Homeowners who owe just a few hundred dollars in municipal debts - including Baltimore City water bills - often are hit with thousands of dollars in fees from private debt collectors and can lose their homes if they don't pay up.
At least 400 city homes have been lost over debts other than property taxes in the past three years, an analysis of city tax records and court filings by The Sun found. Most stemmed from unpaid water and sewer bills, though some also included alley repaving charges, sidewalk repairs and even fees to register rental property.Roughly half of those foreclosures involved unpaid charges of $500 or less.
"It just seems predatory and abusive through and through to me," said Johanna Neumann, policy advocate for Maryland PIRG, a public interest group. "Clearly something is wrong."
Baltimore Mayor Sheila Dixon said she was surprised to hear how often small debts put home ownership in jeopardy, and suggested an amnesty program as the city had with unpaid parking tickets.
"I would never want to see someone lose their home because they haven't paid a $150 water bill," Dixon said, adding: "This is something that we can revisit."
Localities across the nation take steps to compel homeowners to pay their property taxes. But Maryland's process differs from those of many states in several ways.
Rather than trying to collect back taxes themselves, many Maryland counties and cities sell the collection rights to investors in annual auctions. Those investors buy the right to charge interest and fees that often amount to thousands of dollars, and the right to sue to seize the homes. Rising property values have made the properties worth far more than the debt owed in most cases.
Some Maryland jurisdictions include charges other than taxes in the lien sale process. While that happens only rarely in some areas, nearly one in three of the approximately 8,000 liens that Baltimore City offered for sale last year contained no property taxes, and roughly one in 10 were for debts of under $500.
Some critics of these sales see parallels to the state's system of ground rents - leases for the land under tens of thousands of Baltimore rowhouses - which the General Assembly has overhauled in recent weeks with Gov. Martin O'Malley's backing.
Both systems impose fees on homeowners that are many times the amounts of debts owed, can result in property seizures that net investors thousands of dollars in profits, and often are clouded by questions about whether property owners are adequately notified of the debt before being sued.
"It's far more egregious than ground rent, because the ground rent at least has a cap on costs and expenses," said Kathleen S. Skullney, staff attorney with the Legal Aid Bureau in Baltimore.
Rose Tydings lost two properties in the Berea neighborhood of East Baltimore. In one case, her unpaid water bill of $272.22 ballooned to $6,414.69, including nearly $5,000 in legal fees. "The redemption price was crazy," said Barry M. Tapp, a Laurel attorney who represented Tydings. "She didn't have the money."
In separate court cases in November 2006, judges awarded both homes along East Hoffman Street to Hiwan LLC. The company's registered agent is Baltimore County lawyer Heidi Kenny, and her husband, Steven L. Berman, is the managing member, according to property records.
Firms connected to the couple bought $2.4 million worth of liens last year, making them among the three largest tax-sale investors in Baltimore. Neither Kenny nor Berman would comment for this article.
Many public officials defend the tax sales process, which was adopted by the state a half-century ago and now is used to collect any debt over $100.
In November, Baltimore's City Council withdrew a proposed ordinance that would have kept liens resulting exclusively from water bills out of the annual auctions. That action came after high-ranking city officials argued that many property owners would stop paying their bills without the threat of foreclosure.
Baltimore officials point out that most people who lost property in the city failed to respond to repeated demands for payment - including the lawsuits filed against them. Still, they acknowledge that large numbers involve relatively small sums.
Stanley J. Milesky, chief of the city's Bureau of Treasury Management, said that while a tax sale has "some unsavory dimensions," it is "an effective way for compelling people to pay the city."
Private utilities such as Baltimore Gas and Electric Co. shut off service, after going through many regulatory steps, if someone doesn't pay a bill. But Baltimore officials generally place delinquent water bills of more than $100 into lien sales rather than shut off the service. The city can take that step because the Public Service Commission has no authority over municipal utilities.
Sale records in the counties around Baltimore don't make clear how many liens were for debts other than taxes. But about 15 percent of the more than 13,000 liens sold in May 2006 in the city and Baltimore, Howard and Prince George's counties involved debts of less than $500.
State law lets each jurisdiction decide what types of debts to include. In Baltimore County, homes aren't put into tax sales over water bills, even though the county gets its water from the city. Harford County does put water and sewer bills into its sales, but that happened with only seven of the 425 properties involved in its 2006 sale.
In recent years, state legislators have tinkered with the tax sale process. In 1986, they added a stipulation that a Baltimore homeowner can't be forced into a sale over an alley-paving bill alone. Also, in June 1999, Baltimore's City Council reduced the interest rate that lien investors can charge on overdue bills from 24 percent to 18 percent.
