Governmental infiltration of political groups can obviously deter people from joining groups that they think might be infiltrated, and deter them from speaking freely within those groups. The Court in Laird v. Tatum (1972) rejected the argument (largely on procedural grounds) as a basis for challenging such surveillance in federal court, but Justice Douglas dissented, arguing in part:
This case involves a cancer in our body politic. It is a measure of the disease which afflicts us. Army surveillance, like Army regimentation, is at war with the principles of the First Amendment.
Those who already walk submissively will say there is no cause for alarm. But submissiveness is not our heritage. The First Amendment was designed to allow rebellion to remain as our heritage.
The Constitution was designed to keep government off the backs of the people. The Bill of Rights was added to keep the precincts of belief and expression, of the press, of political and social activities free from surveillance. The Bill of Rights was designed to keep agents of government and official eavesdroppers away from assemblies of people. The aim was to allow men to be free and independent and to assert their rights against government.
There can be no influence more paralyzing of that objective than Army surveillance. When an intelligence officer looks over every nonconformist’s shoulder in the library, or walks invisibly by his side in a picket line, or infiltrates his club, the America once extolled as the voice of liberty heard around the world no longer is in the image which Jefferson and Madison designed, but more in the Russian image ….
Here, though, is a different approach, from Justice Douglas’s dissent in Dennis v. United States (1951), where Justice Douglas argued against criminal punishment of Communist Party leaders, partly on the grounds that their fomenting of revolution would fail precisely because of surveillance:
If we are to proceed on the basis of judicial notice, it is impossible for me to say that the Communists in this country are so potent or so strategically deployed that they must be suppressed for their speech. I could not so hold unless I were willing to conclude that the activities in recent years of committees of Congress, of the Attorney General, of labor unions, of state legislatures, and of Loyalty Boards were so futile as to leave the country on the edge of grave peril. To believe that petitioners and their following are placed in such critical positions as to endanger the Nation is to believe the incredible.
It is safe to say that the followers of the creed of Soviet Communism are known to the F.B.I.; that in case of war with Russia they will be picked up overnight as were all prospective saboteurs at the commencement of World War II; that the invisible army of petitioners is the best known, the most beset, and the least thriving of any fifth column in history. Only those held by fear and panic could think otherwise.
This is my view if we are to act on the basis of judicial notice. But the mere statement of the opposing views indicates how important it is that we know the facts before we act. Neither prejudice nor hate nor senseless fear should be the basis of this solemn act. Free speech— the glory of our system of government—should not be sacrificed on anything less than plain and objective proof of danger that the evil advocated is imminent. On this record no one can say that petitioners and their converts are in such a strategic position as to have even the slightest chance of achieving their aims.
So surveillance can deter speech—but it can also protect speech, by becoming the “less restrictive alternative” that lets us tolerate speech that promotes violence (and revolution or sabotage) while still having confidence that we can largely stop the actual violence. Both of Justice Douglas’s analyses, it seems to me, are right, at least to a point and in certain circumstances. But reading them together shows how complicated such questions can be.
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The stock market keeps hitting new highs and employment reports continue to look good. President Trump and central bankers at the Fed like to point to this and tell us that the economy is doing good.
Despite the fact that the economic data is deteriorating. Despite the fact that corporate earnings are falling, it is the Fed that is pushing this market to new highs by cutting interest rates, by indicating to the markets that they don’t have to worry about rate hikes no matter what happens with inflation. The Fed’s not going to raise interest rates. Oh, and by the way, they’re doing quantitative easing, and they’re going to print as much money as they have to keep the markets going up and to keep the economy propped up.”
In a recent article published at the Mises Wire, Ryan McMaken adds another layer of analysis. He says that despite the Fed’s positive rhetoric, it’s actually worried about liquidity and growth. In fact, McMaken believes it is operating from a position of fear.
The Federal Reserve lowered its benchmark interest rate on Wednesday, cutting the target federal funds rate by 0.25 percent to a range of 0.5 to 0.75 percent.
The Fed’s rate-setting committee, the FOMC, has now cut rates three times this year. The committee’s rhetoric around the rate cut was the usual routine. The committee’s statement indicated that “the labor market remains strong and that economic activity has been rising at a moderate rate.” But the official statement says something similar nearly every time the committee meets. So, there is no information here to suggests why the committee is cutting now versus all the other times the labor market is “strong” and economic strength is “moderate.”
Two members of the committee voted against the cut: Esther L. George and Eric S. Rosengren.
Rosengren voted against the measure because he wanted a bigger rate cut. George, like her predecessor Thomas Hoenig at the Kansas City Fed, is relatively hawkish — although not the extent Hoenig was.
Thus, George noted in response to the rate cut: “While weakness in manufacturing and business investment is evident, it is not clear that monetary policy is the appropriate tool to offset the risks faced by businesses in those sectors when weighed against the costs that could be associated with such action.”
In other words, George recognizes that, yes, there are downsides to expansionary monetary policy.
Although the Fed statements offer no insights, the fact the Fed continues to cut rates suggests it is working from a position of fear about the true strength of the economy. Although jobs data continues to point to expansion, a number of other indicators look less rosy. The Case-Shiller index, for example, has fallen to 2-percent growth and appears to be headed toward zero. We have seen a similar dynamic since 2006. Moreover, new housing permit growth has been negative (year-over-year) in six of the last ten months. Tax receipt data has also been weak, with seven out of the last ten reported periods showing negative year-over-year growth.
It’s true that other indicators point to strength, but if things are going so well, why cut rates?
After all, the target rate is already remarkably low even by the standards of the most recent expansion, when the Fed Funds rate was allowed to rise to over five percent.
The Fed has justified this ultra-low-rate policy with theories about the natural interest rate, and about the alleged need to keep prices at or above two-percent inflation.
Nonetheless, the Fed continues to look relatively restrained compared to other central banks, to which its policies are in part a reaction. Other central banks have set a very low bar, to be sure, but the Fred nonetheless looks almost hawkish compared to the ECB and the Bank of Japan. Both are pursuing a negative-interest-rate policy, and even with the latest rate cut, the Fed’s target rate also remains above that of the Bank of England, and equal with the Bank of Canada.
And then there is the interest the Fed pays on reserves. On Wednesday, the FOMC also announced a cut to the interest rate “paid on required and excess reserve balances,” dropping the rate from 1.8 percent to 1.55 %, mirroring the drop in the fed funds rate.
This keeps the interest paid on reserves at 0.2% below the fed funds rate. That’s the biggest gap we’ve seen since 2008, and it suggests the Fed wants more lending in the real economy, even though it’s also apparently concerned about liquidity for banks.
This makes sense if we’re in a late phase of the boom which brings increased demand for loans, but without sufficient savings and earnings at the street level to assure liquidity for banks through the marketplace. This is only a problem one encounters in an economy built on central-bank credit expansion.
Central bankers no doubt are sure they can navigate these waters, but its unclear how long they can keep the current boom going.
Governmental infiltration of political groups can obviously deter people from joining groups that they think might be infiltrated, and deter them from speaking freely within those groups. The Court in Laird v. Tatum (1972) rejected the argument (largely on procedural grounds) as a basis for challenging such surveillance in federal court, but Justice Douglas dissented, arguing in part:
This case involves a cancer in our body politic. It is a measure of the disease which afflicts us. Army surveillance, like Army regimentation, is at war with the principles of the First Amendment.
Those who already walk submissively will say there is no cause for alarm. But submissiveness is not our heritage. The First Amendment was designed to allow rebellion to remain as our heritage.
The Constitution was designed to keep government off the backs of the people. The Bill of Rights was added to keep the precincts of belief and expression, of the press, of political and social activities free from surveillance. The Bill of Rights was designed to keep agents of government and official eavesdroppers away from assemblies of people. The aim was to allow men to be free and independent and to assert their rights against government.
There can be no influence more paralyzing of that objective than Army surveillance. When an intelligence officer looks over every nonconformist’s shoulder in the library, or walks invisibly by his side in a picket line, or infiltrates his club, the America once extolled as the voice of liberty heard around the world no longer is in the image which Jefferson and Madison designed, but more in the Russian image ….
Here, though, is a different approach, from Justice Douglas’s dissent in Dennis v. United States (1951), where Justice Douglas argued against criminal punishment of Communist Party leaders, partly on the grounds that their fomenting of revolution would fail precisely because of surveillance:
If we are to proceed on the basis of judicial notice, it is impossible for me to say that the Communists in this country are so potent or so strategically deployed that they must be suppressed for their speech. I could not so hold unless I were willing to conclude that the activities in recent years of committees of Congress, of the Attorney General, of labor unions, of state legislatures, and of Loyalty Boards were so futile as to leave the country on the edge of grave peril. To believe that petitioners and their following are placed in such critical positions as to endanger the Nation is to believe the incredible.
It is safe to say that the followers of the creed of Soviet Communism are known to the F.B.I.; that in case of war with Russia they will be picked up overnight as were all prospective saboteurs at the commencement of World War II; that the invisible army of petitioners is the best known, the most beset, and the least thriving of any fifth column in history. Only those held by fear and panic could think otherwise.
This is my view if we are to act on the basis of judicial notice. But the mere statement of the opposing views indicates how important it is that we know the facts before we act. Neither prejudice nor hate nor senseless fear should be the basis of this solemn act. Free speech— the glory of our system of government—should not be sacrificed on anything less than plain and objective proof of danger that the evil advocated is imminent. On this record no one can say that petitioners and their converts are in such a strategic position as to have even the slightest chance of achieving their aims.
So surveillance can deter speech—but it can also protect speech, by becoming the “less restrictive alternative” that lets us tolerate speech that promotes violence (and revolution or sabotage) while still having confidence that we can largely stop the actual violence. Both of Justice Douglas’s analyses, it seems to me, are right, at least to a point and in certain circumstances. But reading them together shows how complicated such questions can be.
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The American tech industrymight have a genuine David vs. Goliath merger battle on its hands.
In a bold move for a fading tech star with widespread brand recognition but a minuscule valuation, WSJ reports that Xerox has set its sights set on a takeover of HP – another fading tech star with widespread brand recognition – best known for its printers and laptops after splitting from its enterprise business a few years back. Per the exclusive report, the relatively tiny Xerox, which has a market cap of just $8 billion, is preparing to make a mixed cash-and-stock offer for HP. With a valuation of $27 billion, HP is worth more than 3x Xerox, and any bid would need to incorporate a premium over HP’s current market value.
