Last Tuesday’s Lowell City Council meeting was brief. The agenda had four motion responses, one vote, and 19 new Council motions. The vote was to authorize the late payment of bills incurred by the School Department. This is the second time this came before the City Council. The first time it was kicked back due to a lack of documentation. In a case of history repeating itself, the same thing happened Tuesday.
I’ve written about this before, but here’s a quick refresher: When a governmental entity enters into a contract for goods or services, payment must be made from money appropriated in the fiscal year during which the goods were delivered, or the services performed. If a bill is received after the fiscal year has been closed out, or if it is late being submitted internally for payment, the bill must be paid from future funds but there are mechanisms in place to make that very difficult to do. One such mechanism is requiring the City Council to authorize each late payment.
While the bills presented Tuesday had certifications from the vendors that they had provided the services, there was no corresponding certification from a city representative corroborating that the services had been received. Out of sympathy for the school department representative present, some Councilors made the case that the school department’s cover letter contained a blanket certification, but when it became evident that waiting two weeks to get actual certifications for each bill would not cause irrevocable harm, the Council voted to “table” the matter. When complete documentation is received by the Council, the matter can be taken up again.
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Although not specifically discussed at the Council meeting, some real estate matters warrant comment this week.
The April 24 cyberattack against City Hall released sensitive personal and financial information to the dark web which increases the risk of city employees becoming the victims of cybercrime. Among the concerns of some is “home title theft.” Awareness of this term has increased in recent years due to aggressive advertising campaigns by companies that provide a type of real estate monitoring service. Until this advertising binge began, no one ever mentioned this phenomenon, likely because it is exceedingly rare.
In theory, here is how the crime occurs: A criminal sits down at their computer and types up a deed that purports to transfer your house from you to the criminal. The criminal forges your name to the document and forges the name and stamp of a notary public. The criminal then brings this deed and cash for the recording fee to the registry of deeds where the document is recorded. (Unlike the title to a car which must be produced and signed to sell the vehicle, a real estate deed is created from scratch each time the property is transferred so the prior deed as a specific artifact is not needed to sell the property).
Once that new deed is recorded, the criminal can go to a mortgage company and get a mortgage that uses the house as security for the loan. The criminal gets the cash from the loan but never makes any payment. Eventually the lender schedules a foreclosure sale of the property. The first time that you, the innocent homeowner, knows anything about this is when the auctioneer shows up in your front yard one morning.
The good news is that a forged deed cannot convey title so you would still own your home. The bad news is that you would have to initiate litigation and prove that the deed was a forgery. When you bought your house, you likely obtained title insurance and some policies would pay a lawyer to represent you, but in other cases, you would have to pay the legal costs yourself. In either case, you would almost certainly obtain a court order voiding the fraudulent sale and clearing your title. You would not have any liability for the mortgage, nor could your house be sold to pay off that debt.
While this type of real estate fraud is theoretically possible, in my 29 years as register of deeds and 8 additional years practicing law in Massachusetts, I’ve never once seen it happen. There have been cases of a relative or care giver coercing an infirm elder into signing a deed, or an adult child forging an aged parent’s signature, or even a case where a husband showed up at a closing with his girlfriend pretending to be his wife with the girlfriend signing the (estranged) wife’s name to the deed. So property crime does occur, just not where a complete stranger manufactures a phantom sale then monetizes it.
Still, it could happen. There’s really no way to keep it from happening. Our multi-trillion dollar real estate industry is dependent on the speed of transactions. It is also dependent on notaries public doing their job properly. But as we see from this hypothetical crime, a criminal could easily forge a notary’s signature just as they could a homeowner’s signature. To require more elaborate measures to combat the very rare instances of fraud would cause the entire system to grind to a halt at the cost of billions of dollars.
The best you can do is get early warning that a new document has been recorded at the registry of deeds so you get a head start on filing a lawsuit. That early warning is what these companies that advertise on TV provide. The registry of deeds provides a similar service for free. It’s hosted by Secretary of State William Galvin’s office and it’s called Consumer Notification Service. If you’re interested, go to this page and create a free account. You then enter your name and property address and anytime a document is recorded that contains that name and address, you receive an email notification.
In the alternative, you can go to the registry of deeds website at any time, type in your name, and find any document that contains that name. The website is continuously updated so as soon as something is recorded, it shows up online.
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A more likely way to lose your home is by not paying your property taxes. Last week I wrote about a recent U.S. Supreme Court decision that found a Minnesota tax taking law unconstitutional on the grounds that the law allowed the municipality to take the entire value of the delinquent taxpayer’s home, not just an amount equal to the taxes and fees owed. I suggested that the Massachusetts law, while not identical, is close enough to run afoul of this decision. Boston Globe business columnist Sean Murphy suggested the same thing in a recent column.
