Monday, December 13, 2010

Struggling to grow revenues, Bank of America is getting creative. You will remember that back in the mid-'oos, BofA (and its ugly stepchild, Countrywide Financial Corp.) raked in oodles of cash by making risky home loans to unqualified borrowers, then re-selling the loans (via mortgage-backed securities) to unsuspecting investors. These shenanigans helped to create the Housing Bubble, whereby way more houses were built than there were responsible mortgagors to occupy them. The Bubble began deflating in 2007 and is still deflating today. Home prices, down 30% since the peak, are expected to decline another 10-15% in 2011.

Meanwhile, the subprime loans, and even some of the prime ones, have gone bad. Those that were not securitized are still sitting on BofA's balance sheet. Some that were securitized are being "put back" to BofA because of faulty documentation, a defect that is also making it difficult for the company to foreclose on delinquent loans. Stuck with depreciating collateral, what is a predatory lender to do?

One way to fast-track the foreclosure process is to take over tax liens on distressed properties. According to The Center For Public Integrity, that is exactly what Bank of America is doing. BofA has figured out that people behind on their house payments are likely to be falling behind on their local property-tax payments as well. In other words, there is more than one way to skin a delinquent. BofA is showing up (often in disguise) at tax-lien auctions to widen their claim on residential real estate.

The taxing authorities, you see, don't really want to take property from a delinquent taxpayer. They just want the unpaid tax. So it is not uncommon for them to auction off an outstanding lien. The winning bidder settles the tax liability, effectively replacing the county (or municipality) as the debt collector. The new lien-holder gets to tack on extra fees for penalties and interest and can even seize the property through foreclosure after a certain period of time. BofA has gone one step further and partnered with a hedge fund to securitize the liens, i.e. re-selling them to investors.

So let's get this straight. Federal taxpayers bailed out Bank of America in 2008 (to the tune of $45 billion) so that said bailee can set up shop as a private tax collector. Talk about a turn-around!

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