But since then, little has been done to change the system.
"The city is part of the problem," said Bernard C. "Jack" Young, the 12th District councilman who proposed the bill to end tax sales stemming from water bills. "When you're dealing with bureaucrats, their job is to protect the interests of the city, but sometimes they hurt the very people who are paying taxes in the city."
The tax sale process was designed to find new owners for abandoned or dilapidated properties. That's no small problem in Baltimore, where thousands of houses are boarded up.
"The benefit of the system is that property can be put back in the hands of people who will put it back on the tax rolls and redevelop it," said tax sale investor Christopher F. Bryan.
But more than 80 percent of the properties in Baltimore that investors bid on last year were occupied, city records show. The state assessed the value of about 40 percent of those occupied properties at $50,000 or more. That's typically tens of thousands of dollars more than the liens encumbering the properties, which means investors can make large profits if the homeowners can't get their homes out of hock - although homeowners can in some cases get some of their equity back.
Last year, three investment groups bought about two-thirds of the liens sold by the city and four nearby counties. Investors in two of those groups, or their family members, also own large stakes in ground rents and are among the most frequent filers of lawsuits against homeowners over both types of debts.
None of the three groups would comment. But several attorneys who handle their affairs said investors relieve government of the burden of collecting debts and shoulder the risks of taking over long-neglected properties - risks that entitle them to their gains.
"It's not an easy business. That's why there are so few in it," said Anthony De Laurentis. His Columbia law firm represents Sunrise Atlantic LLC, an arm of BankAtlantic of Fort Lauderdale, Fla. Sunrise Atlantic bought more Baltimore tax liens last year than any other investor.
For investors who understand the system and have the money to get in, the rewards can be large. Many are lawyers who, after buying the liens and waiting six months as required by law, file hundreds of suits to foreclose and seek several thousand dollars of fees in each case. One week last November, three attorneys who specialize in tax sale foreclosures filed more than 1,000 such suits.
Currently, there are 4,820 of these cases on the Baltimore Circuit Court docket, occupying at least one judge full time. Most of these actions take more than a year to resolve.
State law sets the parameters for paying off the liens, which most people or their mortgage companies eventually do, rather than lose the homes.
Costs, especially attorney fees, don't pile up at the start. In the first four months after the tax sale, a homeowner can redeem debt and keep the property by paying interest only. Between four and six months, the lien holder is permitted to add fees for a title search, which is typically $350, as well as $400 in legal charges. Once the lien is six months overdue, the lien holder can head to court, where legal fees greatly escalate and the homeowner usually must pay the bill in full or risk losing the home.
Legal costs in these lawsuits have soared since the legislature in 2003 removed a $400 cap and permitted lawyers to charge "reasonable fees," subject to court approval, once a case gets to court.
Court and county records suggest that legal fee billings are often identical, regardless of the complexity of the case.
"You won't know how many hours [attorneys] worked. We don't know how to break that down. We don't like it, but there's not much we can do about it," said Stan Willis, chief of the treasury for Prince George's County.
Herbert Burgunder III, a lawyer who handles many lawsuits for tax sale investors, said the amount of legal work needed isn't any less for small debts than large ones. "I can't speak for other attorneys, but my fees are based on the amount of work done in each case," he said.
Catonsville attorney Benjamin Decker, who represents tax sale investors, said that legal fees are "real ambiguous," and that the profession could benefit from guidance by the state legislature or the courts. "Some attorneys out there are charging outrageous legal fees," he said.
Baltimore lawyer Jay A. Dackman in recent years has been among the city's most active lawyers in both tax sale and ground rent cases. Now, he says, the tax sale process has become little more than an excuse for attorneys to rack up fees, often at the expense of low-income homeowners. "I don't like what is going on," Dackman said. "It's just abusive now. There needs to be standards set again."
"Once you file suit, the sky's the limit," he said. "The problem with the hefty fees is, 'Who's there to verify it?' It's not the way it's supposed to be. I'm not buying any more, ever. That's it. I'm done."
Judge Evelyn Omega Cannon, who is in charge of the civil docket for the city Circuit Court, was asked whether there has been enough oversight of cases, including legal expenses. The law leaves it up to the court to make sure fees are "reasonable."
"To say there has or has not been enough [oversight] means I would spend time researching what's been done," Cannon replied. "That would be a thesis."
Reporters sampled court files over several years and found judges rarely reduced the fees that attorneys demanded from homeowners seeking to keep their homes. There is no documentation in the files to support the amounts.
After two recent interviews, Cannon acted last week in eight cases to request more documentation from lawyers about their fees. During the interviews, she had insisted that any action she takes in court is not related to the newpaper's inquiries.