Here's how the Massachusetts law works: If you fail to pay your property taxes on time, the city “takes” your property for nonpayment of taxes. The taking isn’t literal: it consists of publishing a notice in the newspaper and recording the notice at the registry of deeds. The homeowner retains possession of the property and can pay the accumulated taxes, interest, and late fees at any time.
Six months after the notice of taking has been recorded, the city can begin a lawsuit in Land Court to foreclose on the tax taking. This is a time-consuming process that is primarily concerned with providing notice of the suit to the homeowner and to anyone with an interest in the property like the holder of a mortgage. Assuming the homeowner fails to respond or responds without a winning defense, the court issues judgment for possession of the property in favor of the city. Even then, the process is not complete because for a full year after the date of the judgment, the homeowner could petition the court to reopen the case and allow the homeowner to pay everything up to date. If that happened, the homeowner would get to keep the property. If it didn’t happen, the city would own the property outright and likely sell it to the highest bidder. Even if the taxes originally due totaled just $100 and the property sold for $500,000, the city would keep the entire $500,000 and the homeowner would get nothing. It was a result like this that led the Supreme Court to hold that the Minnesota law was an unconstitutional governmental taking of property.
Historically in Massachusetts, the time, effort, and upfront legal expense of the full tax lien foreclosure deterred municipalities from pursuing that process. Instead, cities would leave the tax taking on record where it acted as a super lien that would be paid off whenever the property was sold or refinanced.
However, about a dozen years ago, a handful of companies emerged that specialized in the tax lien foreclosure process. They convinced municipalities including Lowell to sell them the tax takings at auction. This allowed the private company to step into the city’s shoes and pursue the tax lien foreclosure process that would ultimately yield a financial windfall to these companies. It was a good deal for the city because without any additional legal effort, the city received the back taxes owed in the form of the high bid at the auction and was able to use that money as current revenue rather than a future receivable.
Because this process is rather abstract, I thought giving a real-world example of how it has worked in Lowell would be helpful. In 1996, BC purchased a single-family home in Centralville for $72,000, financing the purchase with a mortgage for $72,950 from First Eastern Mortgage. (That’s not a typo; the loan amount exceeded the purchase price). In each of the next four years, BC obtained equity loans ranging from $25,000 to $45,000, using each new loan to pay off the previous one and keeping the excess cash. Then BC did his part to pump up the emerging mortgage bubble by borrowing $157,000 from Household Finance in 2001; $185,000 from Household in 2002; $196,000 from Shamrock in 2003; $235,000 from Argent Mortgage in 2004; and $273,000 from America’s Wholesale Lender in 2005. Each mortgage paid off the preceding one, but you’ll note the amount borrowed went up each time. The excess amount borrowed was cash to BC.
Soon after that last mortgage, the bubble burst and the value of the home likely plummeted. Still, there was never any evidence of a mortgage foreclosure being pursued, nor of real estate taxes not being paid.
That changed in July 2012 when the city of Lowell recorded a tax taking for $575.82 in unpaid property taxes for FY2011. Eighteen months later, the city recorded an Instrument of Assignment that transferred the city’s position in the tax taking of BC’s property to Tallage Adams LLC (one of the companies in the business of foreclosing tax liens and the high bidder at the city’s tax lien auction). Tallage immediately commenced an action in Land Court to foreclose the tax lien against BC, and in August 2014, the Court issued judgment in favor of Tallage. In March 2016, Tallage sold the property to a third-party individual for $166,000. That buyer remains in the home (although in 2021 the city recorded a tax taking against them, so history may be repeating itself).
Who won and who lost in this case? Like a game of fiscal musical chairs, America’s Wholesale Lender was left with the $273,000 unpaid mortgage when the last seat was taken away with the tax lien foreclosure. It’s hard to feel sorry for a mortgagee that made reckless loans, but that money most likely came from pension funds or insurance companies, so we all lost on the deal. Homeowner BC lost his residence, but he had extracted $273,000 in cash from a home he had purchased ten years earlier for just $72,000, so it’s tough to feel sorry for him. We’re not sure what Tallage paid the city for the assignment of BC’s tax lien, but we do know that the unpaid tax that started the entire process was less than $600. For that plus some time and effort in Land Court, Tallage got $166,000 when it resold the property after the foreclosure.
The tough cases, the ones that scream injustice, are the ones where the homeowner is elderly, often infirm physically or mentally, and without any mortgage. They miss a tax payment, ignore the notices that arrive because they don’t understand them, and end up losing their house and all its equity for a missed tax payment of $500. That scenario doesn’t occur all that often, but it occurs sometimes. The Minnesota case had that exact set of facts which made the Supreme Court’s decision easier to reach.
Hopefully the Massachusetts legislature steps in quickly and reforms our tax lien law. People should pay their taxes and there should be a mechanism for collecting them when they aren’t paid. But there’s no need for the unjust enrichment built into the Massachusetts law.
June 4, 2023
Thanks for the lesson!