Xerox has reportedly received an informal funding commitment from what WSJ describes as “a major bank”, and some analysts are arguing that a deal between the two disparate companies makes sense. Both companies are household names that have struggled to adjust to the tech industry’s constantly-evolving landscape. With the need for printed documents on the decline (many young people don’t even own a personal printer, once one of HP’s signature products), both Xerox and HP need to cut costs and shrink to survive.
Evercore ISI analyst Amit Daryanani told BBG that the potential synergies and “softer macro environment for printing” make sense. However, the bigger obstacle is the large gulf between Xerox’s valuation and HP’s, as mentioned above. XRX would need to raise a “considerable” amount of debt, or issue a “significant” amount of equity, to finance the deal. Given the size mismatch, Jeriel Ong, an analyst at DB, said any cash-and-stock offer for HP would likely be “heavier” on the cash. Though there is a history for these types of “asymmetrical” deals in the space: the Dell-EMC tie-up resulting in a highly levered Dell Technologies is one.
Estimates project that a combined company would have a combined annual Ebitda of between $6.5 billion and $8 billion.
Based in Norwalk, Conn., Xerox’s primary business remains largely unchanged since the 1990s: It primarily makes large printers and copiers, with most of its business coming from renting and maintaining the machines. Palo Alto-based HP, meanwhile, sells mainly smaller printers and printing supplies. It’s also one of the largest PC makers in the world.
After a recent change at the top ranks, HP said earlier this month that it would implement a restructuring plan that would shrink the company’s workforce by 9,000.
Xerox’s takeover campaign comes at a pivotal time for the company: It recently settled a lawsuit filed by Fujifilm for breach of contract after pulling out of a planned merger. It also sold its 25% stake in a joint venture with the Japanese firm for $2.3 billion. It also agreed to sell a majority stake in a smaller joint venture to an affiliate of Fuji Xerox, according WSJ.
Billionaire Investor Carl Icahn, who owns a 10.6% stake in Xerox, has been lobbying for years for the company to make major changes. In 2015, he warned that Xerox would “go the way of Kodak if there aren’t major changes.” I.e., go bankrupt.
Last year, Icahn and another investor, Darwin Deason, scuttled a planned merger with Fujifilm, and seized control of Xerox’s board. At the time, they argued that the deal undervalued Xerox.
Global Stock Rally Fizzles On Lack Of Trade Talk Optimism
US futures were unchanged, and global stock markets hit a pause after a torrid three-day rally on Wednesday as traders failed to any new intravenous trade talk “optimism” to offset the deepening global earnings recession. The MSCI All Country World Index was flat on the day, after rallying 1.3% since Friday, while Treasuries rose after dropping for three days and the dollar was flat.
World stock markets rallied on a scaling-back of recession bets amid rising optimism about a U.S.-China trade deal this month and as global business surveys indicate tariff-hit manufacturing sentiment has troughed, although on Wednesday they pared some of the recent upside amid cautious sentiment on multiple reports corroborating the narrative that China will push for further US tariff concessions before it signs off on a Phase 1 trade deal. Additionally, the SCMP reported that Chinese President Xi’s visit to Brazil next week may be too soon to sign a Phase One trade deal with the US., as the two sides are yet to reach a consensus, with sources noting time is very limited to finalize the details in writing for next week; Source notes that one idea was for a meeting in the US, but China disagreed.
European stocks seesawed, opening higher, then fading, then turning green again boosted by gains in financial stocks as were greeted with a mixed bag of earnings reports. The Stoxx 600 index was higher by 0.2% as Britain’s FTSE 100 index was flat, while Germany’s DAX and France’s CAC 40 was up 0.2% each.
Incoming economic data continued to show signs of improvement: German industrial orders rose more than expected in September, rising 1.3% sequentially, well above the exp. 0.1%, if still down substantially on an annual basis, offering some hope for manufacturers in Europe’s biggest economy as they head into a near certain economic recession in the fourth quarter.
Separately, Eurozone business activity expanded slightly faster than expected last month but remained close to stagnation, according to a survey whose forward-looking indicators suggest what little growth there is could dissipate.
Earlier in the session, Asian stocks edged lower with MSCI’s broadest index of Asia-Pacific shares ex-Japan down 0.12%, snapping a four-day rising streak, as Beijing insisted on the removal of some tariffs before agreeing to sign an interim trade deal with Washington. Most markets in the region were down, with the Philippines leading losses and India rising. Consumer staples and utilities were among the weakest sectors. The Topix closed little changed, as Mitsubishi rallied and Nippon Telegraph & Telephone retreated. Bank of Japan Governor Haruhiko Kuroda stepped into the global debate on how governments should support growth, saying the ultra-low interest environment created by his central bank makes fiscal spending more powerful. The Shanghai Composite Index slipped 0.4%, with PetroChina and Kweichow Moutai among the biggest drags. The success of China’s first euro bond offering in 15 years is likely to spur a rush of issuance from the nation’s companies. India’s Sensex rose past Monday’s record-high close in volatile trading, as ICICI Bank and Infosys offered strong support. Strong company earnings for the September-ending quarter helped buoy sentiment
Markets were consolidating gains made over the last three sessions as focus shifted to lingering concerns over the outcome of U.S.-China trade talks. As Reutersx noted, traders and investors are hoping a preliminary Sino-U.S. trade pact will roll back at least some of the punitive tariffs that Washington and Beijing have imposed on each other’s goods, but it is still uncertain when or where U.S. President Donald Trump will meet Chinese President Xi Jinping to sign the agreement. Some suggested markets had already discounted a lot of good news.
“Optimism about a trade deal between the US and China has given a lift to global equities,” wrote Capital Economics’ Simona Gambrani in a note to clients. “But with a lot of good news already discounted and global economic growth likely to remain sluggish, we suspect that any further upside for stock prices will be limited.”
In currencies, the dollar dipped against a basket of currencies, down 0.2%, while the euro was higher by 0.1% at $1.1088 and the pound was roughly unchanged, trading at $1.2880. A survey showed small British manufacturing firms are at their most pessimistic since just after the Brexit referendum in 2016 as they face political uncertainty at home and trade wars abroad. The yuan again strengthened past 7 per dollar for a second day following a stronger than expected PBOC fixing, while the dollar was steady as investors awaited fresh developments on the U.S.-China trade front.
In rates, 10Y yields were modestly lower after a battering in the past three days as European bond markets shrugged off mixed services PMIs from Europe; curves remained around the steepest levels of the week. France’s benchmark 10-year bond yield turned positive on Wednesday for the first time since July, in a further sign that entrenched pessimism in world bond markets is abating.
Looking at US politics, in an outcome that could offer clues as to how next year’s U.S. presidential election may unfold, U.S. Democrats claimed an upset win in Kentucky on Tuesday and seized control of the state legislature in Virginia. Democrats won both chambers of the Virginia General Assembly from the Republicans which previously had a 1-seat majority in both the state Senate and House of Delegates. In related news, Democrat candidate Beshear defeated Republican and incumbent Bevin in the Kentucky Gubernatorial Election, while Republican Lieutenant Governor Reeves won the election in Mississippi in what was a fairly tight race against Democrat Attorney General Hood.
In commodities, Bloomberg’s gauge of raw-material spot prices climbed to its highest level since April, even as oil prices fell pulled down by a larger-than-expected build in U.S. crude stocks, after gaining for three sessions on expectations of an easing in U.S.-China trade tensions. U.S. crude fell 0.72% to $56.82 per barrel and Brent crude fell 0.92% to $62.38 per barrel. Gold ticked higher following a slump Tuesday.
Economic data include mortgage applications, non-farm productivity. Earnings due from Qualcomm, CVS Health, Fiserv
Market Snapshot
S&P 500 futures up 0.02% to 3,072.50
STOXX Europe 600 down 0.1% to 403.72
MXAP down 0.04% to 166.08
MXAPJ down 0.2% to 534.56
Nikkei up 0.2% to 23,303.82
Topix up 0.02% to 1,694.45
Hang Seng Index up 0.02% to 27,688.64
Shanghai Composite down 0.4% to 2,978.60
Sensex up 0.7% to 40,521.87
Australia S&P/ASX 200 down 0.6% to 6,660.16
Kospi up 0.07% to 2,144.15
Brent Futures down 0.7% to $62.53/bbl
Gold spot up 0.2% to $1,486.78
U.S. Dollar Index down 0.2% to 97.83
German 10Y yield rose 0.4 bps to -0.305%
Euro up 0.1% to $1.1088
Brent Futures down 0.7% to $62.53/bbl
Italian 10Y yield rose 3.3 bps to 0.686%
Spanish 10Y yield fell 1.2 bps to 0.316%
Top Overnight News from Bloomberg
While IHS Markit’s composite Purchasing Managers’ Index edged up to 50.6 in October, better than the flash reading of 50.2, it signaled the euro-area economy remained close to stagnation last month. The figure indicated a rate of growth that was among the weakest in six and a half years
Boris Johnson will try to get his U.K. election campaign on track after a stumble Tuesday with one of his best-known ministers in trouble for comments about people killed in a tower-block fire
British businesses are taking Johnson’s election pitch to ‘Get Brexit Done’ with a pinch of salt: they know that confusion over the U.K.’s exit from the EU is set to carry on through 2020, or longer
German Finance Minister Olaf Scholz sought to break the deadlock in discussions over European banking integration by signaling the country may drop its opposition to a key part of the plan
The success of China’s first euro bond offering in 15 years is likely to spur a rush of issuance from the nation’s companies. The Ministry of Finance sold 4 billion euros ($4.4 billion) of notes in maturities of seven, 12 and 20 years on Tuesday
Rudy Giuliani’s back-channel attempts to pressure Ukraine for investigations linked to Donald Trump’s top political rival deeply unsettled two of the president’s top envoys, providing fresh evidence that undercuts White House efforts to portray the episode as innocent and routine
Asian equity markets traded lacklustre following a flat finish on Wall St where the major indices remained near record highs on US-China trade optimism, but with some caution seeping through amid Chinese demands for the removal of tariffs which is seen as a sticking point for the ‘phase one’ deal. ASX 200 (-0.6%) and Nikkei 225 (+0.2%) were mixed with underperformance in Australia’s gold miners after the precious metal slipped below the psychological key USD 1500/oz level, while trade in Tokyo was stable amid a mixed currency and as the local benchmark took a breather from the prior day’s surge to a fresh yearly high. Hang Seng (+0.1%) and Shanghai Comp. (-0.4%) were tentative after the PBoC refrained from open market operations and as participants await the next developments in the trade saga such including whether the US succumbs to China’s demands to roll-back tariffs. Finally, 10yr JGBs declined significantly overnight as the benchmark 10yr JGB yield rose to its highest in around 5 months, while the pressure in JGBs was later exacerbated following mixed 10yr auction results and after prices collapsed through a key support area around 153.60 which previously held up during the last 3 months.
Top Asian News
Thailand Cuts Interest Rate to Record Low to Rein in Currency
SoftBank Reveals $6.5 Billion Loss From Uber, WeWork Turmoil
U.S. Sees Japan-South Korea Thaw as Last Hope to Save Intel Pact
Aberdeen Sees a Turning Point for Malaysia’s Battered Market
Major European bourses (Euro Stoxx 50 +0.3%) are choppy with the indices off having pared earlier upside amid cautious sentiment on multiple reports corroborating the narrative that China will push for further US tariff concessions before it signs off on a Phase 1 trade deal. Earlier in the session, the DAX and Euro Stoxx indices managed to again eke out fresh YTDs highs; the former was halted by resistance at 13170 (15th June 2018 high), ahead of further resistance at the 13200 level (22 May 2018 high). US equity futures are relatively flat intra-day and are yet to fully recover from Monday’s modest losses, which saw the contracts pull back slightly from YTD highs. “The tape is overbought, buyers seem “tired”, valuations are stretched, and trade expectations are elevated (the removal of the 9/1 tariffs is quietly becoming consensus thinking)” JPM noted yesterday, and “that this is making buyers reticent to aggressively chase at present levels.” The FTSE 100 underperforms amid weakness in large cap stocks. Sectors are mostly in the red, barring Consumer Staples (+1.0%) and Financials (+0.5%), with the latter supported by the continued rise in yield, which is also supporting SocGen (+5.3%) despite the firm reporting a net decline of 34.8% YY and a 20% drop in equities trading revenue in Q3. Co. CEO noted that the bank “delivered resilient net income in an unfavourable environment without yet benefitting from the positive effects of ongoing restructuring which is ahead of its 2020 objectives.” Sticking with earnings, solid numbers from Marks & Spencer (+2.1%) and Alstom (+3.8%) saw their respective shares moved higher. Conversely, weaker than forecast earnings from Wirecard (-1.1%), Dialog Semiconductors (-8.8%) and Adidas (-3.2%) sees their shares under pressure. Meanwhile, BT (-3.5%) have been hit by reports that Virgin Media dealt the company a “blow” by striking a deal to switch its 3mln mobile phone customers from the BT over to Vodaphone. Finally, Fincantieri (-1.6%) shares initially slumped amid reports that the Italian finance police are undertaking searches 19 shipbuilding companies working with the Co.
Top European News
ECB’s Guindos Sees Scope for Higher ‘Releasable’ Capital Buffers
BMW Profit Jumps on Cost Cutting in New CEO’s Debut Quarter
Aston Martin Shareholder Deal Limits Options for Raising Cash
M&S Provides Glimmer of Hope as U.K.’s Retail Woes Deepen
In FX, the Dollar has lost some of its post-US services ISM vigour after the DXY managed to scale 98.000 and match the knee-jerk high notched in wake of last week’s FOMC policy meeting precisely. The index topped out just ahead of Fib resistance at 98.085, but also amidst broad consolidation in rival G10 currencies and especially safer-havens that have been underperforming on the positive US-China Phase 1 trade vibe alongside encouraging developments on proposed US auto tariffs. The DXY has slipped back below the big figure, but is holding well above recent lows and 97.500.
JPY/EUR/AUD/NZD – All marginally firmer vs the Greenback, as the Yen contained losses beyond 109.00 to 109.25 and did not threaten technical support around 109.37, while the Euro also defended a key chart level and Fib retracement circa 1.1064 before regrouping with the aid of some decent German data and mostly encouraging Eurozone PMIs. Elsewhere, the Aussie has crept back up to 0.6900 as the Aud/Nzd cross attempts to form a base above 1.0800 and Kiwi labours just under 0.6400 following fractionally weaker than forecast NZ jobs data overnight.
GBP/CHF/CAD – The Pound, Franc and Loonie are struggling to take advantage of the Buck’s fade, with Cable unable to reclaim 1.2900, Usd/Chf still elevated on the 0.9900 handle and Usd/Cad pivoting 1.3150 after Tuesday’s somewhat contrasting Canadian compared to US trade balances (relative to consensus), and ahead of today’s Ivey PMIs.
EM – The Rand has retraced quite sharply from sub-14.7400 vs the Dollar to 14.8000+ on renewed Eskom strife as the company suffers more severe power supply issues and concedes that output will not meet demand even though certain generation sites have resumed production after maintenance. Investors also waiting on tenterhooks to hear from SA President Ramaphosa at a conference aimed at drumming up foreign funds.
In commodities, crude markets are modestly softer but off intraday lows, with downside seen following last night’s larger than expected headline API stocks builds, with crude inventories rising by 4.26mln BDP (vs. Exp. +1.5mln), whilst the cautious tone around the market provides little by way of sentiment-driven upside. Both the WTI Dec’ 19 and Brent Jan’ 19 contracts sit above October’s USD 56.90/bbl and USD 62.30/bbl highs – greater expectations for a US/China Phase 1 trade deal breakthrough combined with a better backdrop of macro data (i.e. US jobs data last Friday) seemingly continue to provide a base for now. In terms of crude specific news flow, the WSJ reported that the Saudis are to set to press OPEC members for production cuts ahead of its Aramco IPO, although the push would be more aimed at “laggards” to comply with current curbs, rather than pushing for deeper trims in output, the article caveated. Quoting sources, the WSJ added that Russia had privately told the group it wants to maintain the current targets until March whilst noting that Saudi wants to refrain from taking a bulk of the cuts – in fitting with recent separate source reports. Further, the article noted that the oil giant’s growth assumptions, as well as the dividend it promises investors, are predicated on oil prices around USD 65/bbl, according to an investor document. Looking ahead on the docket, oil traders will be eyeing the EIA crude stocks release as a scheduled catalyst with headline crude expected to print a build of 1.5mln barrels. In terms of the metals; gold is staging a tepid recovery after yesterday’s slide, which saw the precious metal slip briefly beneath the USD 1480/oz mark. Copper, meanwhile, is subdued after pulling back somewhat from yesterday’s 4-month highs around of USD 2.716/lbs.
US Event Calendar
7am: MBA Mortgage Applications, prior 0.6%
8:30am: Nonfarm Productivity, est. 0.9%, prior 2.3%
8:30am: Unit Labor Costs, est. 2.25%, prior 2.6%
Central Banks
8am: Fed’s Evans Speaks in New York
9:30am: Fed’s Williams Takes Part in Moderated Q&A in New York
3:15pm: Fed’s Harker Discusses Innovation and the Future of Work
DB’s Jim Reid concludes the overnight wrap
I’m in the US at the moment and on the flight over on Monday I watched the original Blade Runner (from 1982) for the first time as my wife wants to watch the recently released sequel. I was a bit shocked that the opening scene tells you it’s set in November 2019. From watching the rest of the film I’m pretty pleased that this vision of the future didn’t pan out. It makes this year’s long term study ( link ) on the future of debt look wildly optimistic by comparison. The other highlight of the trip so far is being in a lift lobby yesterday and hearing this conversation between two people. Person A “So you’re interviewing him now? What are you going to ask him” Person B “I’ll keep it simple. I’ll ask him what 36×36 is. I’ll get all I need to know from that”. I then went away working out how I’d reply if that were me. I thought the best response would be to get my iPhone out and let the calculator work it out. Anyway just in case you’re being interviewed today in NY and you get the same guy the answer is 1296 (thanks iPhone).
The US was buzzing yesterday from higher yields, interesting trade headlines and the split outcome from the services PMI (disappointing) and the arguably more important ISM (positive). Indeed the October ISM non-manufacturing improved 2.1pts to 54.7 (vs. 53.5 expected) with encouraging improvements also for new orders (+1.9pts to 55.6) and more significantly the employment (+3.3pts to 53.7) components. The latter had fallen by nearly 6pts over the previous three months before yesterday and is more consistent with what we saw from the payrolls report last Friday.
That being said it did go against what the Markit PMI data showed just 15 minutes before the ISM was released. The services PMI was revised down 0.4pts to 50.6 and is now at the lowest since February 2016. On top of that, the employment component slid to 47.5 and the lowest since December 2009. So, a very different story to the employment report and perhaps more importantly what the ISM survey data is showing. The ISM tends to be more closely followed but the divergent pictures is no doubt confusing. Europe’s final services PMIs are out this morning and they will be very important. So all eyes on them.
The S&P 500 never really got going yesterday and ultimately finished slightly lower at -0.12%. It was the moves in bond markets which were the bigger talking point though. Indeed the 10y Treasury sold off +8.1bps to take it to 1.858% and approaching the September highs again. A reminder that it was only back in early September that it traded at 1.427%. At the short end 2y yields (+4.2bps) didn’t sell off quite so much which steepened the 2s10s curve to 22.7bps. That is actually the steepest since July and it’s worth flagging that the steepest the curve has been this year was 29bps back in June so we’re not all that far from that level. Markets are now pricing just a 9% probability of a cut at the December meeting. That compares to a 27% probability just under a week ago. I’ve had a lot of questions about the US yield curve while I’ve been in the US with most asking whether this recent steepening reduces the recession risk. I answered that the problem is that it’s a lagging indicator (plus or minus 18 months) so the damage might have already been done prior to this steepening with most of the yield curve inverted for much of this year until very recently. So if the yield curve is to be the usual lead indicator then late 2020/early 2021 might be a worrying time for the US economy regardless of what happens in the next 0-6 months in the economy or the yield curve. Indeed with the trade picture looking better it’s possible we could get a near term data bounce and the yield curve signal still proving accurate over the medium-term.
More on trade below but back to bonds and it was the same story in Europe where 10y Bunds closed up +4.0bps and at the highest since early July while OATs closed at -0.017% and are closing in on positive territory again for the first time since July. The move in rates did help banks to post decent gains yesterday with the S&P and STOXX bank sub-indices up +0.69% and +1.39% respectively.
There’s not much to report this morning in Asia with a small loss for the Shanghai Comp (-0.25%) versus modest gains for the Nikkei (+0.14%) and Kospi (+0.20%). The Hang Seng is flat while bond markets are also weaker in Asia including a +6.0bps rise for 10y JGBs which has pushed them up to -0.078% and the highest yield since May. That comes despite Japan’s final October services PMI coming in 0.6pts lower than initial read to 49.7.
