June 2014
Delinquencies For Sale:
City's Annual Lien Sales Trigger Payments From Owners,
Often Exceeding Original Amount Owed
PDF version available here.
Summary
For many years, when property owners failed to pay their property taxes the city would eventually foreclose and take control of the site. Since 1996, the city has instead conducted lien sales on property owners’ debts for unpaid property taxes, water and sewer fees, and—more recently—emergency repair payments. The liens are sold at a fraction of their nominal value to a city-created trust that bundles the debts as bonds and sells them to investors. Every year, liens on about 5,000 properties in the city are sold.
The policy of undertaking annual lien sales has triggered a considerable amount of debt repayment. Before the liens are sold, property owners are notified of the impending sale and many owners then pay in full or enter into a payment plan with the city and those liens are removed from the sale list. When the liens are sold additional fees are attached to the debt and collection agencies are hired to seek payments on the debt in order to repay holders of the lien trust’s bonds. An annual interest rate of 18 percent on each property’s liens along with the threat of foreclosure motivates many property owners who did not resolve their delinquencies prior to the lien sale to settle their outstanding debt as the fees and interest mount. Any revenue in excess of what is needed to pay debt service to the bondholders and fees to the collection agencies flows to the city.
IBO has examined lien sales from 2009 through 2012, years in which the total value of the liens sold ranged from $70 million to $110 million a year. Among our findings:
A majority of the liens sold, 59 percent, were on residential properties, 25 percent on nonresidential properties, and 16 percent on vacant lots, based on an analysis of the lien pool in 2012. There were some geographic concentrations of properties in the 2012 lien pool: in the Brooklyn neighborhoods of Bushwick, Bedford-Stuyvesant, East Flatbush, and East New York; and in Southeast Queens. Smaller clusters also were in Harlem, the North Shore of Staten Island, and throughout the Bronx.
Every year New York City sells liens on approximately 5,000 properties in its annual tax lien sale. The lien debt is comprised of unpaid property taxes, water and sewer charges, and various other charges against properties. The total value of the liens in these sales ranged between $70 million and $110 million annually from 2009 to 2012. There are significant consequences to having a lien sold on a property, including facing a repayment schedule to a third-party lien servicer at an 18 percent interest rate and the risk of foreclosure by the servicer if payments are not made. Property owners who do repay their liens pay substantially more than they originally owed the city. Owners who do not repay their lien debt typically see the amount they owe double after three years and may have foreclosure pursued against their property.
There is a notable set of properties that have liens sold on them multiple times (for separate delinquencies) in the span of a few years. The repayment pattern for these properties is strikingly different than that of properties without prior liens. While the majority of owners of properties with a single lien pay their liens in full, a majority of owners of properties with multiple liens do not make any payments on any of their liens.
The city can ultimately receive more money than was originally owed in delinquencies through the lien sale because owners pay the original debt plus interest and fees. The inclusion of properties in the lien pools with debts that are most likely to be paid off is needed to make bonds backed by the liens attractive to private investors and to increase collections. Determining that a property with new outstanding debt was included in an earlier lien sale can indicate that its new lien will not be repaid and that it is possibly already in the foreclosure process. However, this distinction is not a determining factor in having properties disqualified from the lien pool, leading to the addition of a new debt burden on properties that are already heading toward foreclosure and the sale of collection rights for a debt that is not likely to be redeemed.
Background
New York City has been conducting annual lien sales since 1996 (all years refer to fiscal years) to collect unpaid property taxes and other charges as an alternative to the in-rem process in which the city took direct ownership of delinquent properties along with responsibility for maintenance and operating costs. The sale of liens, or the transfer of the legal claim to collect a debt, generates revenue for the city in two ways: it encourages property owners to settle their accounts in order to be removed from the list of potential lien sale properties, and it brings in cash payments through the actual sale of the liens.
Property owners with delinquencies that are eligible to be sold are first notified 90 days before the next scheduled lien sale and are further notified 60 days, 30 days, and 10 days before the sale date. To be removed from the lien list, property owners can pay off their debts or enter into payment agreements with the city. Terms of the agreements include up to 10 years to repay at an annual interest rate of 18 percent (the same rate charged by the city on all property-related delinquencies) and no down payment is required.1 The Mayor’s Office of Management and Budget (OMB) estimates that from 2008 through 2010, approximately three-fifths of the properties on the 90-day lists were removed in this way. Properties can also be removed from the lists if it is determined that the charges were listed in error or that the property is somehow exempt from the sale. From 2008 through 2010 about one-fifth of the properties on the 90-day lists were in the latter category, according to OMB.
