From The Center for Public Integrity

Wall Street Quietly Creates a New Way to Profit From Homeowner Distress
Large Bank, Hedge Fund Bundle Small Tax Debts Into Private Investments

By Fred Schulte | December 09, 2010

When Florida retiree Gladys Walker fell behind in paying taxes on her modest Pompano Beach home, she had no idea one of America’s biggest banks and a major Wall Street hedge fund engaged in frenzied bidding for the right to collect her debt—all $768.25 of it.

“I just couldn’t come up with the money,” said Walker, 67, a former hotel worker who makes do on a monthly Social Security check.

Barely more than a year after a taxpayer bailout of major financial institutions, Bank of America and the hedge fund, Fortress Investment Group, spotted a fresh money-making opportunity – collecting the tax debts of tens of thousands of people like Walker. The bank and hedge fund can add interest charges and fees, and they bundled the debts as securities for investors.

In late May and early June, proxies for the two institutions quietly bought hundreds of millions of dollars in homeowners’ property tax debts in Florida by bidding at a series of online auctions held by county tax collectors. They didn’t use their names but donned multiple other identities, dominating the auctions and repeatedly bidding on the same parcels – in the case of Walker’s small home, more than 8,000 times.

Then, in September, Bank of America’s securities division packaged $301 million worth of the tax liens it and Fortress had acquired into bonds pitched privately to major investors. The anticipated return – estimated at between 7 to 10 percent – is possible because buyers of tax debts can assess a panoply of interest charges and other fees. When the debt goes unpaid long enough, the liens buyer can seize properties through foreclosure.

Because the bonds were sold privately, there’s no public record indicating who purchased them, the prices paid, or the anticipated return. Moody Investment Services spokesman Tom Lemmon said the type of offering, known as a tax lien securitization trust, is fairly uncommon. Bank of America, he added, may make additional offerings in future years.

A Bank of America spokesman, while otherwise declining comment, said that the bank and Fortress had not acted together in bidding in the auctions.

Bank of America spokesman William Halldin said by email: “Our bids were made independent of any other organization. Any suggestion that they weren’t independent is simply incorrect.”

Fortress, which is headed by former Fannie Mae chief Daniel Mudd, had no comment.

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