Back to those trade headlines where initially the focus was on the FT story that we referred to this time yesterday about the US side contemplating dropping some tariffs on China. However later in the afternoon China’s Global Times Editor Hu Xijin tweeted that “to reach a deal, China and the US must simultaneously remove the existing additional tariffs at the same ratio, which means that tariffs to be removed should be in proportion to how much agreement has been reached”. I had to read this a few times before my mind could catch up. I think it was frazzled by trying to work out 36×36. Anyway, it puts a little tension back into the “phase one” signing.
As for the other data out yesterday, the September trade deficit narrowed to $52.5bn from $55.0bn, and broadly in line with expectations. The limited revisions in the trade data also mean Q3 GDP estimates should be little changed. Here in Europe the only data came from the UK where the October services PMI rose 0.5pts to 50.0, meaning the composite also printed at 50.0 following a 49.3 print in September.
Staying with the UK, a YouGov poll released yesterday gave the Conservatives a 13pt lead over Labour (38% versus 25%). That means the last three YouGov polls have showed the Tories with a lead of 15pts, 13pts and 15pts – so, fairly consistent but YouGov has been at the very top of the range for Tory leads. Sterling was little changed yesterday while for completeness there wasn’t much going on in European equity markets either where the STOXX 600 finished +0.20%.
In other news, the Fed’s Barkin said yesterday with respect to the Fed that “I think it is a good time to pause”. He added that “we have decided to take rates down 75bps to protect against weakening coming from this uncertainty…so if we get either no weakening or the modest kind of weakening that we expect, then I think we have taken out the insurance that we would take”.
Looking at the day ahead, this morning we get September factory orders print in Germany followed by the final October services and PMIs in Europe. Also out this morning is September retail sales for the Euro Area. In the US this afternoon it’s fairly quiet for data with just the preliminary Q3 nonfarm productivity and unit labour costs prints due. Away from that we’re due to hear from the Fed’s Evans, Williams and Harker at various points, as well as the ECB’s Guindos, Mersch and Holzmann.
An 83-year-old retired engineer in Michigan underpaid his property taxes by $8.41. In response, Oakland County seized his property, auctioned it off to settle the debt, and pocketed nearly $24,500 in excess revenue from the sale.
Under Michigan law, it was all legal. And hardly uncommon.
Uri Rafaeli, who lost his property and all the equity associated with it, is just one of thousands of people to be victimized by Michigan’s uniquely aggressive property tax statute. The law, passed in 1999 in an attempt to accelerate the rehabilitation of abandoned properties,empowers county treasurers to act as debt collectors. In the process, it creates a perverse incentive by allowing treasurers’ offices to retain excess revenue raised by seizing and selling properties with delinquent taxes—even when the amount owed is miniscule, and even when the homes aren’t abandoned or blighted at all.
Organizations representing property owners like Rafaeli say the practice is unconstitutional, inequitable, and unreasonably harsh. They call it “home equity theft”—a process that’s a close relative to the civil asset forfeiture laws that have been used by police departments to similarly deprive innocent Americans of their property without due process. They are now asking the state Supreme Court to restrict the practice.
“Michigan is currently stealing from people across the state,” says Christina Martin, an attorney with the Pacific Legal Foundation, a nonprofit law firm now representing Rafaeli and other homeowners in a class-action lawsuit that will go before the Michigan Supreme Court in early November.
“Counties have been authorized to take not just what they are owed, but to take people’s life savings.”
A Win-Win Situation
Rafaeli’s case—which has the potential to stop the predatory behavior of county treasurers across the state—began with a simple mistake.
Uri Rafaeli
In August 2011, Rafaeli purchased a three-bedroom, 1,500-square-foot home in the predominantly African American community of Southfield, Michigan, a lower-middle-class suburb just north of Detroit. “The investment was good to the state economy, and [at] the same time, it may produce a good rent for my retirement. A ‘win-win’ situation,” says Rafaeli, who lived in neighboring Macomb County at the time. (He no longer lives in Michigan.)
The $60,000 purchase was recorded by the Oakland County Register of Deeds on January 6, 2012. About six months later, in June 2012, Rafaeli was notified that he had underpaid his 2011 property tax bill by $496. Rafaeli made subsequent property tax payments on time and in full—and, in January 2013, he attempted to settle the unpaid tax debt, according to court documents.
But he made a mistake in calculating the interest owed, resulting in another underpayment of $8.41.
A little more than a year later, in February 2014, Rafaeli’s rental property was one of 11,000 properties put up for auction by Oakland County. It was sold for $24,500 in August of the same year—far less than what Rafaeli had paid for the property just three years earlier.
Today, real estate service Zillow, which rates the Southfield region as a “hot” market in the Detroit region, estimates the property is worth $128,000, But Rafaeli has missed out on reaping a financial reward for being an early investor in the area.
Uri Rafaeli’s house and surrounding property in Southfield, Michigan.
“I believed in the power of the U.S. to withstand the difficulties,” says Rafaeli, “and I believed in its fairness and dignity in doing business there.” Now, he says, he thinks differently.
“Punitive for Property Owners, and Profitable for the County”
In court documents, Rafaeli’s attorneys estimate there have been more than 100,000 properties—along with the “entire equity in them”—that have been taken by Michigan counties since 2002. “In thousands of instances each year, the proceeds for a given property sold at auction far exceed the delinquent tax amount and are far less than a delinquent taxpayer’s equity in the property,” they argue. “This results in millions of dollars in surplus proceeds and equity for the counties and tax sale purchasers.”
At the root of those seizures is a 1999 update to Michigan’s general property tax statute. That legislation, Act 123 of 1999, gave Michigan’s 83 county treasurers the authority to act as the primary agents for handing the foreclosure and auction of properties with unpaid taxes. It also expedited the process for seizing and auctioning homes that owed taxes, allowing county treasuries to sweep aside liens and other speed bumps in the tax foreclosure process.
The legislation’s goals were “to encourage the rapid reuse of property, prevent the onset of blight, and improve the overall use of property” in the state, according to a 2011 University of Michigan report about the effects of Act 123 in Wayne County—where Detroit is located, and where the 1999 law has had the most devastating effects on homeowners.
Over the past decade, more than 150,000 properties in Detroit have gone through the tax forfeiture process, according to data collected by Jerry Paffendorf, the founder of Loveland Technologies, a Detroit-based mapping firm. The process, says Paffendorf, is “punitive for property owners and profitable for the county.”
Paffendorf became increasingly interested in Michigan’s unique tax foreclosure rules shortly after Detroit’s 2013 bankruptcy, when his company worked with an anti-blight task force to identify and photograph abandoned properties across the city. At the time, the media was fascinated with Detroit’s economic collapse—one of the most memorable signs of which were the homes being auctioned for $1,000 or less.
As he began tracking the supposedly vacant homes being auctioned off by the city, Paffendorf noticed an odd trend: Lots of them weren’t actually vacant.
“There was sort of an assumption that tax foreclosures were happening to abandoned buildings. You know, properties that people had left,” he tells Reason. But that wasn’t always the case. “We saw thousands of properties that had people living in them being auctioned.”
That was happening because of the accelerated foreclosure process created by Act 123, which harshly punished any Michigander for falling behind on property tax payments. Prior to 1999, the average time between a property falling into tax delinquency and foreclosure was five to seven years, but Act 123 reduced that timeline to a little over two years. The accelerated foreclosure process caught many homeowners who fell behind on their taxes during the Great Recession.
In Michigan, property taxes are due twice per year. Bills are sent in July and December, with payments due in April and November. If there are outstanding debts from the previous year, delinquent properties are turned over to the county in March the following year. The county buys the debt from municipalities—the funding comes from the county’s “delinquent tax revolving fund” (DTRF)—and the county effectively becomes the debt collector for the unpaid taxes. Under state law, counties are allowed to impose a one-time 4 percent administrative fee to each delinquent property, and may charge 1 percent interest for every month the tax remains unpaid.
If the property owner still owes back taxes by March 31 of the third year of delinquency—that is, two years and 31 days after the county took over the collection process—the county can foreclose and take the property to auction.
After a property is auctioned, the county keeps the proceeds and recycles the revenue through the same DTRF used to buy the debt from municipalities in the first place.
If the county ends up with a positive balance in its DTRF, the excess funds can be channeled into the county budget.
That’s how Wayne County has funneled more than $382 million in delinquent tax surpluses into its general fund budget since 2012, according to an analysis by Bridge magazine, a Michigan-based nonprofit publication.
In Oakland County, where Rafaeli’s Southfield property was seized and sold in 2014, the process has been lucrative too. According to the county’s most recent comprehensive annual financial report, its DTRF had $196.8 million in net assets.
The same document details plans to use the DTRF for a number of pet projects, including the construction of a new animal shelter and adoption center. The county also “anticipates the continuation of annual transfers from the DTRF to support General Fund / General Purpose operations in the amount of $3.0 million annually for FY 2019 through FY 2023″—totals that are in line with historical norms, according to the annual report.
That’s hundreds of millions of dollars in private equity that have been transferred to the two counties’ control—completely legally, under the terms of Act 123.
“It is simply government-sanctioned theft,” says private attorney Philip Ellison. Ellison has been involved in a series of class-action lawsuits targeting nine Michigan counties’ use of home equity forfeiture over the past six years, during which time, he calculates, counties in Michigan have pocketed more than $36 million in surplus equity seized from tax delinquent properties.
Ellison represents people like Donald Freed, a resident of Alma, Michigan, who had his home and 35 acres of land seized by Gratiot County, Michigan, over a $750 tax debt. The property was auctioned for more than $100,000—and, of course, the county kept the change.
Romualdo and Erica Perez
The same thing happened to Romualdo and Erica Perez, a father/daughter duo who bought a four-unit apartment building and an adjacent, abandoned single-family home in Detroit in 2012. Even though they were living in New Jersey at the time, Romualdo would drive 11 hours to Detroit on weekends to fix up the properties in the hopes of eventually relocating there to be closer to other relatives. Romualdo and Erica planned to live in the house and earn a living by renting the small apartment building.
“Every bit of money we saved and every spare minute we had went to fixing the house,” Erica says. “The plumbing, the electricity—everything.”
But the first year they owned the property, they underpaid their property taxes by $144. County tax records show that they made full payments, on time, every subsequent year. But Wayne County never informed them of the unpaid debt, they say, because the notices were sent to the wrong address. But the county should have known the correct address for the notices because more recent property tax payments indicated the proper address, says Martin.
In 2017, the county foreclosed on their property, sold it for $108,000, and kept the excess equity beyond the $359 owed in back taxes, fees, and interest. They, too, are suing the state with the assistance of the Pacific Legal Foundation, in a case that’s separate from Rafaeli’s.
Making Detroit a Worse Place to Live
In addition to destroying the livelihoods of individual property owners, Act 123 has made Detroit a less attractive place to live.
“Detroit’s collapsing structures and vacant lots didn’t just happen,” the Obama administration’s special Detroit Blight Removal Task Force concluded in its 2013 report. “They are the physical result of dire economic and social forces that pulled the city apart.”
The county’s aggressive home equity forfeiture scheme seems to be part of the problem. Over a two year period between 2017 and 2018, volunteers working with the Quicken Loan Community Fund, a Detroit-based nonprofit connected to the mortgage company, interviewed more than 60,000 property owners who owed taxes to the city. Most were aware that they owed taxes, but did not have accurate information about the process or the potential consequences.
Worse, the survey found that aggressive use of home equity forfeiture was leaving the city with more vacant properties, not fewer. “In theory, the annual tax foreclosure auctions are intended to take properties that are neglected and not generating tax revenue, and sell them to owners who will pay taxes and put the properties to productive use,” the Quicken Loans Community Fund report concluded. “In practice, most Detroit homes that have been tax foreclosed do not return to productive use. Instead, speculators who purchase cheap property at auction allow it to deteriorate without paying property taxes, leading to further depressed home values and blight.”
Paffendorf, whose company was involved in the Quicken survey, says that about 80 percent of tax-foreclosed properties end up abandoned. Some are vacant because they are going through forfeiture, and some are going through forfeiture because they are vacant, he says. But regardless of which way the causation runs, it’s fairly obvious that a law that was meant to return tax-delinquent abandoned properties to productive, tax-producing ones is failing to achieve that goal.
“If you sell houses with people living in them,” Paffendorf tells Reason, then “you’re only creating more vacant properties.”
An Incentive for County Officials to Steal
The aggressive use of home equity forfeiture under Act 123 has not only failed at its stated goal of returning abandoned homes to productive use, it has created a perverse incentive for county officials to effectively steal from their constituents.
On the morning of April 1, 2014, Linda Irwin, Cass County’s treasurer, emailed a county contractor to say she was “tickled pink” to have the opportunity to seize a $3.5 million lakefront property. The deadline for the property owner to settle an unpaid property tax debt had passed the day before and the county was ready to foreclose. In subsequent emails, the contractor joked with Irwin about using the property to host cookouts for county employees, according to court documents attached to a lawsuit against Cass County.
It wasn’t until three weeks later that Douglas Anderson, the registered agent who was handling the property and overseeing the construction of a still-unfinished home, became aware anything was wrong. In court documents, lawyers representing Anderson and property owner Sergei Antipov allege the county failed to provide adequate notice about the unpaid property taxes. Cass County argues that it took the appropriate steps required under law, sending two certified letters to the address. Both were returned as undeliverable, likely because there was no one actually living at the address yet.
It was not until April 18, 2014, weeks after the foreclosure deadline had passed, that county officials called Anderson to tell him the property was being seized. When Anderson and Antipov offered to pay the back taxes, the county refused to accept it.
“It’s a done deal,” Irwin told a local newspaper in June 2014. “They’ve tried to send us a check for $100,000, and I’ve returned it. I’ve had my council look at it, and we’ve done everything right. We didn’t make any mistakes. They did.”
Maybe so. But the county—and the contractor, Title Check, which works with county treasurers across the state and gets to keep a portion of the proceeds from auctioned properties—does not appear to have done much to alert Antipov that he owed taxes.
Antipov’s situation bears many similarities to the forfeitures that targeted the Rafaeli and Perez properties, among others. In each case, the property owners alleged that they were not given sufficient warning about their delinquent taxes. In some cases, that’s because county officials were mailing notices to unfinished homes or properties without permanent residents. In others, like Rafaeli’s case, the notices were delivered to tenants who failed to pass along the information to their landlord, mistakenly believing that the county would inform the landlord separately.
The county officials involved in each of those lawsuits contend in court documents that they complied with the notification requirements written into state law. Although Act 123 does require that county treasurers make three attempts to contact tax delinquent property owners, attorneys representing the homeowners say more should be done.
“They don’t have to sue in the normal sense,” says Martin. Because the legal action—the forfeiture—is filed against the property itself, the notice required is significantly lower than what is required in other legal matters. And some counties don’t include delinquent taxes on subsequent property tax bills, she says. “There is no notice on the new assessments that says ‘you have not paid a prior year’s bill.'”
In Cass County, officials don’t appear to have done anything beyond the bare minimum.Antipov’s attorneys say it would have taken a quick online search to find that the property was owned by an LLC registered in Anderson’s name and with his Indiana address. Antipov, who owns a metal fabrication company in Indiana, owns another property in Cass County and would have been on the county’s tax rolls (and likely known to the treasurer’s office) But neither the county nor Title Check made anything other than the bare minimum effort to avoid running out the clock established by Act 123.
“This is a major asset,” Irwin said in 2014. “We can sit on it and decide what to do with it, or we can move forward with an auction.”
Irwin, who no longer serves as Cass County treasurer, did not return requests for comment. The county has racked up more than $250,000 in legal fees since 2014 defending its right to seize Antipov’s property, documents show. The home is still unfinished.
And while some county officials use Michigan’s aggressive foreclosure law to benefit their budgets or to provide a setting for backyard barbeques, others use it in ways that are more openly designed to advance municipal self-interest.
Wayne County Treasurer Eric Sabree has also been caught on camera admitting that Wayne County and the city of Detroit will sometimes conspire to manipulate the auction process. During a 2015 appearance on “Detroit Wants To Know,” a local web series,Sabree talked about how the treasurer’s office will bundle properties together in order to make them more attractive to potential buyers—or perhaps less attractive, so the city of Detroit can keep certain parcels for itself.
“It’s a group of properties we put together, because we cooperated with the city of Detroit…Nobody will buy this bundle, and then we can just give it to the city, and then the city will use the demolition funds to tear them down,” he said. “And in the bundle, we also had some good properties, which the city then sold to fund the demolition and the management of the properties they took.”
It’s not only the city that benefits. In February, the Detroit Free Press and The Detroit News published a joint expose showing that Sabree’s relatives purchased several homes in county-run tax foreclosure auctions. When confronted with the allegations, Sabree dismissed the rules that forbid treasurer’s office employees or their family members from bidding in those auctions as “intrusive and unrealistic.”
Sabree did not return requests for comment. But in July, an ethics board voted 5-1 to clear him of any wrongdoing, concluding that his wife’s purchase of properties in 2011 did not violate the ethics rules because the rules were adopted in 2012. Wayne County Executive Warren Evans told the Detroit Metro Times that he was “not sure that the Board’s action today did much to address” the concerns about Sabree’s behavior.
In Oakland County, the suburban county north of Detroit where Rafaeli’s property was seized and sold in 2014, there were 86 properties included in the county’s 2019 land auction, held in October. In 2018, the county auctioned off 79 properties that had been seized due to unpaid taxes, according to a list obtained by Reason via Michigan’s freedom of information law. That’s down from nearly 300 properties that went to the auction block as recently as 2015 in the same county.
County Treasurer Andrew Meisner, who is a defendant in the Rafaeli lawsuit going to the Michigan Supreme Court, did not return repeated requests for comment on this story.
His office says it tries to help homeowners avoid foreclosure. In a press release issued in March 2019, Meisner said his office has “contacted hundreds of property tax owners to discuss their options to avoid foreclosure” before the April 1 property tax payment deadline. “Preventing foreclosure is in everyone’s best interest,” said Meisner, in the same statement. Yet the evidence clearly shows that county officials and budgets have benefited from aggressive seizures and sales.
An Unconstitutional Fine
If Rafaeli is victorious before the Michigan Supreme Court, the next step would be to enter into negotiations with Oakland County to determine a fair market value for his lost property and he would be entitled to “just compensation.” And so would lots of other Michiganders. “If the Michigan Supreme Court in the Rafaeli case…rules in favor of the property owners, counties will be required to make an appropriate refund,” says Ellison.
Legally, the matter is fraught. Counties seizing excess revenue above and beyond the amount necessary to settle the unpaid debts could be considered a taking—in which case it would be subjected to the Fifth Amendment, which promises that “private property [shall not] be taken for public use, without just compensation.” The Michigan Constitution offers similar protections against government taking private property without compensation.
Oakland County has prevailed in lower courts by arguing that the seizure of Rafaeli’s property was a forfeiture. But that argument runs into other legal problems: For one, even under the wide leeway that is afforded in asset forfeiture laws, there must be an allegation of underlying criminal activity. Not paying property taxes is a civil violation, but not a criminal one.
“Traditionally, civil forfeiture would only apply to the product of the crime or the proceeds of the crime,” says Martin. Although many states and localities have stretched their use of civil asset forfeiture to include cases where no one is actually convicted of a crime—often as part of drug enforcement—the legal doctrine requires that the property seized must be “tainted with criminal activity,” she says.
But if that’s the way courts want to look at it, then the Eighth Amendment’s prohibition against excessive fines would apply. It doesn’t matter that a state law, like Act 123, might authorize such a forfeiture if it is unconstitutional.
In a landmark U.S. Supreme Court case last year, Timbs v. Indiana, the high court ruled that the excessive fines clause applies to both state and federal proceedings. In Timbs, the state of Indiana attempted to seize a $42,000 vehicle that had been used to transport illegal drugs, but the Supreme Court determined that taking the value of the vehicle—which was many times in excess of the allowable monetary fine for the crime Tyson Timbs had committed—violated the Eighth Amendment.
That might matter for the Rafaeli case. “Tax foreclosure is not the same thing as a forfeiture,” Wesley Hottot, an attorney with the Institute for Justice, a nonprofit libertarian law firm, tells Reason. Hottot was the lead attorney in the Timbs case.
“But even if they were right,” Hottot adds, the forfeiture in this case violated the excessive fines clause of the U.S. Constitution, he says, “because it was grossly disproportionate to the minor offenses involved.”
