Great, yet another thing that might slow the housing recovery. Bear with me as I explain (or go read the full article yourself).

It works like this:

  1. Homeowner falls behind on paying taxes.
  2. Cash-strapped localities sell the tax liens to, well, anyone who will buy them. (Literally.)
  3. The buyers are mainly investment firms and banks, including Bank of America, natch. They take thousands of these liens (each of which may be only a few hundred bucks), blend them together, and package them as bonds for investors. (Sound familiar?)
  4. The law allows them to add interest and fees. (One thing I’m not clear on is how they can charge fees if the homeowner hasn’t signed any kind of contract, but IANAL.)
  5. While homeowners who had trouble paying taxes may have gotten some help from the locality — worked out a payment plan or whatever — banks aren’t as forgiving. They’re happy willing to foreclose.

The end result is that banks — you remember, the folks who begged for a bailout from us? — have found a way to take people’s homes not just if they don’t pay their mortgage, but if they don’t pay their taxes.

But while foreclosing on someone who didn’t pay his mortgage is about recouping a loss, buying a tax lien is strictly about profiting on someone’s misfortune. It’s worse, actually. Foreclosures mean lower property values all around, which makes it tougher on others in the neighborhood, which leads to more missed payments… you get the picture.

Read the full story.