When she and her auto worker husband bought it in 1970, they were one of the first black families on the block, Perry said.
They raised three children. There was a finished basement, a big kitchen and plenty of sweet potato pie, Perry said.
“It was a palace. It was paradise,” Perry said. “But I’ve been paying taxes so many years and I just fell short. And I just don’t have it.”
By the end of the workshop, she was on another payment plan. Perry acknowledged she’d probably not live long enough to repay the county.
‘Just pay your taxes’
Wayne County officials have argued for years about what to do with the tax surplus.
At one point, a few years ago, Wojtowicz controlled a fund that was worth nearly a quarter billion dollars. The money could have cushioned a county-wide financial emergency, argued Ficano, who lost re-election after fiscal and corruption scandals.
“We had one hand tied behind our back financially because we never had complete access to that fund,” Ficano said. “I always had to go hat-in-hand to ask for more.”
After Ficano lost re-election, Wojtowicz transferred more than $80 million to the county’s general fund.
Money from delinquent fees initially funded basic county operations. Now, the money is only earmarked for one-time purchases, said Saunders, the county’s chief financial officer. And though the county anticipates getting more than $35 million this year from the surplus, the county expects the revenues to decline as foreclosures continue to decline.
Saunders rejected the idea that the money “benefits” the county. The ripple effect of tax delinquencies have slashed overall property values in hard-hit neighborhoods and lowered overall tax collections, Saunders said.
“If people were able to pay, we wouldn’t be where we are today,” he said.
Current Wayne County Treasurer Eric Sabree said the county does significant outreach to prevent foreclosures. He said he and the city worked with lawmakers to extend a recent program that lowers interest rates on back taxes to 6 percent for homeowners.
Wojtowicz noted the county’s tax foreclosure crisis began roughly three years after the mortgage meltdown – indicating that a good percentage of county foreclosures were from banks that took possession of property and failed to pay taxes.
“We did the best we could,” Wojtowicz said.
He and Sabree said the treasurer's options are limited: They can hold on to the surplus or send it to the county general fund.
“We can’t use that money to pay people’s taxes,” said Sabree, a former deputy of Wojtowicz.
Wojtowicz has another suggestion: “Just pay your taxes on time.”
Genesee County offers another way
About an hour north on I-75, Genesee County Treasurer Deb Cherry has taken a different tack.
She transfers about $5 million a year in surplus from the delinquent tax revolving fund to the county general fund. But she said she’s also made sure another $1 million goes toward demolishing blighted properties in the county, mainly in Flint.
By taking some of the money generated by the foreclosure process on stabilizing neighborhoods, the money could help avert future abandonment and foreclosures, she said.
“If we can use some of the money to improve the community and make the neighborhoods better then we should do that,” Cherry told Bridge.
Back at the Detroit community center, Chears signed a plan to repay her back taxes and avoid losing her home to auction. It’s a routine she knows well. She’s done it before.
She bought the home in the Brightmoor neighborhood of Detroit for $5,000 a few years ago. It came with back taxes that she inherited.
Chears has a good job now, working on the line at a Ford Motor Co. assembly plant in Dearborn. But she’s not yet a full-time employee and the hours vary. Every time she thinks she’s about to get ahead, something else happens, Chears said.
“It meant a lot buying my house. I was one of the first in the family (to become a homeowner) and to not pay rent, that’s a good feeling,” Chears said.
“Hopefully, I can keep it, but it’s a lot of playing catch-up.”
Bridge Magazine teamed with Detroit’s public radio station WDET to investigate how counties make money from foreclosures. Bridge and WDET reporters will discuss the story on the station’s “Detroit Today” program at 9 a.m. Monday, June 12.
To focus on community life and the city’s future after bankruptcy, five nonprofit media outlets have formed the Detroit Journalism Cooperative (DJC).
The Center for Michigan’s Bridge Magazine is the convening partner for the group, which includes Detroit Public Television (DPTV), Michigan Radio, WDET and New Michigan Media, a partnership of ethnic and minority newspapers.
Funded by the John S. and James L. Knight Foundation and the Ford Foundation, the DJC partners are reporting about and creating community engagement opportunities relevant to the city’s bankruptcy, recovery and restructuring.
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