Michigan Supreme Court
In a brief submitted to the state Supreme Court defending Oakland County’s use of home equity forfeiture against Rafaeli, the Michigan Association of County Treasurers makes several arguments in favor of the existing arrangement. The current system allows for counties to more easily? address blight, the group argues, despite evidence, like Paffendorf and Quicken found,that it has made blight worse in some places.
Elsewhere, the group’s arguments seem to contradict one another. Ruling that tax foreclosure is a taking “could eliminate any incentive for property owners to pay delinquent real property taxes,” the MACT argues, because the threat of punishment must exist for property owners to comply. But, later, the group argues that the seizure of an entire property to pay a smaller debt is “not intended to be punitive” and therefore does not run afoul of the Eighth Amendment’s prohibition on excessive fines.
At the very least, the group’s attorneys argue, the legislature—not the courts—should be responsible for fixing Act 123, because it would be able to do so “without destroying the tax collection process.”
At other times, county officials have pleaded poverty. “They were on the verge of [bankruptcy] for quite a while. It was up to elected officials and administrators of local governments to take the initial steps (to collect taxes) and somehow they just didn’t do it,” Ray Wojtowicz, a retired Wayne County treasurer, toldBridge in 2017. It’s clear that counties in Michigan now count on being able to pad their budgets with revenue from homes seized for having unpaid taxes.
The burden of aggressive property tax enforcement, meanwhile, falls heaviest on poor communities. Wealthier homeowners have easier access to the legal and accounting assistance necessary to avoid underpayments or to quickly address any problems. Once property is seized, there’s no guarantee of due process or even a court hearing. Homeowners don’t even have access to public defenders; those are allocated only in criminal cases.
In some counties, Act 123 has “created this incredibly unhealthy incentive where the county isn’t just satisfied when they make enough to cover what they would have made in taxes,” says Paffendorf. “They are relying on these surpluses from people who are in debt.”
University of Massachusetts law professor Ralph Clifford has spent years studying home equity forfeitures in Massachusetts. The state has a less aggressive foreclosure law, but similarly allows municipalities to pocket excess revenue when tax delinquent foreclosures occur. His research shows that an estimated $56 million is appropriated from Massachusetts taxpayers every year. After reviewing all such seizures—known as “tax deed” actions, under Massachusetts state law—that took place between August 2013 and July 2014, Clifford found that towns in the state collected $42.87 for every dollar in taxes owed. His analysis includes one instance in which a property assessed for a value of $24,000 was taken to cover a $26 tax bill.
“As far as I can tell,” he told Reason, “it’s all just blatantly unconstitutional.”
Reforming the System
“We’d had these situations for decades, where people have lost their entire homes over a few hundred dollars of unpaid property taxes,” Montana state Sen. Tom Jacobson (D–Great Falls) tells Reason. “They would lose their entire homes. Forty years. All that equity. Over a few hundred bucks.”
Shortly after his election to the state legislature in 2012, he introduced a bill to require that property owners be compensated for what is taken—minus the debt owed and any interest.
But Jacobson says he was surprised by the level of opposition he witnessed. Lobbyists for counties (which handle property taxes in Montana, like in Michigan) said the bill would hurt their budgets.
He reintroduced the bill during the 2015 and 2017 sessions—Montana lawmakers meet for a formal session only once every two years, though they have an interim session in off years where much of the groundwork is laid, though no votes are taken. By the third time though the process, lawmakers agreed to add additional notification requirements before a property could be seized.
This year, the state legislature passed, and Gov. Steve Bullock signed, a bill giving property owners the right to the remainder of the equity in their homes after the tax debt is settled. The bill also requires that properties cannot be sold for less than 50 percent of their assessed value—an important caveat that should prevent some of what has occurred in Michigan.
The reforms also flip the counties’ incentives. Instead of being able to profit off delinquent taxes, says Jacobson, officials will now have an incentive to make sure the taxes are paid up front and on time—or they’ll have an incentive to help taxpayers find ways to meet their obligations.
A Penalty More than 8,000 Times the Underlying Debt
In Michigan, however, the practice of seizing homes over tiny underpayments of property taxes is likely to remain in place unless the courts step in. A bill introduced in the Michigan state House by Rep. Gary Howell (R–Lapeer) to reform Act 123 collected a handful of co-sponsors this year but did not receive even a committee vote.
Which means there will be more people like Uri Rafeali, who lost a home over an $8.41 mistake. His property, bought as an investment, is valued at an estimated $136,000. The penalty imposed by Oakland County was more than 8,000 percent greater than the underlying debt.
But today, while the legal battle over its fate plays out, the house sits empty. It generates no tax revenue for the city or county. It earns no money for Rafaeli or his wife in their retirement.
“The Constitution was written to prevent the government from violating a right that preexists the Constitution,” says Martin. “If this can happen to multimillionaires and to the poor, to the elderly….If this can happen to Mr. Rafaeli, it can happen to anyone.”
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An 83-year-old retired engineer in Michigan underpaid his property taxes by $8.41. In response, Oakland County seized his property, auctioned it off to settle the debt, and pocketed nearly $24,500 in excess revenue from the sale.
Under Michigan law, it was all legal. And hardly uncommon.
Uri Rafaeli, who lost his property and all the equity associated with it, is just one of thousands of people to be victimized by Michigan’s uniquely aggressive property tax statute. The law, passed in 1999 in an attempt to accelerate the rehabilitation of abandoned properties,empowers county treasurers to act as debt collectors. In the process, it creates a perverse incentive by allowing treasurers’ offices to retain excess revenue raised by seizing and selling properties with delinquent taxes—even when the amount owed is miniscule, and even when the homes aren’t abandoned or blighted at all.
Organizations representing property owners like Rafaeli say the practice is unconstitutional, inequitable, and unreasonably harsh. They call it “home equity theft”—a process that’s a close relative to the civil asset forfeiture laws that have been used by police departments to similarly deprive innocent Americans of their property without due process. They are now asking the state Supreme Court to restrict the practice.
“Michigan is currently stealing from people across the state,” says Christina Martin, an attorney with the Pacific Legal Foundation, a nonprofit law firm now representing Rafaeli and other homeowners in a class-action lawsuit that will go before the Michigan Supreme Court in early November.
“Counties have been authorized to take not just what they are owed, but to take people’s life savings.”
A Win-Win Situation
Rafaeli’s case—which has the potential to stop the predatory behavior of county treasurers across the state—began with a simple mistake.
Uri Rafaeli
In August 2011, Rafaeli purchased a three-bedroom, 1,500-square-foot home in the predominantly African American community of Southfield, Michigan, a lower-middle-class suburb just north of Detroit. “The investment was good to the state economy, and [at] the same time, it may produce a good rent for my retirement. A ‘win-win’ situation,” says Rafaeli, who lived in neighboring Macomb County at the time. (He no longer lives in Michigan.)
The $60,000 purchase was recorded by the Oakland County Register of Deeds on January 6, 2012. About six months later, in June 2012, Rafaeli was notified that he had underpaid his 2011 property tax bill by $496. Rafaeli made subsequent property tax payments on time and in full—and, in January 2013, he attempted to settle the unpaid tax debt, according to court documents.
But he made a mistake in calculating the interest owed, resulting in another underpayment of $8.41.
A little more than a year later, in February 2014, Rafaeli’s rental property was one of 11,000 properties put up for auction by Oakland County. It was sold for $24,500 in August of the same year—far less than what Rafaeli had paid for the property just three years earlier.
Today, real estate service Zillow, which rates the Southfield region as a “hot” market in the Detroit region, estimates the property is worth $128,000, But Rafaeli has missed out on reaping a financial reward for being an early investor in the area.
Uri Rafaeli’s house and surrounding property in Southfield, Michigan.
“I believed in the power of the U.S. to withstand the difficulties,” says Rafaeli, “and I believed in its fairness and dignity in doing business there.” Now, he says, he thinks differently.
“Punitive for Property Owners, and Profitable for the County”
In court documents, Rafaeli’s attorneys estimate there have been more than 100,000 properties—along with the “entire equity in them”—that have been taken by Michigan counties since 2002. “In thousands of instances each year, the proceeds for a given property sold at auction far exceed the delinquent tax amount and are far less than a delinquent taxpayer’s equity in the property,” they argue. “This results in millions of dollars in surplus proceeds and equity for the counties and tax sale purchasers.”
At the root of those seizures is a 1999 update to Michigan’s general property tax statute. That legislation, Act 123 of 1999, gave Michigan’s 83 county treasurers the authority to act as the primary agents for handing the foreclosure and auction of properties with unpaid taxes. It also expedited the process for seizing and auctioning homes that owed taxes, allowing county treasuries to sweep aside liens and other speed bumps in the tax foreclosure process.
The legislation’s goals were “to encourage the rapid reuse of property, prevent the onset of blight, and improve the overall use of property” in the state, according to a 2011 University of Michigan report about the effects of Act 123 in Wayne County—where Detroit is located, and where the 1999 law has had the most devastating effects on homeowners.
Over the past decade, more than 150,000 properties in Detroit have gone through the tax forfeiture process, according to data collected by Jerry Paffendorf, the founder of Loveland Technologies, a Detroit-based mapping firm. The process, says Paffendorf, is “punitive for property owners and profitable for the county.”
Paffendorf became increasingly interested in Michigan’s unique tax foreclosure rules shortly after Detroit’s 2013 bankruptcy, when his company worked with an anti-blight task force to identify and photograph abandoned properties across the city. At the time, the media was fascinated with Detroit’s economic collapse—one of the most memorable signs of which were the homes being auctioned for $1,000 or less.
As he began tracking the supposedly vacant homes being auctioned off by the city, Paffendorf noticed an odd trend: Lots of them weren’t actually vacant.
“There was sort of an assumption that tax foreclosures were happening to abandoned buildings. You know, properties that people had left,” he tells Reason. But that wasn’t always the case. “We saw thousands of properties that had people living in them being auctioned.”
That was happening because of the accelerated foreclosure process created by Act 123, which harshly punished any Michigander for falling behind on property tax payments. Prior to 1999, the average time between a property falling into tax delinquency and foreclosure was five to seven years, but Act 123 reduced that timeline to a little over two years. The accelerated foreclosure process caught many homeowners who fell behind on their taxes during the Great Recession.
In Michigan, property taxes are due twice per year. Bills are sent in July and December, with payments due in April and November. If there are outstanding debts from the previous year, delinquent properties are turned over to the county in March the following year. The county buys the debt from municipalities—the funding comes from the county’s “delinquent tax revolving fund” (DTRF)—and the county effectively becomes the debt collector for the unpaid taxes. Under state law, counties are allowed to impose a one-time 4 percent administrative fee to each delinquent property, and may charge 1 percent interest for every month the tax remains unpaid.
If the property owner still owes back taxes by March 31 of the third year of delinquency—that is, two years and 31 days after the county took over the collection process—the county can foreclose and take the property to auction.
After a property is auctioned, the county keeps the proceeds and recycles the revenue through the same DTRF used to buy the debt from municipalities in the first place.
If the county ends up with a positive balance in its DTRF, the excess funds can be channeled into the county budget.
That’s how Wayne County has funneled more than $382 million in delinquent tax surpluses into its general fund budget since 2012, according to an analysis by Bridge magazine, a Michigan-based nonprofit publication.
In Oakland County, where Rafaeli’s Southfield property was seized and sold in 2014, the process has been lucrative too. According to the county’s most recent comprehensive annual financial report, its DTRF had $196.8 million in net assets.
The same document details plans to use the DTRF for a number of pet projects, including the construction of a new animal shelter and adoption center. The county also “anticipates the continuation of annual transfers from the DTRF to support General Fund / General Purpose operations in the amount of $3.0 million annually for FY 2019 through FY 2023″—totals that are in line with historical norms, according to the annual report.
That’s hundreds of millions of dollars in private equity that have been transferred to the two counties’ control—completely legally, under the terms of Act 123.
“It is simply government-sanctioned theft,” says private attorney Philip Ellison. Ellison has been involved in a series of class-action lawsuits targeting nine Michigan counties’ use of home equity forfeiture over the past six years, during which time, he calculates, counties in Michigan have pocketed more than $36 million in surplus equity seized from tax delinquent properties.
Ellison represents people like Donald Freed, a resident of Alma, Michigan, who had his home and 35 acres of land seized by Gratiot County, Michigan, over a $750 tax debt. The property was auctioned for more than $100,000—and, of course, the county kept the change.
Romualdo and Erica Perez
The same thing happened to Romualdo and Erica Perez, a father/daughter duo who bought a four-unit apartment building and an adjacent, abandoned single-family home in Detroit in 2012. Even though they were living in New Jersey at the time, Romualdo would drive 11 hours to Detroit on weekends to fix up the properties in the hopes of eventually relocating there to be closer to other relatives. Romualdo and Erica planned to live in the house and earn a living by renting the small apartment building.
“Every bit of money we saved and every spare minute we had went to fixing the house,” Erica says. “The plumbing, the electricity—everything.”
But the first year they owned the property, they underpaid their property taxes by $144. County tax records show that they made full payments, on time, every subsequent year. But Wayne County never informed them of the unpaid debt, they say, because the notices were sent to the wrong address. But the county should have known the correct address for the notices because more recent property tax payments indicated the proper address, says Martin.
In 2017, the county foreclosed on their property, sold it for $108,000, and kept the excess equity beyond the $359 owed in back taxes, fees, and interest. They, too, are suing the state with the assistance of the Pacific Legal Foundation, in a case that’s separate from Rafaeli’s.
Making Detroit a Worse Place to Live
In addition to destroying the livelihoods of individual property owners, Act 123 has made Detroit a less attractive place to live.
“Detroit’s collapsing structures and vacant lots didn’t just happen,” the Obama administration’s special Detroit Blight Removal Task Force concluded in its 2013 report. “They are the physical result of dire economic and social forces that pulled the city apart.”
The county’s aggressive home equity forfeiture scheme seems to be part of the problem. Over a two year period between 2017 and 2018, volunteers working with the Quicken Loan Community Fund, a Detroit-based nonprofit connected to the mortgage company, interviewed more than 60,000 property owners who owed taxes to the city. Most were aware that they owed taxes, but did not have accurate information about the process or the potential consequences.
Worse, the survey found that aggressive use of home equity forfeiture was leaving the city with more vacant properties, not fewer. “In theory, the annual tax foreclosure auctions are intended to take properties that are neglected and not generating tax revenue, and sell them to owners who will pay taxes and put the properties to productive use,” the Quicken Loans Community Fund report concluded. “In practice, most Detroit homes that have been tax foreclosed do not return to productive use. Instead, speculators who purchase cheap property at auction allow it to deteriorate without paying property taxes, leading to further depressed home values and blight.”
Paffendorf, whose company was involved in the Quicken survey, says that about 80 percent of tax-foreclosed properties end up abandoned. Some are vacant because they are going through forfeiture, and some are going through forfeiture because they are vacant, he says. But regardless of which way the causation runs, it’s fairly obvious that a law that was meant to return tax-delinquent abandoned properties to productive, tax-producing ones is failing to achieve that goal.
“If you sell houses with people living in them,” Paffendorf tells Reason, then “you’re only creating more vacant properties.”
An Incentive for County Officials to Steal
The aggressive use of home equity forfeiture under Act 123 has not only failed at its stated goal of returning abandoned homes to productive use, it has created a perverse incentive for county officials to effectively steal from their constituents.
On the morning of April 1, 2014, Linda Irwin, Cass County’s treasurer, emailed a county contractor to say she was “tickled pink” to have the opportunity to seize a $3.5 million lakefront property. The deadline for the property owner to settle an unpaid property tax debt had passed the day before and the county was ready to foreclose. In subsequent emails, the contractor joked with Irwin about using the property to host cookouts for county employees, according to court documents attached to a lawsuit against Cass County.
It wasn’t until three weeks later that Douglas Anderson, the registered agent who was handling the property and overseeing the construction of a still-unfinished home, became aware anything was wrong. In court documents, lawyers representing Anderson and property owner Sergei Antipov allege the county failed to provide adequate notice about the unpaid property taxes. Cass County argues that it took the appropriate steps required under law, sending two certified letters to the address. Both were returned as undeliverable, likely because there was no one actually living at the address yet.
It was not until April 18, 2014, weeks after the foreclosure deadline had passed, that county officials called Anderson to tell him the property was being seized. When Anderson and Antipov offered to pay the back taxes, the county refused to accept it.
“It’s a done deal,” Irwin told a local newspaper in June 2014. “They’ve tried to send us a check for $100,000, and I’ve returned it. I’ve had my council look at it, and we’ve done everything right. We didn’t make any mistakes. They did.”
Maybe so. But the county—and the contractor, Title Check, which works with county treasurers across the state and gets to keep a portion of the proceeds from auctioned properties—does not appear to have done much to alert Antipov that he owed taxes.
Antipov’s situation bears many similarities to the forfeitures that targeted the Rafaeli and Perez properties, among others. In each case, the property owners alleged that they were not given sufficient warning about their delinquent taxes. In some cases, that’s because county officials were mailing notices to unfinished homes or properties without permanent residents. In others, like Rafaeli’s case, the notices were delivered to tenants who failed to pass along the information to their landlord, mistakenly believing that the county would inform the landlord separately.
The county officials involved in each of those lawsuits contend in court documents that they complied with the notification requirements written into state law. Although Act 123 does require that county treasurers make three attempts to contact tax delinquent property owners, attorneys representing the homeowners say more should be done.
“They don’t have to sue in the normal sense,” says Martin. Because the legal action—the forfeiture—is filed against the property itself, the notice required is significantly lower than what is required in other legal matters. And some counties don’t include delinquent taxes on subsequent property tax bills, she says. “There is no notice on the new assessments that says ‘you have not paid a prior year’s bill.'”
In Cass County, officials don’t appear to have done anything beyond the bare minimum.Antipov’s attorneys say it would have taken a quick online search to find that the property was owned by an LLC registered in Anderson’s name and with his Indiana address. Antipov, who owns a metal fabrication company in Indiana, owns another property in Cass County and would have been on the county’s tax rolls (and likely known to the treasurer’s office) But neither the county nor Title Check made anything other than the bare minimum effort to avoid running out the clock established by Act 123.
“This is a major asset,” Irwin said in 2014. “We can sit on it and decide what to do with it, or we can move forward with an auction.”
Irwin, who no longer serves as Cass County treasurer, did not return requests for comment. The county has racked up more than $250,000 in legal fees since 2014 defending its right to seize Antipov’s property, documents show. The home is still unfinished.
And while some county officials use Michigan’s aggressive foreclosure law to benefit their budgets or to provide a setting for backyard barbeques, others use it in ways that are more openly designed to advance municipal self-interest.
Wayne County Treasurer Eric Sabree has also been caught on camera admitting that Wayne County and the city of Detroit will sometimes conspire to manipulate the auction process. During a 2015 appearance on “Detroit Wants To Know,” a local web series,Sabree talked about how the treasurer’s office will bundle properties together in order to make them more attractive to potential buyers—or perhaps less attractive, so the city of Detroit can keep certain parcels for itself.
“It’s a group of properties we put together, because we cooperated with the city of Detroit…Nobody will buy this bundle, and then we can just give it to the city, and then the city will use the demolition funds to tear them down,” he said. “And in the bundle, we also had some good properties, which the city then sold to fund the demolition and the management of the properties they took.”
It’s not only the city that benefits. In February, the Detroit Free Press and The Detroit News published a joint expose showing that Sabree’s relatives purchased several homes in county-run tax foreclosure auctions. When confronted with the allegations, Sabree dismissed the rules that forbid treasurer’s office employees or their family members from bidding in those auctions as “intrusive and unrealistic.”
Sabree did not return requests for comment. But in July, an ethics board voted 5-1 to clear him of any wrongdoing, concluding that his wife’s purchase of properties in 2011 did not violate the ethics rules because the rules were adopted in 2012. Wayne County Executive Warren Evans told the Detroit Metro Times that he was “not sure that the Board’s action today did much to address” the concerns about Sabree’s behavior.
In Oakland County, the suburban county north of Detroit where Rafaeli’s property was seized and sold in 2014, there were 86 properties included in the county’s 2019 land auction, held in October. In 2018, the county auctioned off 79 properties that had been seized due to unpaid taxes, according to a list obtained by Reason via Michigan’s freedom of information law. That’s down from nearly 300 properties that went to the auction block as recently as 2015 in the same county.
County Treasurer Andrew Meisner, who is a defendant in the Rafaeli lawsuit going to the Michigan Supreme Court, did not return repeated requests for comment on this story.
His office says it tries to help homeowners avoid foreclosure. In a press release issued in March 2019, Meisner said his office has “contacted hundreds of property tax owners to discuss their options to avoid foreclosure” before the April 1 property tax payment deadline. “Preventing foreclosure is in everyone’s best interest,” said Meisner, in the same statement. Yet the evidence clearly shows that county officials and budgets have benefited from aggressive seizures and sales.
