Home security? Some opposed to Domb’s bill to securitize liens on tax deadbeats

Jake Blumgart

November 17, 2017

After almost two years in office, Councilmember-At-Large Allan Domb finally introduced the bill he ran his campaign on. At Thursday’s City Council session, he put forward tax-lien securitization legislation that he claims will net the city hundreds of millions in delinquent payments.

But the legislation, co-sponsored by Mark Squilla and Bobby Henon, was met with immediate opposition from other councilmembers. Third District Councilmember Jannie Blackwell introduced a bill on behalf of City Council President Darrell Clarke of the Fifth District to preemptively exclude their districts, along with Councilmember Maria Quiñones-Sanchez’s Seventh District, from Domb’s proposal.

Such a note of bald dissent is rare in the usually congenial Council chambers. Most legislative battles are fought behind closed doors, away from the public’s inquisitive gaze.

“I was surprised by that,” admitted Domb, in an interview with PlanPhilly later that afternoon.

WHAT WOULD “SECURITIZATION” DO?

Domb proposes to securitize real estate tax liens. That would entail transferring all of the city-owned liens into a corporate entity or trust (created specifically for the securitization), which would then issue bonds — or debt securities, hence “securitization” — based on the anticipated income streams from those liens. The trust would also hire private debt collectors to enforce the liens. The bonds would then be sold to investors, and the sale proceeds would then go back to the city, after paying off the debt-collection agencies (and the investment banks and law firms hired to process the securitization). In theory, the city would get paid immediately for the liens, and the investors would then collect the income streams over time.

In theory, securitizing assets is seen as a useful way to speed up payments, offload the hassle and cost of supervising debt repayment, and diversify risk. In exchange, the asset-backed securities sell at a discount: collectively, a little bit less than the sum of the debts.

From the beginning, Domb’s proposal has made many other City Council members anxious. They feared that the securitization could harm low-income homeowners who fell behind on their property taxes. They also believed securitization would undermine the city’s land bank, potentially putting properties earmarked for the agency on the auction block.

But, as introduced, Domb’s bill would exempt both owner-occupied homes and land bank properties from securitization, although the liens would still be sold into a city-owned trust.

“I’m surprised they would exclude certain districts because we have totally protected all owner-occupancy housing,” said Domb. “Everyone wants to protect owner occupants while collecting from those who choose not to pay. That’s what this is about.”

After the council meeting closed, Clarke said he still wasn’t convinced that homeowners would be protected.

“I was just made aware of introduction today,” said Clarke. “But we’ve been talking about this program for months. We are concerned about including owner-occupied properties in a trust that would enter into tax lien securitization. We have put legislation in to exempt our districts, among the city’s poorest, out of the program until we get consensus on what will be included.”

Domb sees the proposal as an easy fix to a longstanding problem, which he estimated to be over $450 million in unpaid property taxes. To get those who owe to pay up, he wants to transfer all the liens into a city-run trust, and then hire third-party collectors to go after the debtors. At the same time, the trust would bundle all the non-homeowner liens into asset-backed securities, letting investors bet on a private agency being able to collect more than their municipal counterparts did.

While Domb’s bill would include liens on owner-occupied houses in the trust, it would exclude them from being used as collateral the asset-backed securities.

The bill would also exclude “property identified for acquisition by the Philadelphia Land Bank,” although it is unclear exactly how that would work. After all, some Council members have yet to transfer many properties eligible for the land bank.

Skeptics say the very complexity of the proposal raises even more questions: What would happen to renters, who could face eviction if their building’s deadbeat owner gets sucked into the securitization process? Can land bank land be effectively exempted? Just how different will the process be than the 1997 tax lien securitization?

On that last question, a city controller’s report in 2013 described as “the worst case scenario.” Some investors who purchased bonds in 1997 still have not been paid off, essentially giving them a private lien over the properties thus preventing those lots from being developed or included in the land bank.

After months of negotiations with Domb over protections for residents, Community Legal Service’s Monty Wilson said he is “very happy” with the homeowner exemption.

Still, Wilson remains skeptical of the bill’s efficacy.

“Since homeowners aren’t going to be part of it, this becomes an experiment,” said Wilson on Thursday. “This did not work in 1997. They couldn’t show CLS the data they think supports this. I still would like to know the financial basis that makes this different from the 1997 securitization.”

Both Domb and Mayor Jim Kenney’s administration insist this proposal and the 1997 securitization are very different. Back then, the city did not place the liens into a trust, allowing the bondholders more control over the underlying lien debt. This time, the city would be in command of the whole process, in theory, providing easier recourse to any homeowners or non-profits accidently sucked into the system.

“Data analysis is much better in 2017 than it was in 1997, making administration and evaluation of the portfolio significantly better,” writes Mike Dunn, spokesman for the Kenney administration.

But the three councilmembers, at least, are still taking the radical step of exempting their districts from the whole process. It’s worth noting that then-Councilman John Street — Clarke’s mentor — exempted his district from the in 1997 securitization.

Domb said the concerns are overblown. Most of the returns will come from from debtors paying up once they get a letter from the debt collectors : Property owners will get four letters before they foreclosure upon. In a similar program in New York, Domb said, 85 percent of debtors paid by the fourth notice.

“The official notice is very strong in helping collect the money—that’s the most powerful tool in this whole process,” said Domb.

Why, then, go through the complexity of securitization at all?

“The squeaky wheel gets the oil and we need to become that squeaky wheel,” said Domb. Switching metaphors, he added: “You need the threat of a hammer. If they don’t pay there needs to be a real consequence.”

Dear reader, please help us continue providing the local public interest news that you value in 2018 by making a tax-deductible donation during our once-a-year membership drive. For each gift you make, we will pay it forward by donating a meal to someone in need through Philabundance.

WHYY is your source for fact-based, in-depth journalism and information. As a nonprofit organization, we rely on financial support from readers like you. Please give today.