(Bloomberg) -- Trinity Smith lost her home in Detroit because of unfairly high property taxes—and in the process, she handed over thousands of dollars to a multibillion-dollar money machine that benefits real estate speculators, big banks and the county government that foreclosed on her.

Smith’s home was one of more than 100,000 that officials have auctioned off over the past decade in Wayne County, Michigan, which has transformed delinquent property taxes into investment opportunities. Since 2005, county officials have used the debts to back roughly $3.5 billion in bond sales—securities that pay high yields to investors and are funded by penalties, fines and foreclosure sales like Trinity Smith’s.

While issuing these so-called Delinquent Tax Anticipation Notes, or DTANs, the county has done well for itself, collecting hundreds of millions of dollars in revenue beyond the actual tax debts. Meanwhile, Smith, who lost her entire investment in the house as part of the 2013 foreclosure, is still grappling with the consequences.

“I haven’t been able to get myself back mentally,” she said in a recent interview, wiping away tears.

Wayne County is an extreme example of a nationwide phenomenon: Local officials use fines and foreclosures or tax lien sales as cudgels against people who haven’t paid their property taxes—even though flawed tax assessments have systematically inflated tax bills for the lowest priced homes. Some municipalities’ efforts to securitize or sell the debts have led to a broad, upward transfer of wealth that’s rooted in fundamentally unfair tax systems.

New York City, where a Bloomberg News investigation found profound systemic unfairness in property taxes, has recouped billions by rolling tax liens into trusts and selling bonds, a practice that generates millions in fees for finance professionals. New York’s attorney general has recommended overhauling the practice, citing a “disproportionate impact” on minority homeowners.

And in Texas, a financial firm cofounded by a billionaire has taken a private-sector approach to financializing property-tax debt, purchasing and bundling more than 35,000 municipal liens worth nearly $300 million into securities to sell on Wall Street.

Nationwide data show that much of the debt that’s being sold never should have existed in the first place. Across the U.S., local governments collect roughly $500 billion in residential property taxes each year by applying a set tax rate to the market value of every home, making it vitally important to assess each property’s value accurately. But in county after county, studies show that unfair valuations shift the tax burden from high-priced homes to low-priced ones.

Some local officials have acknowledged the problem, citing causes that include the challenge of ascertaining the condition—and thus, the value—of thousands of individual homes. But if the causes are complex, the effects are simple: Families who have been unfairly taxed get caught in a vicious cycle of debt, and many lose their best chance at building wealth.

See also: How Unfair Property Taxes Keep Black Families From Gaining Wealth

King Smith was 11 years old when the men came to put him and his mother, Trinity, out of their two-story home in Detroit’s Rosedale Park neighborhood. He recalls his friends looking on as the workers piled their possessions on the curb. His Playstation went missing. Later, he’d learn that animal control had taken his two dogs.

“That was the childhood I was supposed to have,” says King, now 16, “but it was taken away from me.” The Smiths moved from a street with wide lawns and a canopy of trees, eventually landing in a one-story house on a block that’s pocked with abandoned properties.

Trinity Smith had purchased their home in 2011 for $22,500, but Detroit officials valued it at $85,000 for tax purposes that year. She’d applied for a property-tax exemption under a local program for low-income families, she says, and she never received a bill or any other official notice from the city. Regardless, county records show, the house racked up more than $6,000 in unpaid taxes in just a few years’ time.

Her first clue about the tax debt came in 2013, when she got a call from a company offering to buy her home; the caller mentioned the past-due amount and told her she was in danger of losing her place to foreclosure. Smith rushed to the Wayne County Treasurer’s office, where she discovered that that her property sat on two separate tax parcels. While that’s not uncommon, it had caused a mix-up with her exemption paperwork, she says.

She filed for an extension and sought aid from a social-service agency. But by that time, the county had already foreclosed. The next year, the Smiths’ house became one of more than 23,000 homes that county officials auctioned off; it fetched a price of $39,000. Trinity and King Smith lost everything. Others gained.

First, Wayne County used their tax debt and thousands of others to back its 2014 issue of DTANs. The two- to three-year notes were attractive to underwriters and investors; in an era of historically low interest rates, they offered yields that were as much as six times higher than similarly rated debt, county records and market data show. Among the largest institutional holders of the bonds were Bank of New York Mellon, a handful of insurance companies and a rural electric cooperative association.

Since 2017, Wayne County has offered DTANs through private placements, and as of this year, it had sold roughly $617 million privately. County records show that roughly $500 million of those notes were purchased by JPMorgan Chase & Co. A spokeswoman for the bank declined to comment for this story.

