Home equity theft is unconstitutional and wrong, which means that it can be ended either through legislative means or in the courts. A decision in the Supreme Court of the United States finding it unconstitutional for government to confiscate more than a debtor owes would end home equity theft once and for all. Short of that, a patchwork of lower-court judgments and legislative solutions could end home equity theft in the remaining states that still wrongfully authorize it.
For example, the Michigan Supreme Court recently held in Rafaeli, LLC v. Oakland County that a Michigan county violated the state constitution when it took more property than necessary to collect delinquent taxes, penalties, interest, and fees. In that case, a homeowner mistakenly failed to pay $8.41 in property taxes.1 Oakland County nevertheless foreclosed on the home and sold it at auction for $24,500. Rather than just keep what it was owed in taxes, penalties, interest, and fees—$285—the county kept all the profits, pursuant to Michigan’s tax statute.
The Michigan Supreme Court held that by keeping more than it was owed, the county violated the state constitution’s requirement that it pay just compensation when it takes private property for a public use. Similarly, several other state supreme courts, including those of New Hampshire, