The Predatory Nature of Tax Lien Investing: Exploiting the Vulnerable and Poor in America’s Housing Markets

Hedge Fund Preys on Poor Residents in Cook County, Illinois

Earlier this year, the hedge fund Alden Global Capital made a controversial move by purchasing tax liens on over 600 tax-delinquent properties in Cook County, Illinois. In exchange for paying off the outstanding taxes on these properties, Alden Global Capital can charge escalating interest rates and attach fees to the debts. If the delinquent taxpayer fails to pay within two years, the hedge fund can claim ownership of the property.

Tax lien investing is a multibillion-dollar industry in America, dominated by hedge funds and private equity firms. It is seen as a predatory enterprise that exploits struggling homeowners, particularly those who are poor, elderly, and disproportionately Black and Latino. Critics argue that this practice exacerbates existing inequities in housing markets and disproportionately affects vulnerable populations.

Illinois is one of 27 states that permit or require local governments to sell tax lien certificates at public auctions when property taxes are past due. While this practice dates back to the 19th century, it has faced criticism for its exploitative nature. Critics argue that tax lien sales target poor neighborhoods and vulnerable homeowners, extracting wealth and property from those who are already struggling.

The reasons behind higher rates of tax delinquency in minority neighborhoods are linked to historical racial disadvantages in housing markets and tax administration. Studies have shown that properties in Black and brown neighborhoods tend to be overassessed, leading to higher tax burdens for residents. Additionally, low-income and minority homeowners are less likely to have conventional mortgages with property tax escrow accounts, making it harder for them to pay their taxes.

Tax lien investors often target poor neighborhoods for their speculative value, hoping to profit from future development or gentrification. This can further deteriorate neighborhood conditions and block community-led revitalization efforts. Critics argue that relying on private interests for tax collection and enforcement exacerbates underlying issues of tax delinquency and inequality.

Calls for reform in property tax enforcement have been ongoing, with advocates pushing for a more humane and effective system. Ending tax lien sales is seen as a first step, but addressing the root causes of tax delinquency and investing in public goods and services are also crucial. Critics argue that taxing the wealth of the top earners, instead of preying on the most vulnerable, is a more equitable solution to address budgetary woes in local governments.