Bondholders weren’t the only beneficiaries when the Smiths lost their home. It sold for $39,000 in October 2014, far more than Trinity Smith’s $6,358 tax debt—and Wayne County pocketed the difference for a five-fold return on the unpaid taxes.

For years, Wayne County and at least seven other counties in Michigan have routinely auctioned off foreclosed homes for amounts that exceeded the homes’ tax debts and kept the difference. Last year, the Michigan Supreme Court ruled that the practice constitutes an unconstitutional “taking” of private property. Thus far, none of the Michigan counties have agreed to reimburse people like Trinity Smith; five class action lawsuits have been certified.

“It was just shocking to me that governments were treating people like they don’t really own their property,” says Christina Martin, an attorney for the Pacific Legal Foundation, a libertarian public-interest law firm that led the team that secured the state Supreme Court ruling. “They have a right to seize property to get paid for what they are owed, but they don’t have the right to keep anything more than that.” The group has challenged similar practices across the country, Martin said, including in Nebraska, Massachusetts, New Jersey and Minnesota.

In Michigan, Martin said, “it quickly became apparent that this practice was being used by some treasurers as a way to boost their budgets.”

Since 2005, Wayne County’s delinquent tax program and its foreclosures have generated roughly $715 million in revenue beyond the taxes that were owed, audited financial reports show, and the county has transferred almost $600 million from the program into its general fund.

In a written response to questions, Wayne County Treasurer Eric Sabree said that the county operates the delinquent tax program “in accordance with Michigan law” and that transfers to the county’s general fund “are also mandated by state law.” He added, “We are continuously analyzing and evaluating any impact of the Michigan Supreme Court ruling” and “related litigation is ongoing.”

The investor who bought the Smiths’ home also got some advantages. After buying it for $39,000 in 2014 and letting Trinity and King Smith stay for a while, the investor flipped it in 2017 for $120,000, property records show. That year, city assessors valued it at just $47,000 for tax purposes—about 39% of its market value. When Trinity Smith bought it in 2011, assessors had valued the place at 377% of its market price.

Such “regressive” assessments—meaning those that burden people at the low end of the economic scale more than people at the high end—were responsible for at least 25% of Detroit’s foreclosures of the lowest-priced homes, according to a 2019 study. One of the study’s authors, Bernadette Atuahene, a law professor at the Illinois Institute of Technology, co-founded a group that’s fighting to suspend foreclosures until Detroit addresses flaws in its assessments.

In a paper last year, Atuahene cited systemic flaws in the city’s assessments and the high volume of foreclosures in calling Detroit a “predatory city.” She suggested that other cities across the U.S. might also deserve the title.

“There are a lot of people making money at various levels,” Atuahene said. “The people profiting are doing what’s perfectly legal, but they are allowing a predatory system built off illegally high assessments.”

See also: How a $2 Million Condo in Brooklyn Ends Up With a $157 Tax Bill

Foreclosures are far rarer in New York City, where property tax debts have backed more than $2 billion in bonds since 1996; the most recent batch was sold Dec. 17.  Because the city operates a highly regressive property tax system that shifts hundreds of millions of dollars in taxes from higher- to lower-priced properties each year, many homeowners still wind up losing.

Kevin B. Rose discovered as much after his father died in 2012. Lyndon Rose left behind the family home in the Bronx, where unpaid property taxes began piling up. By the time Kevin Rose realized what was happening, he had a heap of foreclosure warnings to sort through and a tax debt that was approaching $10,000 at interest rates as high as 18%. (In 2019, officials cut the top interest rate to 7% for properties like the Roses’.) Feeling overwhelmed, he sold the house in April 2016 for $260,000.

That sale price was $80,000 less than the value that city officials had attached to the house two months earlier, city records show, resulting in an annual tax bill of about $3,900. Based on the actual sale price, that’s an effective tax rate of 1.5%—far higher than the median rate of 0.9% for the Bronx.

(The buyer got to work rehabbing the Roses’ former home a month later, city records show, and resold the property in 2017 for $442,568. That year, city officials set its value for tax purposes at $370,000.)

“It’s incredible, it’s unbelievable,” Kevin Rose says of the experience. “They know that people like my father, he may not have a support group, a lawyer who can look this stuff over. They take advantage of your ignorance, your lack of options.”

He didn’t know it, but a chunk of the tax bill went to investors as well. Each year, New York City officials collect about $30 billion in property taxes and set up a trust to handle a comparatively tiny $75 million worth of taxes that haven’t been paid, on average. Officials transfer liens—or official, binding claims they’ve filed against properties for unpaid bills—into each trust, which then issues bonds to investors. Liens on roughly 7,000 properties were eligible for the most recent sale, city data show.