An Unconstitutional Fine
If Rafaeli is victorious before the Michigan Supreme Court, the next step would be to enter into negotiations with Oakland County to determine a fair market value for his lost property and he would be entitled to “just compensation.” And so would lots of other Michiganders. “If the Michigan Supreme Court in the Rafaeli case…rules in favor of the property owners, counties will be required to make an appropriate refund,” says Ellison.
Legally, the matter is fraught. Counties seizing excess revenue above and beyond the amount necessary to settle the unpaid debts could be considered a taking—in which case it would be subjected to the Fifth Amendment, which promises that “private property [shall not] be taken for public use, without just compensation.” The Michigan Constitution offers similar protections against government taking private property without compensation.
Oakland County has prevailed in lower courts by arguing that the seizure of Rafaeli’s property was a forfeiture. But that argument runs into other legal problems: For one, even under the wide leeway that is afforded in asset forfeiture laws, there must be an allegation of underlying criminal activity. Not paying property taxes is a civil violation, but not a criminal one.
“Traditionally, civil forfeiture would only apply to the product of the crime or the proceeds of the crime,” says Martin. Although many states and localities have stretched their use of civil asset forfeiture to include cases where no one is actually convicted of a crime—often as part of drug enforcement—the legal doctrine requires that the property seized must be “tainted with criminal activity,” she says.
But if that’s the way courts want to look at it, then the Eighth Amendment’s prohibition against excessive fines would apply. It doesn’t matter that a state law, like Act 123, might authorize such a forfeiture if it is unconstitutional.
In a landmark U.S. Supreme Court case last year, Timbs v. Indiana, the high court ruled that the excessive fines clause applies to both state and federal proceedings. In Timbs, the state of Indiana attempted to seize a $42,000 vehicle that had been used to transport illegal drugs, but the Supreme Court determined that taking the value of the vehicle—which was many times in excess of the allowable monetary fine for the crime Tyson Timbs had committed—violated the Eighth Amendment.
That might matter for the Rafaeli case. “Tax foreclosure is not the same thing as a forfeiture,” Wesley Hottot, an attorney with the Institute for Justice, a nonprofit libertarian law firm, tells Reason. Hottot was the lead attorney in the Timbs case.
“But even if they were right,” Hottot adds, the forfeiture in this case violated the excessive fines clause of the U.S. Constitution, he says, “because it was grossly disproportionate to the minor offenses involved.”
Michigan Supreme Court
In a brief submitted to the state Supreme Court defending Oakland County’s use of home equity forfeiture against Rafaeli, the Michigan Association of County Treasurers makes several arguments in favor of the existing arrangement. The current system allows for counties to more easily? address blight, the group argues, despite evidence, like Paffendorf and Quicken found,that it has made blight worse in some places.
Elsewhere, the group’s arguments seem to contradict one another. Ruling that tax foreclosure is a taking “could eliminate any incentive for property owners to pay delinquent real property taxes,” the MACT argues, because the threat of punishment must exist for property owners to comply. But, later, the group argues that the seizure of an entire property to pay a smaller debt is “not intended to be punitive” and therefore does not run afoul of the Eighth Amendment’s prohibition on excessive fines.
At the very least, the group’s attorneys argue, the legislature—not the courts—should be responsible for fixing Act 123, because it would be able to do so “without destroying the tax collection process.”
At other times, county officials have pleaded poverty. “They were on the verge of [bankruptcy] for quite a while. It was up to elected officials and administrators of local governments to take the initial steps (to collect taxes) and somehow they just didn’t do it,” Ray Wojtowicz, a retired Wayne County treasurer, toldBridge in 2017. It’s clear that counties in Michigan now count on being able to pad their budgets with revenue from homes seized for having unpaid taxes.
The burden of aggressive property tax enforcement, meanwhile, falls heaviest on poor communities. Wealthier homeowners have easier access to the legal and accounting assistance necessary to avoid underpayments or to quickly address any problems. Once property is seized, there’s no guarantee of due process or even a court hearing. Homeowners don’t even have access to public defenders; those are allocated only in criminal cases.
In some counties, Act 123 has “created this incredibly unhealthy incentive where the county isn’t just satisfied when they make enough to cover what they would have made in taxes,” says Paffendorf. “They are relying on these surpluses from people who are in debt.”
University of Massachusetts law professor Ralph Clifford has spent years studying home equity forfeitures in Massachusetts. The state has a less aggressive foreclosure law, but similarly allows municipalities to pocket excess revenue when tax delinquent foreclosures occur. His research shows that an estimated $56 million is appropriated from Massachusetts taxpayers every year. After reviewing all such seizures—known as “tax deed” actions, under Massachusetts state law—that took place between August 2013 and July 2014, Clifford found that towns in the state collected $42.87 for every dollar in taxes owed. His analysis includes one instance in which a property assessed for a value of $24,000 was taken to cover a $26 tax bill.
“As far as I can tell,” he told Reason, “it’s all just blatantly unconstitutional.”
Reforming the System
“We’d had these situations for decades, where people have lost their entire homes over a few hundred dollars of unpaid property taxes,” Montana state Sen. Tom Jacobson (D–Great Falls) tells Reason. “They would lose their entire homes. Forty years. All that equity. Over a few hundred bucks.”
Shortly after his election to the state legislature in 2012, he introduced a bill to require that property owners be compensated for what is taken—minus the debt owed and any interest.
But Jacobson says he was surprised by the level of opposition he witnessed. Lobbyists for counties (which handle property taxes in Montana, like in Michigan) said the bill would hurt their budgets.
He reintroduced the bill during the 2015 and 2017 sessions—Montana lawmakers meet for a formal session only once every two years, though they have an interim session in off years where much of the groundwork is laid, though no votes are taken. By the third time though the process, lawmakers agreed to add additional notification requirements before a property could be seized.
This year, the state legislature passed, and Gov. Steve Bullock signed, a bill giving property owners the right to the remainder of the equity in their homes after the tax debt is settled. The bill also requires that properties cannot be sold for less than 50 percent of their assessed value—an important caveat that should prevent some of what has occurred in Michigan.
The reforms also flip the counties’ incentives. Instead of being able to profit off delinquent taxes, says Jacobson, officials will now have an incentive to make sure the taxes are paid up front and on time—or they’ll have an incentive to help taxpayers find ways to meet their obligations.
A Penalty More than 8,000 Times the Underlying Debt
In Michigan, however, the practice of seizing homes over tiny underpayments of property taxes is likely to remain in place unless the courts step in. A bill introduced in the Michigan state House by Rep. Gary Howell (R–Lapeer) to reform Act 123 collected a handful of co-sponsors this year but did not receive even a committee vote.
Which means there will be more people like Uri Rafeali, who lost a home over an $8.41 mistake. His property, bought as an investment, is valued at an estimated $136,000. The penalty imposed by Oakland County was more than 8,000 percent greater than the underlying debt.
But today, while the legal battle over its fate plays out, the house sits empty. It generates no tax revenue for the city or county. It earns no money for Rafaeli or his wife in their retirement.
“The Constitution was written to prevent the government from violating a right that preexists the Constitution,” says Martin. “If this can happen to multimillionaires and to the poor, to the elderly….If this can happen to Mr. Rafaeli, it can happen to anyone.”
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The Atlantic has published an essay based on a post I wrote here last week about Lawrence VanDyke’s nomination to the Ninth Circuit. Here is the conclusion:
What happens next? Nominees, of course, could refuse to meet with the ABA. Though that option includes a risk: The most damning allegations will not be refuted. There is a far more productive approach. These interrogations should be treated as hostile depositions. A court reporter and videographer should be present, as well as privately retained counsel to push back on unfounded accusations. In the event that the nominee is rated as qualified, there would be no need to release the transcript. Going forward, when a nominee is rated as unqualified, the transcript should be released, and the recording should be posted publicly online. There is no reason to rely on disputed accounts of the interview.
As originally designed, the confidential nature of this process made some sense. The interviews were not recorded to ensure that members of the bar could candidly critique a potential jurist, and to prevent the nominee from facing public embarrassment if the report was released. But the VanDyke letter turns that practice on its head. He was sandbagged at the last minute, and he was not given a chance to address any of the accusations it contained. This wound was entirely self-inflicted. If the ABA wanted to rate a nominee like VanDyke as unqualified, the organization should have followed its own rules to a T. Instead, it ran a slipshod process, led by a person whose objectivity was open to question.
This process should no longer be a black box. If reports faithfully reflect the interviews, faith can be restored in the ABA. If the process remains shrouded in secrecy, Americans can safely discount future findings.
To date, the ABA has continued to stand by the VanDyke report. That decision should be reconsidered. The organization should assign a second investigator, whose objectivity cannot be question, to review the recommendation. That move would restore some faith in the process.
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The Atlantic has published an essay based on a post I wrote here last week about Lawrence VanDyke’s nomination to the Ninth Circuit. Here is the conclusion:
What happens next? Nominees, of course, could refuse to meet with the ABA. Though that option includes a risk: The most damning allegations will not be refuted. There is a far more productive approach. These interrogations should be treated as hostile depositions. A court reporter and videographer should be present, as well as privately retained counsel to push back on unfounded accusations. In the event that the nominee is rated as qualified, there would be no need to release the transcript. Going forward, when a nominee is rated as unqualified, the transcript should be released, and the recording should be posted publicly online. There is no reason to rely on disputed accounts of the interview.
As originally designed, the confidential nature of this process made some sense. The interviews were not recorded to ensure that members of the bar could candidly critique a potential jurist, and to prevent the nominee from facing public embarrassment if the report was released. But the VanDyke letter turns that practice on its head. He was sandbagged at the last minute, and he was not given a chance to address any of the accusations it contained. This wound was entirely self-inflicted. If the ABA wanted to rate a nominee like VanDyke as unqualified, the organization should have followed its own rules to a T. Instead, it ran a slipshod process, led by a person whose objectivity was open to question.
This process should no longer be a black box. If reports faithfully reflect the interviews, faith can be restored in the ABA. If the process remains shrouded in secrecy, Americans can safely discount future findings.
To date, the ABA has continued to stand by the VanDyke report. That decision should be reconsidered. The organization should assign a second investigator, whose objectivity cannot be question, to review the recommendation. That move would restore some faith in the process.
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In Michigan, however, the practice of seizing homes over tiny underpayments of property taxes is likely to remain in place unless the courts step in. 