Detroit’s Tax Foreclosure Problems Need Long-Term Solutions

This is an excerpt of Chapter 3 of Tackling Vacancy and Abandonment: Strategies and Impacts After the Great Recession, jointly produced by the Center for Community Progress, the Federal Reserve Bank of Atlanta, and the Federal Reserve Bank of Cleveland. It has been lightly edited and condensed for the web. In this chapter, Margaret Dewar details the tax foreclosure problem in Detroit and offers some approaches that city, county, and state officials could adopt that might lead to longer-term solutions. Click here to download the full chapter and read more insights on tackling vacancy and abandonment from the nation’s leading experts.

Tax foreclosure problems in Detroit have been difficult to solve long term for several reasons. Many possible solutions within the constraints of the law and regulations may have unforeseen harmful consequences, would deliver minimal benefits, or would cost too much. The number of tax foreclosures in Detroit has fallen substantially since the peak in 2015, but the pandemic-induced recession will likely increase tax delinquency because homeowners have lost jobs and income not only in Detroit but also elsewhere in the nation. Tax foreclosures increased across the country during and after the last recession. If long-term solutions to tax foreclosure could be implemented in Detroit, they could serve as a model for other jurisdictions facing the need to protect vulnerable people and preserve housing despite tax delinquency.

Housing disinvestment inevitably occurs after a city loses substantial population and incomes fall. Public actions or failures to act, however, should not advance the loss of low-income owner occupants’ housing or enable investors’ extraction of profit from deteriorated structures with low-income tenants. The solutions in place thus far have lessened tax foreclosure problems, at least in the short term, but have not solved them.

Financial gains from the redemption of properties and from tax auctions gave county officials throughout the state an incentive to oppose changes that might yield less revenue from the tax foreclosure process. As of 2017, Wayne County had added $421 million to the county government’s general fund from payments of fees, interest, and penalties and from sales of properties at the auctions since about 2007. The Wayne County executive stated that the foreclosure auctions worked against healthy communities and good government, but neither he nor the treasurer had taken concerted action to transform the system.

Fraud and legal challenges are indeed common, and fairness matters. In 2007 an investigative reporter exposed fraud in the assessor’s Board of Review approval of poverty tax exemptions, prompting removal of some commissioners and changes in procedures. Both city and county officials faced severe budget problems that needed to be addressed through increased revenues and cuts in expenditures.

Nevertheless, city, county, and state officials could adopt additional approaches that might offer longer-term solutions. For instance, they could make applications for the poverty tax exemption easier, thus requiring less staff and volunteer work. State law requires verification only of the applicant’s ownership and occupancy of the property and of the incomes of all those in the household, but the City of Detroit application has required much more information and documentation.

More property owners could benefit from the poverty tax exemption if the Board of Review could prove the exemption for elderly homeowners and others on fixed low incomes for several years at a time. This change would require state legislation. Legislation passed in December 2020, put in place to deal with financial hardships and administrative challenges during the pandemic, allows multiyear exemptions temporarily and could serve to test the viability of new measures that would reduce the burden of the annual application process in more normal times.

State law could change to make all very low-value, owner-occupied structures exempt from property taxes on the assumption that the occupants would qualify for the poverty tax exemption. Then volunteers could focus on enrolling households that met program guidelines but were left out. Officials could use algorithms to identify those who may have made a fraudulent claim and to investigate them, and they could investigate a randomly chosen list of approved properties each year to confirm their eligibility.

Other actions to prevent the ill effects of the auctions seemed possible in Detroit based on efforts elsewhere in the state. The law allows the “bundling” of properties for auction. The large number of properties in a bundle in unknown condition makes the high-priced package unattractive to bidders and prevents sale at the auction. The Wayne County treasurer could bundle all occupied houses and all properties requiring demolition. After the unsold bundle became the property of the city government, the city land bank could work to sell the properties to their occupants and to other responsible owners in a more deliberate way than the auction process, as other land banks have done.

If the legislature and the governor were willing to amend state law, treasurers could exercise more discretion in offering properties at auction. For instance, they could gain the right to remove owner-occupied properties from the auction or to decide whether to hold an auction in the first place. State, city, and county governments could be permitted to exercise the right of refusal to purchase properties between the first and second auctions by paying the opening bid of $500.

Solving Detroit’s tax foreclosure problem continues to be a heavy lift. The city and county governments face many other pressing priorities and lack funds for initiatives, a significant barrier to making changes to resource-intensive tax foreclosure processes. The Detroit Land Bank lacks sufficient streams of funding and already owns around 85,000 properties; so it may have difficulty handling more. More effort across all levels of government to find viable, long-term solutions is greatly needed and likely to yield more progress. Such effort is vital to stop properties occupied by low-income homeowners and renters from going through tax foreclosure and auction only to result in blighted neighborhoods and vacant buildings.