Guest Post: Backdoor Way Investors Can Clear Housing Inventory

Submitted by Rolfe Winkler, publisher of OptionARMageddon

A hedge-funder well-known to OA—who wishes to remain anonymous—chimes in with a rather fascinating idea in our humble opinion, one that (at least in the state of Maryland) could take the foreclosure process for many houses/condos out of the hands of banks.*

We thought worthy of sharing because of the larger theme at play. Various housing “rescue” programs have all been failures because it is nearly impossible to get competing constituencies to agree on workouts. Banks, servicers, bondholders, homeowners…their interests are simply incompatible.

“Rescue” programs are absurd to begin with, of course. They amount to taxpayer-financed price fixing schemes to put a floor under house prices in order to protect Bill Gross MBS investors, bank balance sheets, and existing homeowners (in that order).

The only real solution to the housing mess is for prices to fall far enough for inventory to clear. Arbitrage opportunities like this might effect that outcome:

In lieu of buying a house I’m thinking of trying to buy some tax liens at the Baltimore auction on May 19th. For those not familiar with tax liens, they’re property taxes that delinquent taxpayers have not yet paid the city. The city needs the cash to fund its operations so it auctions off these delinquent tax receivables every year to raise funds. In return, the holder of the tax lien gets statutorily mandated interest payments of up to 25% (annualized, paid by the property owner, not the city) as well as first lien rights. Maryland’s laws are very favorable for tax lien holders. If you haven’t been repaid by the delinquent property owner within six months you can begin to foreclose on a property to recoup your investment plus accumulated interest. Further, you can actually control the process because you’re senior to the bank in the capital structure. Essentially you just push the property into auction and then you get paid off with the proceeds before even the bank does. In very rare and complicated circumstances you can sometimes take control of the property with the bank getting nothing (i.e., you buy a property for the value of the tax lien, or really for pennies on the dollar).

I actually bought a few books and studied the tax lien market pretty closely back in 2002, the last time the economy was weak. I never acted on my knowledge, though. I can’t imagine a better environment for lien holders than the current one. There are back taxes on so many vacant condos and other properties that can’t possibly be funded by their insolvent developers. The question is just how competitive the process will be to purchase the liens on these properties. Big institutional money participates in this market because the only major risk is liquidity (i.e, it may take you six months to a year to cash in your liens).

Anyway, the point of this discussion is that I think the lien auctions could have serious ramifications for the bottoming of the housing market, both in Baltimore and nationally. As noted above, tax lien owners in Maryland have the right to begin foreclosure proceedings within six months of a lien auction. The number of liens up for auction has skyrocketed relative to last year. This would suggest that a flood of properties might go into foreclosure across Maryland late this year and in early ’10 as lien holders begin positioning to cash in their returns. Thus, there could be a spike in foreclosure auctions later this year and well into 2010. Assuming ’09 is the peak year for tax lien auctions (i.e., there will be fewer delinquent property owners next year than this year) that might mean that the Maryland housing market – especially in high delinquency regions like Baltimore city – could begin to really bottom over the course of the next year. In other words, these lien owners could force the system to purge itself of its excesses more so than the banking system or the government will.

Since bank foreclosure proceedings are interminable and banks are loathe to take write-downs quickly these days until they can allow their current wide [net interest margin] spreads to rebuild their capital base, they are not going to rush to clear their crap housing inventory. Tax lien holders, however, can take over the process from the banks and have a completely different set of incentives and timing priorities. As such, they’re likely to push the process much more aggressively…and quickly. Thus, I wouldn’t be surprised to see the Baltimore city market looking much cleaner – albeit at lower prices – a year from now as a lot this overpriced, over-built housing stock gets cleared.

Tax lien laws are less favorable for lien holders in most other states (if I recall, Arizona is the only other state with the 6-month waiting period). The vast majority of states – again, if I’m remembering correctly – require tax lien holders to wait at least two years before they can begin foreclosure proceedings. If my logic above regarding banks’ and lien holders’ varied incentives and time horizons is correct, then it’s possible housing could continue to weigh on certain markets for a couple more years until the tax lien holders are allowed to force properties into auction and clearing prices are realized…..I think the tax lien market could be a driver that brings us to the much-needed day of reckoning….


*Nothing in this article should be construed as investment advice. The piece is provided for readers’ edification only.

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  1. CCL

    Great idea. We need to get these people out of their houses and out onto the street. I’m particularly interested in homes with retired people, as they’ll put up less of a physical fight.

  2. fuzzychaos

    we’ll i think this will atleast delay the forclosure… if the guy cannot pay his tax certainly hes not paying his mortgage……


  3. Stephen

    That should definitely help move the bottoming process along in MD. Don’t forget how long the foreclosure process itself can take though.

    Most servicers have also been keeping taxes current. But, as they run out of cash for advances you will probably see more tax bills go unpaid by the servicer. (advances usually come out of the servicers pocket, they don’t get reimbursed until the property is sold)

    In Florida the Tax Certificate law is not so generous. Tax Certificate holders cannot force a property sale for several years… And the foreclosure process is running over a year as well. So a Cert sold today would not translate into a property sale for 3 years.

  4. Kalare Studio

    I think you’re misinformed about Arizona. This is from the pdf file issued by Pima County outlining its tax lien sale program:

    “…Pursuant to Arizona Revised Statutes, Section 42-18201, you must hold the certificate for a period of three years from the date of original offering before initiating an action in Superior Court.”

  5. JSV

    Just a side note. I did some research, and the Arizona waiting period is 3 years from the purchase date on the lien–not 6 months. Minor quibble though.

  6. DownSouth

    Rolfe Winkler said: “banks are loathe to take write-downs quickly these days until they can allow their current wide [net interest margin] spreads to rebuild their capital base”

    I’m seeing more and more on how banks are increasing their “wide margin” by jacking up credit card interest rates and fees, including a report on CBS Evening News last night:

    Also this from CNN Money:

    The senate bill also includes these provisions:

    It would increase Federal Deposit Insurance Corp.’s ability to borrow from the Treasury to $500 billion, up from $100 billion. It also allows the National Credit Union Administration to borrow from Treasury up to $18 billion, up from $6 billion.What are the implications of those measures?

  7. Fraud Guy

    In my personal experience, we thought we had 2 1/2 years to repay our tax lien–but the mortgage company redeemed the lien, and have tacked it on to the new escrow account on the mortgage, thus keeping it off of the loan itself.

    This might be an option for lenders elsewhere, to redeem the liens to forstall tax liens speeding up the reconciliation process.

  8. profnickd

    Good Lord this seems complicated. A person better know exactly what he’s doing before wading into this.

  9. Bob Sharpe

    Some states don’t have liens. Texas, for example, has what’s called a sheriff’s sale where the purchaser actually receives a Sheriff’s Deed to the property. Deeds constitute ownership, though a Sheriff’s Deed constitutes a lesser form of ownership than a General Warranty Deed. It pays to talk with someone in the local market and you need to know the title issues as well, but it can be a great way to pick up property for pennies on the dollar.

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