State Sen. George W. Della Jr., a Baltimore Democrat, said he believes the legislature is at least partly to blame for the soaring fees.
He has introduced a bill to restore the $400 cap.
"Granted, these are people who haven't paid their property taxes or other liens, but still they're being taken advantage of. We need to change the law and bring about some fairness," Della said.
Bills also can include legal-advertising fees charged by The Sun and other newspapers, and various court and processing fees. "I honestly don't know how the courts can approve foreclosures with fees like this," Della said.
City and county officials send final bills to all property owners before placing their accounts in the tax sale. They also publish a list of these properties in newspapers and post delinquent billings on Web sites. Baltimore officials also send second warning letters over unpaid water bills.
But officials concede that in a city where ownership of property is often clouded and rentals abound, property owners might not find out about the debt until they are sued.
Michael A. McNeil, 50, said he had no idea he owed the city $298.77 for water use at his Belair-Edison home or that the debt had been sold at the May 2006 tax sale to Del Mar's Recap LLC, a firm for which Baltimore County attorney Heidi Kenny is the registered agent.
Four days before Christmas, McNeil learned that Kenny was filing suit against him to foreclose on his right to pay the debt, the first step in taking a home.
"If the water bill is so delinquent, why didn't they shut off the water and then I would have known about it?" McNeil asked. "They didn't ring the bell. I found something posted on the door. When I went down to the Municipal Building and tried to pay it, they said it was too late. It had been sold at tax sale."
McNeil, a disabled former mattress assembler, sought help from the Legal Aid Bureau in Baltimore. His lawyer, Skullney, seeks to have the suit dismissed, arguing that the complaint didn't specify the amount owed.
McNeil's tab now stands at about $3,000, he said in a recent interview. The interest grows daily.
Robin C. Howard paid $4,600 to get out from under a $265.89 water bill and a business license bill of $283.47 assessed against her late aunt, who cut hair in her home's basement. Howard said she didn't realize that any money was owed or that a lien had been sold in May 2005 to a company called 2005 Baltimore City LLC until almost a year later. Court documents show that a foreclosure document was posted on the house in January 2006, but Howard said she never saw it.
Veteran tax sale investor and attorney Harvey M. Nusbaum is the registered agent for 2005 Baltimore City LLC. It is among several firms tied to his family that have bought liens from Maryland municipalities. One of the firms, 2006 Baltimore City LLC, paid Baltimore about $2 million last year, placing it among the top three buyers of city liens.
Nusbaum, whose family members also own thousands of Baltimore ground rents, would not comment.
"My issue is not that the $500 is owed," Howard said. "If it's owed, fine. I'll pay it. My issue is the fees."
Howard went to court in October to dispute the fees that had accrued - particularly the $2,500 in attorneys fees.
She asked Burgunder, who represented 2005 Baltimore City LLC, to account for his expenses. Burgunder did not respond, saying he was waiting for a court ruling. Howard said she did not have the money to keep pursuing the matter and paid the $4,600 last November.
"I was fortunate enough to piecemeal this thing together," Howard said. "A lot of people are not that fortunate. It was just humiliating."
In many states, lawyers are not involved in the process. In Florida, counties handle their own tax sales - many far larger than in Maryland - without incurring large attorney fees.
Even some investors question whether Baltimore should be putting water bills and other small debts into the tax sale process.
Patricia Fletcher of Houston, who buys Baltimore tax liens, said she believes that Baltimore needs to adopt a different system. "It seems crooked that the city can foreclose on you for a water bill," she said.
Burgunder suggested that "raising the threshold to be included in the tax sale will protect some people who overlook a small bill."
Meanwhile, the number of people facing the prospect of foreclosure or costly lawsuits over small debts shows no sign of decline. Among the Baltimore liens sold last May were more than 750 on properties whose owners owed $500 or less for water and other municipal services, records show. Another set of liens is scheduled for auction May 14.
Said City Council member Young, "We've got a system that needs to be fixed."
How the story was reported
The Sun analyzed computerized records of nearly 90,000 liens offered for sale by Baltimore since May 2000. The data showed which property owners were cited for unpaid property taxes, water bills or other municipal fees, and identified the investors who bought the rights to collect the debts.
With property addresses as a common link, The Sun used computer software to connect those records with more than 10,000 lawsuits filed in City Circuit Court by lien buyers against homeowners during the past three years. Reporters reviewed dozens of those cases to establish patterns in attorney fees and other costs that defendants paid to keep their homes.
Reporters also reviewed 2006 lien sale records from several counties, which listed amounts of liens and the buyers.
Interviews with area officials, homeowners, lien buyers and others filled out the picture of a system for collecting public debts that has become a thriving business for a few private firms.