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By LISA BURDEN
The nation’s highest court has agreed to hear a collection of cases that accuse state and local governments of unconstitutionally stealing homeowner equity.
In one instance, a Minnesota woman’s condo was taken by authorities to pay for $15,000 in back taxes. Hennepin County sold the condo for $40,000 and kept the entire amount.
In another instance, according to a study by the Pacific Legal Foundation, a Massachusetts woman who purchased a home in 2012 was contacted five years later by a private investor. The investor notified the woman that it had purchased the $400,000 home for about $6,500 in back taxes and interest. When she purchased the property, the woman allegedly was unaware of the unpaid taxes.
The foundation said the woman offered to pay the sum, adding enough to make it “into the six figures,” but the investor refused. The woman lost the home and her equity while paying her mortgage. And she still owes the mortgage debt.
Windfall Profits
The nonprofit said it found that at least 7,900 homes were foreclosed upon by local governments and private investors from 2014 to 2021.
In the jurisdictions it studied, governments collected about $26 million more than they were owed on 1,300 houses – an average of 61 percent above the owner’s actual debt.
Private investors scored even better. Pacific Legal said they collected $250 million more than they were owed on 2,350 houses — collecting an average of 76 percent more than the homeowner’s debt.
“Private investors do not need the incentive of full property value to invest in tax liens,” Pacific Legal stated. “We know from other states’ systems that the interest that they earn is more than enough. If the property owner redeems the property, the lienholder still receives interest in addition to being reimbursed for the price of purchasing the lien.”
Some localities hand over the homes to charities, while others generate revenue through a quick sale at a bargain price, the organization said.
Most states refund the surplus equity. However, 12 states and the District of Columbia allow “home equity theft” via tax foreclosure laws, according to Pacific Legal.
State legislatures might be taking note of the issue. Several states have banned the practice in the past couple of years. Pacific Legal said Wisconsin’s legislature banned the practice in 2022, North Dakota prohibited it in 2021 and Montana issued its own ban in 2019.
In 2020, Michigan’s top state court reportedly rejected the county’s argument that it had done nothing wrong when it took a man’s house over an $8.41 tax underpayment and sold the property without paying the overage to the homeowner.
Unconstitutional?
Critics have argued that such actions violate the nation’s Constitution. They make two arguments. First, the Fifth Amendment to the Constitution prohibits the government from taking property without just compensation – meaning that the government has the right to take private property for public use but when it does, it must pay the owner the fair market value of the property.
Second, that the Eighth Amendment bans excessive fines and fees.
Indeed, the Michigan state court that reportedly struck down the practice of taking property without returning equity did so on the grounds that the action is unconstitutional.
On Jan. 13, the U.S. Supreme Court agreed to hear the case. Oral arguments have not yet been set.
The case is Tyler v. Hennepin County, Minnesota.
Lisa Burden is a freelance journalist who writes for HELN about legal issues and litigation tied to second mortgages. She has more than two decades’ experience covering the mortgage industry. Lisa achieved a B.A., in communications from the University of Dayton, and a J.D. from the University of Maryland Francis King Carey School of Law. Read more stories by Lisa.
