WASHINGTON — The elderly and other vulnerable homeowners are losing their homes because they owe as little as a few hundred dollars in back taxes, according to a report from a consumer group.

Outdated state laws allow big banks and other investors to reap windfall profits by buying the houses for a pittance and reselling them, the National Consumer Law Center said in a report being released Tuesday.

Local governments can seize and sell a home if the owner falls behind on property taxes and fees. The process helps governments make ends meet at a time when low property values and the weak economy are squeezing tax revenue.

But tax debts as small as $400 can cause people to lose their homes because of arcane laws and misinformation among consumers, says John Rao, the report’s author and an attorney with NCLC.

The consequences are “devastating for individuals, families and communities,” Rao said. He said states should update laws so speculators can’t profit from misinformed homeowners and people who have difficulty managing their finances.

The rules for property tax sales can be confusing, especially to elderly people who can’t keep track of their finances and people in minority-heavy communities that were targeted by subprime lenders. Here’s how it works:

The government files a public document called a tax lien saying that it can seize the property if the taxes remain unpaid.

If the taxes aren’t paid, the government auctions the lien to investors. Past investors include JPMorgan Chase, Bank of America and people who respond to Internet get-rich schemes, the report said. Homes are sold at steep discounts.

For a limited time, the homeowner may buy back the home by paying to the investors the purchase price of the lien, plus interest, fees and other costs. That’s possible because investors haven’t bought the home itself – they have purchased the tax lien, which allows them to seize the home later.

If the owner fails to pay all the costs, investors can sell the home at a big profit compared with the cost of buying the tax lien.

The report said state governments should make it easier for homeowners to retake their homes after tax lien sales. It said they should limit the interest and penalties investors can charge and increase court oversight.

It also called on local governments to let people pay back taxes or fees to investors on an installment plan, and to increase notice to homeowners and make sure they understand their rights.

Tax lien sales differ from most foreclosures, which happen when people fall behind on mortgage payments. In many states, homes in arrears on taxes can be sold for only the amount of back taxes owed.

That means a $200,000 home might fetch only $1,200, the report said.

 

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