Michigan Gets Money to Help Homeowners, Uses it to Demolish Homes Instead

Detroit has foreclosed on a remarkably large number of private homes for failure to pay property taxes. The tax bills in question may have been unconstitutionally high, and federal funds intended to prevent the foreclosures have been spent demolishing the houses instead.

Since 2002, 143,958 properties in Detroit—more than 37 percent of the properties in the city—have gone through tax foreclosure auctions, according to data compiled by Detroit-based mapping and data company Loveland Technologies. More than 100,000 of those auctions have taken place since the Great Recession hit in 2008. “Something that has really followed on the mortgage foreclosure crisis is the tax foreclosure crisis,” says Loveland CEO Jerry Paffendorf.

Many of those foreclosures may have been illegal. “People are losing their home for inability to pay taxes that they never should have had to pay in the first place,” says Michael Steinberg of the American Civil Liberties Union (ACLU).

Under the Michigan Constitution, Steinberg points out, property taxes must be assessed on the actual cash value of a property. The recession caused housing prices to plummet in Detroit, but there was no corresponding reassessment of property taxes. “Homes are sold in the tax foreclosure auction for $500 or $1,000 when at least a few years ago it was being taxed as if it were worth $50,000 or $60,000,” he says.

As part of the Troubled Asset Relief Program (TARP), the federal government provided the State of Michigan with $761 million to prevent these foreclosures. But less than half of that money ever got into the hands of financially distressed homeowners.

A TARP report released earlier this year notes that Michigan is “among the states that have the most TARP dollars set aside,” but it also has one “of the highest percentage of people turned down for the Hardest Hit Fund” (HHF). The state rejected 52 percent of those who applied for mortgage assistance through the HHF. A majority of the rejected applicants—71 percent across the state, more than 80 percent in Detroit—earned less than $30,000 a year.

Where did the money go instead? Since 2013, Michigan officials have spent $381 million out of that $761 million demolishing vacant buildings. Some 11,249 homes have been destroyed with HHF funds, 7,119 of them in Detroit.

“The properties that need to be demolished, 95 percent of them, have gone through tax foreclosure in the past,” notes Paffendorf. “It doesn’t seem like as an effective use of those funds to spend $13,000 or $15,000 on a demolition later on when someone might have been $2,000 or $3,000 behind on their taxes and the funds were there to work on that.”

Meanwhile, another TARP report faults the Michigan authorities for insufficient safeguards on how the HHF money was spent, leaving them “vulnerable to the risk of unfair competitive practices such as bid rigging, contract steering, and other closed door contracting processes.” Indeed, contractor costs for demolitions rose 90 percent in Michigan after HHF funds were made available, from $9,266 per building in January 2014 to $17,643 per building in June 2016.

The City of Detroit is now the subject of a federal grand jury investigation over its use of the HHF funds. And the Michigan ACLU and the NAACP Legal Defense Fund are suing Wayne County and the City of Detroit over illegally collected taxes and illegally seized houses.

But in the meantime, the seizures and demolitions will continue. Roughly 8,000 homes are going to property tax auction in September, according to Paffendorf. “This is still something that is happening this year,” he says. “It’s going to happen again next year until something changes.”