Companies hired to recoup the debt earn 1% of the trust’s assets as a base fee. Bonuses climb as they collect more; their payments can reach $3 million for larger trusts. For several years, New York’s trusts have given this collection work to South Carolina-based MTAG Services and New Jersey-based Tower Capital Management. MTAG executives didn’t respond to requests for comment, and an executive at Tower said all inquiries should be directed to New York’s finance department.

In an email, a department spokesman said the system has advantages over traditional enforcement efforts, including a decreased chance of foreclosure.

“The tax lien sale has been an effective enforcement tool to maintain a high level of voluntary compliance with property taxes,” the spokesman said. “The program is designed to prompt property owners to pay delinquent taxes and charges. It is not a blunt instrument that charts a one-way path to foreclosure.”

Those who buy the trusts’ bonds—typically, institutional investors like insurers and banks—get remarkably safe bets and yields that surpass U.S. treasuries.

The bonds generally receive AAA scores, and for good reason: Tax liens get “super-priority” in the case of a defaults; lien holders get paid even before mortgage lenders. Moreover, the value of a New York tax lien, on average, is about 10% of the property’s value, which tends to give owners an incentive to pay instead of simply walking away.

New York’s commitment to tax lien trusts may be waning. Officials didn’t create one for 2020, citing the Covid-19 pandemic. In an October letter, New York Attorney General Letitia James had called on outgoing Mayor Bill de Blasio to forgo creating one this year too, describing the prospect as “alarming.” Critics say the trusts exacerbate displacement and gentrification, a societal cost that they consider too high.

De Blasio’s incoming successor, Eric Adams, has said he plans to end the trusts. Even Keith Sernick, who cofounded one of the companies that collects debt for them, says their time has probably passed.

“They’d be better off if they just did an open auction” to sell off tax liens without securitizing them, says Sernick, who now runs an economic development firm. “Because securitizations are very expensive. And the guys who do the securitization make tons of money.”

Meanwhile, a company in Texas has demonstrated that the private sector can accomplish pretty much the same process. In 2014, Propel Financial Services bundled $141 million of Texas tax debt into a trust that sold securities backed by it; and in 2017, after expanding its reach to seven more states, it launched another, with $137 million worth of notes.

Propel mostly built those trusts one lien at a time, by going directly to delinquent homeowners, often via direct mail or online marketing campaigns. In effect, the company pays off the homeowners’ back taxes, creating new loans that are still secured by the liens against their property.

For borrowers, the appeal can be hard to resist: They exchange thousands of dollars in public tax debt for comparatively manageable monthly payments. But the new debts can add up quickly. Initial fees can add $600 or more to the principal, and interest accrues at rates of 13.9% and higher, according to contracts reviewed by Bloomberg. If borrowers pay down their debts on schedule, they’ll typically have paid more than double the face value of their tax liens.

“This is one of my babies that I intend to grow into a very competitive financial services company,” Propel cofounder Red McCombs told the San Antonio Business Journal in March 2018. “In two to three years, it will be a $100 million business.” McCombs, a billionaire, built his wealth on car dealerships and Clear Channel Communications, the media company.

Propel executives didn’t respond to repeated requests for comment for this article.

Back in Detroit, prospects are looking up for some property tax debtors. The Gilbert Family Foundation has pledged $15 million to pay off the debts for 20,000 Detroit homeowners on fixed incomes. The foundation was established by billionaire Dan Gilbert, founder of Detroit-based Quicken Loans, now known as Rocket Mortgage, and his wife Jennifer. As of September, the property-tax program aided about 1,600 households.

A 2020 state law, pushed by local community groups, drastically reduced back taxes for those who receive poverty exemptions from the county. Trinity Smith would have qualified. But for her family, like tens of thousands of others, the aid came too late. Detroit officials have acknowledged overtaxing about 130,000 homeowners between 2010 and 2013. Recent research shows that the city’s system remains deeply regressive.

King Smith is now a junior in high school. A star wide receiver on his high school football team, he is working to keep his grades up and looking forward to college. A scholarship would come in handy; his mother, Trinity, says she spent much of his college fund in a futile attempt to hold on to their old home. She’s working part-time now as a contractor for Amazon, delivering packages at night. Sometimes the job takes her back to her old neighborhood.

“That’s when I feel like I didn’t do everything I could have to keep that house,” she says. “It was wealth. I thought I could pass it along to him someday. But then I realize this is big business. They wanted my house, and they took it.”


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