The eligible debts of the remaining one-fifth of the parcels on the original 90-day lists—the properties that are not exempt, have valid charges, and whose owners do not settle their delinquency with the city or enter a payment plan by the sale date—are the liens that are sold. On the sale date, the city adds a 5 percent surcharge and an administrative fee of roughly $200 to the outstanding balance and sells the liens to a tax lien trust, a Delaware statutory trust formed by the city for the purpose of issuing bonds. After the sale, the city no longer owns the liens and no longer has a role in the collection process. The trust sells bonds to third-party investors and uses the proceeds to give the city a cash payment in exchange for the tax liens. The liens are sold at discount, the extent of which varies with every lien sale; on average the initial payment from the trust to the city is about 73 percent of the total value of the lien pool. The trust hires a private collection agent, or ”servicer,” to bill and collect payments from property owners with liens.2 If property owners do not make their required payments to the servicer, the servicer can pursue foreclosure on the properties. The trust pays the bondholders with the tax lien revenue collected by the servicer. After the investors are repaid, any residual interest is then paid to the city.
Since the program’s inception, lien sales have been reauthorized several times. With each reauthorization, there have been changes to the program in terms of the types of properties eligible, to allow additional types of liens to be sold, and to add exemptions to the sale process that protect vulnerable populations from having their properties included in a lien sale.
The types of properties allowed on the lien lists have changed over time. Eligibility for the lien sale depends on the building type, the tax class, the type of lien that would be sold, and whether the property has reached thresholds for the amount of time delinquent and the value of the outstanding debt. In addition to these criteria, properties owned by certain populations, such as seniors, veterans, the disabled, and low-income homeowners can be exempted from inclusion in the lien sale, regardless of the amount owed. Properties can also be removed from the process at the discretion of the Department of Housing Preservation and Development (HPD).
The lien sale program first concentrated on delinquent property taxes but allowed other charges such as water and sewer fees to be added on if the property had outstanding property tax charges as well. Standalone liens for water and sewer charges were allowed in the lien pool under the December 31, 2007 reauthorization. In the March 16, 2011 reauthorization, standalone liens for the Emergency Repair Program (ERP), under which HPD performs repairs on properties with immediately hazardous violations at the owner’s expense, also became eligible for inclusion in the lien pool.
A complex set of rules exists for filling the lien sale lists with appropriate properties, including those that are most likely to repay the delinquency and thus increase the marketability of the bonds which finance the purchase of the lien debt. However, there is nothing to prevent properties that have already had liens sold on them from inclusion in a new lien pool. For the purposes of this analysis, we distinguish between properties with a single lien and properties with multiple liens. A review of the repayment patterns of owners of properties with multiple liens suggests that this is a distinct set of property owners within the lien pools that are less likely to pay their outstanding debts after the liens are sold.
Scope, Data, and Limitations
The primary data used for this analysis are the lien lists created by the Department of Finance (DOF) for the four annual lien sales conducted in 2009 through 2012 and monthly lien servicer reports released by the three third-party servicers hired for these lien pools: MTAG Services, XSPAND, and Tower Capital Management. Repayment was tracked for the 2009-2011 sales by matching the monthly servicer reports to the DOF lien sale lists.3 For the 2009 and 2010 sales, repayment was tracked through February 28, 2013 while repayment for the 2011 sale was tracked through June 30, 2013. Therefore, for the 2009 list we are able to analyze 44 months of repayment (July 2009-February 2013). We analyze 32 months for the 2010 sale (July 2010-February 2013) and 22 months for the 2011 sale (September 2011-June 2013). Given the timing of our research, this study does not include analysis of the repayment of the liens in the 2012, 2013, or 2014 sales.
This analysis only tracks repayment for properties that had liens sold and received bills from the private servicers. It does not include properties that were removed from the lien list by entering into payment plans with the city or that were taken off the list before the sale for some other reason. This analysis will refer to properties with a single lien and properties with multiple liens. Properties with a single lien are those that were involved in only one of the four lien sales in 2009 through 2012, while properties with multiple liens were defined as any property that had a lien sold in the 2012 sale that also had at least one prior lien on a separate delinquency sold in either the 2009, 2010, or 2011 sales.
Changes Between the 90-Day and Sale Lists
On average about 24,300 properties were listed on each of the initial 90-day notification lists for the 2009 through 2012 lien sales. As previously discussed, however, liens on only about 20 percent of those properties were actually sold each year. It appears that properties with smaller debts were more likely to be removed, either because their owners entered into payment plans or were taken off the list for another reason.
During our study period, the number of liens on the 90-day list peaked in 2011, the first year standalone ERP charges were included in the sale; 25,937 properties were listed, of which 5,153 were included in the final sale. The 90-day list in 2012 had the fewest liens with 22,111 properties listed, of which 4,093 were included in the final sale. Despite having the fewest liens listed, the 90-day list for 2012 had the greatest debt outstanding of the four pools studied, $700 million.
While the number of properties on the list decreased by about 80 percent between the initial 90-day list and the lien sale for each year of our study period, there was an average decline of 85 percent in total outstanding debt associated with the properties that went to sale. By the sale date, the total outstanding debt of all properties with liens sold was $85 million in both 2009 and 2010, $106 million in 2011, and $73 million in 2012.
About 80 Percent of Properties on the 90-Day List are Removed Before the Actual Sale
Number of Properties on 90-Day List