Shedding Light on New York City’s Tax Lien Securitization Program
Thursday, June 20, 2019
Posted by: Carly Cahur
By: Alexandra C. Mink, Esq., Associate at Bronster LLP
Before Tax Lien Securitization
New York City is notable for many things—the Empire State Building, the Statue of Liberty, the New York Yankees, pizza, fast walkers and even (allegedly) a certain “attitude.” Slightly more obscure—but no less remarkable—is New York City’s tax lien sales program, a program that not only supports and funds local government but also provides robust safeguards for the city’s taxpayers. Just over twenty years ago, however, the City’s tax lien collection efforts looked remarkably different.
In the mid- to late-nineties, New York City faced a housing crisis that was exacerbated by a
policy of in rem foreclosure fraught with inefficiencies. The in rem program was slow, costly,
and rarely resulted in enforcement or collection of funds necessary to the functioning of the
City. It also forced the City to manage thousands of properties, often ineffectively. Under the in rem system, the City would take title to delinquent properties after the expiration of certain time minimums with the ultimate goal of selling the properties via auction. To dispose of one
delinquent property under the in rem procedure was extremely costly, however, sometimes
costing upwards of $2.2 million per property. What is more, under the in rem foreclosure
program, the City collected only about 29% of delinquencies within one year of their creation.
The practical result of New York City’s in rem foreclosure program was twofold: (1) the City
lacked a meaningful enforcement mechanism to incentivize payment of taxes and (2) responsible taxpayers often shouldered the burden of increased municipal expenses that would otherwise have been funded by the collection of taxes. The system was unmanageable, unfair, and adversely targeted responsible residents. Moreover, it undeniably spurred the decline of Manhattan’s real property values and standards of living.
Tax Lien Program Overhaul
In response to the above crisis, New York City completely overhauled its tax lien sale program in 1996 with the goal of resolving real property tax compliance as a last-resort enforcement and collection mechanism for unpaid property taxes and/or municipal charges in the City. After much review, the City installed the current, semi-private system in which delinquent tax liens are sold annually in bulk to City-owned trusts, which then issue interest-earning bonds secured by tax lien certificates to institutional investors. The tax lien certificates are, in turn, secured by the underlying delinquent properties. The institutional investors, known as Qualified Institutional Buyers (“QIBs”), hire vetted servicers which work to collect the delinquent taxes and charges. After the amounts collected by the servicers are enough to retire the bonds, any residual collections are paid to the City. If the delinquent taxes are not redeemed or paid off, the properties go to foreclosure sale.
While all unpaid property taxes, water charges, sewer charges, etc. become liens the day they are due and payable, those debts can be sold only when certain time and dollar amount thresholds are met. At that time, the City notifies the property owners via local newspapers and letters that a lien on their property will be sold if not redeemed (i.e. satisfied). These notices are provided 90 days, 60 days, 30 days, and then again 10 days out before the sale. The property owner can pay the outstanding debt or enter into a payment plan with the City at any time during this notification process to avoid inclusion in the sale.
If a property owner has not redeemed the debt or entered into some kind of forbearance
agreement or payment plan within one year of the date of sale, the lien is subject to
foreclosure. The foreclosure process, while rarely used, is the final enforcement mechanism
under the securitization program. New York City’s tax liens are foreclosed in a judicial process that mirrors the process for mortgages under New York State law. Tax lien foreclosure actions are regulated by the New York City Administrative Code and the New York Real Property Actions and Proceedings Law and generally span one to three years. The process is underscored by layers of protections for property owners, especially owners who are disabled, veterans, active military personnel, or senior citizens. Again, the property owner has the right to redeem the lien at any time prior to the court-administered foreclosure auction of the underlying property.
Why It Works
New York City’s program is unique in that it provides an immediate source of revenue to the
City to function at a municipal level, reduces the burden on local government to act as tax
collector, returns distressed and delinquent properties to the New York City tax roll, and creates bespoke payment plans for individual taxpayers to encourage home retention. The securitized, bulk-sale approach mobilizes the private sector in a controlled, more standardized and costefficient enforcement process.
Unlike other counties in New York State, there are no private tax lien holders in New York
City. As stated herein, all City liens are serviced by a limited number of well-vetted private
servicers. Outsourcing the servicing of the tax liens removes a huge burden from local
government and creates an industry that benefits all parties involved. Notably, it decreases the cost-shifting from tax delinquent property owners to tax compliant owners.
Even after sale, however, the City continues to oversee the enforcement aspects of the program through its agencies, thus always maintaining some degree of control over the existing tax lien portfolio. As a result, the City can quickly close budget gaps resulting from tax delinquencies and ensure a virtually abuse-free collection system driven by private servicers for the benefit of outside investors. The system provides a unique but effective combination of public and private services for the benefit of the City at large.
Role of Attorneys
There is no doubt that servicers play an integral role in the success of New York City’s tax lien securitization program. Equally important, however, are the law firms and attorneys who support these servicers. Attorneys work on the front lines to implement servicers’ goals and negotiate with property owners to settle cases without compromising tax liens. Attorneys shape legal strategies to accommodate individual property owners and frequently limit their fees to help servicers control legal expenses.
Bronster LLP is unique along with other law firms handling tax lien foreclosures in New York
City, as its partners have litigated tax lien foreclosures since the City’s adoption of the tax lien securitization program in 1996. The attorneys associated with Bronster LLP have prevailed in suits regarding, inter alia, clouded title, strict foreclosure, deceased and/or incapacitated defendants, bankruptcies, landlord/tenant issues, deed forgeries, and compliance with the Fair Debt Collection Practices Act. The firm represents parties in foreclosure proceedings involving real estate, limited liability companies, cooperative apartments, condominiums, and personal property under the Uniform Commercial Code and has successfully litigated thousands of matters. For additional information or to contact the Firm directly, please visit bronsterllp.com