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Mixing Public and Private Objections

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Yesterday's New York Times reported on homeowners being pushed out of their homes by companies that buy tax liens.

First a little background. A tax lien is an encumbrance placed on a piece of real property to secure unpaid real estate taxes due to a town, city or county. These liens are recorded in a Clerk's Office so that a property cannot be sold until they are paid off. These liens usually earn very high interest (+/- 18%) and take precedence over any and all other liens against a property, such as a mortgage.

About thirty years ago, in order to raise money, governments began selling these liens in earnest to private investors. In a well-written book that explains how and why to buy tax liens, the author describes the six benefits of purchasing tax liens: high yield, safety, small units, obtaining property at favorable prices (foreclosures), tax-deductible travel and "bragging rights." Although not many people understand the process, the truth is that the purchase of tax liens from a government entity can be a very lucrative endeavor.

Now, however, with lots of homeowners in financial trouble, governments are saying "Oops, the people who bought our tax liens are actually invoking their rights to charge outrageous interest rates and throw people out of their homes ... that's not what we contemplated."

Well, what the heck did these cities and counties contemplate would happen when private enterprise gets its hands on a financial boondoggle?

Tax liens were created to push homeowners to pay their real estate taxes. Governments did not, however, want to actually force people out of their homes so they outsourced the dirty work -- selling the rights to private enterprisers who had no problem foreclosing on distressed homeowners. In my mind these sales should not be legal.

Governments get into trouble when they mix public and private objectives. A government has a responsibility to its citizens to treat people fairly and assist people who get into unavoidable, difficult situations (see the Times article for examples). By selling tax liens to private investors, governments are asking for trouble.

This public/private confusion is exactly how Fannie Mae and Freddie Mac (now owned by the taxpayers) got into trouble. These enterprises were pushed by Congress not only to make money and be profitable (private objective) but also to facilitate loans to people who were marginal homeowners (public objective). Same deal with banks that were pushed by the Community Reinvestment Act to make loans to borrowers they might not otherwise lend to (private choice) because the government wanted more homeownership in lower-income areas (public choice).

I could go on with many other examples but this is my take from the tax lien story: government gets into trouble when it expects private enterprise to do anything other than what its DNA requires: to make as much money as it can. When governments outsource distasteful chores (like foreclosing on tax liens) to private enterprise, good people in difficult situations are going to get hurt.

Jim Randel is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, was just awarded First Prize in a book competition sponsored by NAREE, an organization of 650 journalists who cover housing, finance and business.