Profiting from Property Distress: A Letter To Governor Whitmer Concerning Michigan’s Predatory Tax Foreclosure & Delinquent Property Tax System
Preface: This open letter has been emailed and physically mailed to Governor Whitmer’s office. It’s written and shared in the spirit of working together to solve problems that affect the state.
Dear Governor Whitmer and Lieutenant Governor Gilchrist,
Congratulations to you both on your election victory! I am very excited about your commitment to a fair and equitable Michigan, and look forward to you accomplishing great things for our state.
I am writing to draw your attention to serious problems with Michigan’s current delinquent property tax and foreclosure system. The system was last overhauled in 1999 during the Engler administration through Public Act 123 which was promoted by a think tank and only partially implemented, as a program to encourage homeownership through the auction was never put into place (Akers, 2013). The system affects communities across the state, and has a particularly acute and negative impact on Detroit.
(Note: as I type this, Michigan is in a state of emergency over sub-zero temperatures. One of the events that was cancelled is the Show Cause hearing where Detroiters who are subject to tax foreclosure can receive in-person assistance from the county and independent counselors.)
Michigan has perhaps the strictest and fastest property tax foreclosure law in the country. The law lends itself to counties encouraging late tax payments because of the profitability of interest, penalties, fees, and auction sales, and the unrestricted ways that county Treasurers can use the surpluses they generate. Laws that were initially passed to expedite the transfer of truly abandoned property into productive re-use are too often responsible for turning occupied homes into blight.
Consider the case of Detroit. Detroit has only 7% of Michigan’s population, but between 2012 and 2017 Detroit accounted for 62% of all tax foreclosures in the state. Even into 2017, Wayne County had more tax foreclosures than all other Michigan counties combined.
At the left of the graph are all of the tax foreclosures in Wayne County from 2012 to 2017, then Detroit, then Genesee County, then Wayne County minus Detroit, followed by other counties with more than 1,000 tax foreclosures during this time period:
Clearly there is something going on that requires relief as even after years of people working hard to highlight and solve this problem, another 34,800 tax foreclosure notices were recently delivered to Detroit properties this year. According to county data, the number of foreclosure notices has been stuck at this number for the last three years even as local efforts have significantly reduced the number of properties that are reaching the auction. The reduction at the auction should not be allowed to mask the punishing incentive structure of the system.
Here is a picture of property tax delinquency in Detroit from August of 2018. The 40,562 yellow properties are more than a year behind on taxes, and the 53,070 orange properties are more than two years behind and therefor labeled by the county as “subject to foreclosure” — they’re everywhere:
Interactive map at https://taxforeclosure.landgrid.com/m/subject-to-foreclosure-august-2018
While I haven’t seen any evidence of explicit racial bias, I would be remiss not to mention that given the racial demographics of Detroit and Wayne County, and quite likely other communities where tax foreclosures have been outsized, that the policy is having a disproportionate impact on African-American and minority communities. This would seem to cross the line into Disparate Impact as defined in the Fair Housing Act, which does not require conscious intent to discriminate. According to The Equal Rights Center: “Disparate impact refers to policies and/or practices by housing providers that are neutral on their faces, but that disproportionately and negatively impact a group of people protected by the Fair Housing Act. The federally protected classes under the Fair Housing Act are race, color, religion, national origin, familial status, disability, and sex.”
Here are some basic pie charts showing Detroit as a percentage of Michigan’s population, as well as the percentage of tax foreclosures it has suffered, along with its racial composition compared to the state as a whole:
Now, as to why this is happening and what can be done about it:
Since 2015 I have attended near-monthly meetings on tax foreclosure in Detroit Mayor Duggan’s office. These meetings bring together city and county staff with researchers, community groups, and advocates to work on the problem. After studying this situation for a very long time, talking to all of the actors over the course of years, and going very deep into the data, here is my understanding of why the problem continues happening at such a scale, and some actionable things that can be done.
The reality is that late tax payments can be wildly profitable for counties due to the interest, penalties, and fees that are added on, as can the auction when properties sell for more than they owe. This can lead counties to use their Delinquent Tax Revolving Fund surpluses as unregulated profit centers to pay for things that property taxes were never intended to. It also fits with a broader national trend of municipalities monetizing the poor through fines that I’m sure Michigan does not want to be a part of.
For the last 8 years this issue has received very little attention from the state, and because of the profitability of late taxes and foreclosure there has been very little local action. The city points to the county, and the county points to the state, and the state has been silent. I am hoping that during your tenure we can apply your administration’s values to get Michigan’s city and county governments back to focusing on a property tax collection and foreclosure system that builds communities rather than profits from distress.
Here are a few major things that can be done through policy, laws, and leadership:
1.) Encourage Detroit to make its Poverty Tax Exemption retroactive for owner-occupied properties that should not have been paying property taxes in the first place
For many years Detroit has had a Poverty Tax Exemption program where owner-occupants making less than a certain amount do not have to pay property taxes at all. Unfortunately this program was not adequately advertised, nor was it easy to apply for, which resulted in the loss of many thousands of occupied homes that shouldn’t have been foreclosed.
In December 2018, the University of Michigan’s Poverty Solutions Initiative and Detroit Urban Research Center released a report on this situation and found that “Each year, about 40,000 owner-occupied households in Detroit are eligible for the exemption, but just over 5,500 individuals applied for an exemption in 2017, with roughly 5,200 people being granted some sort of relief.”
The ACLU and the City of Detroit recently settled a lawsuit over this, and Detroit has agreed to make the process easier. However, earning the exemption does not currently affect tax debts owed from prior years, leaving people stuck in a cycle of debt they can’t escape.
Relieving the debt of people who should have never owed it to begin with will take a massive and immediate bite out of Detroit’s occupied foreclosure problem, preserve homeownership, and relieve financial stress for tens of thousands of currently struggling homeowners. Detroit is currently considering whether or not to act on relieving these accumulated debts, and could use encouragement.
2.) Put limits on how much counties are allowed to profit from late taxes, interest, fees, penalties, and the auction, and how they can use surpluses from their Delinquent Tax Revolving Funds
The Michigan Supreme Court is preparing to hear a case on whether counties should return profits from auction sales to the prior owners. As or more significantly, counties should have to invest profits from late tax collection into relevant actions like making sure people are paying their taxes on time and have the outreach, information, assistance, and easy payment options to do so.
Instead, what we see currently is that more counties are regularly tapping into their Delinquent Revolving Tax Fund surpluses to cover budgetary shortfalls that are far outside of the spirit of tax foreclosure laws, to say the least. In turn, they have less incentive to assist taxpayers, and in fact gives counties financial motivation not to do so. This is painful to say, but the data indicates it is likely very true.
If you were to look at how counties are spending the money from these surpluses, I think you would be surprised. Perhaps someone can be empowered to compile data on this, as I don’t think anyone currently has a clear picture.
3.) Give Counties more control over how they choose to deal with foreclosures, and don’t make the auction mandatory
When occupied homes are sold by the hundreds and thousands, Treasurers often say there is nothing they can do because the auction is a state law. They say they are not free to operate the auction on a case by case basis, although in reality, at least in Wayne County, they already do, by arbitrarily including or excluding properties from foreclosure based on formulas they do not share and that are not in the state law.
The auction in general tends to attract speculation and absentee ownership, and, rather than putting abandoned properties back to productive re-use, can lead to eviction, vacancy, and property damage. It seems unwise to force counties to auction all foreclosures to the highest bidder in a yearly purge without any differentiation between what is being sold. An abandoned building is different than a vacant lot, which are both different than an owner-occupied home or a rental property with a family in it.
There are more potential actions beyond the three listed here, but each of these would seem to be common sense, they cut close to the root, and they are within the realm of concrete action and advocacy your office can provide and/or encourage others with political power to pursue.
Lest this letter sound like a lone voice, there is no shortage of research, reporting, and scholarly work on the problems with tax foreclosure in Michigan. Searches for Michigan tax foreclosure in the news will provide a dizzying array of articles highlighting the troubles. I am concerned that it is already a stain on the state’s history, and one that should not bleed into your administration.
I thank you for reading this and for considering it as an issue worthy of paying attention to and advocating for. If you ever want to assemble a working group on Michigan’s delinquent tax, foreclosure, and auction policies, I would be happy to join and recommend others who have been working on this issue just as hard.
I am also sending a similar note to the State Attorney General and Treasurer, as well as to the Wayne County Commissioners, to make sure they are also aware of this issue, its dynamics, and some potential approaches to improving things. The Wayne County Treasurer’s office and the City of Detroit are already well aware, but I will send notes to them as well.
Hopefully this letter was succinct without being overwhelming. I chose to leave out a lot of data, which is shareable upon request. The main thing I want to impart is that we have a situation here that requires attention, and that there is an addressable dynamic that drives it.
All of my best, and thank you for serving the people of Michigan,
Detroit resident and CEO of LOVELAND Technologies, landgrid.com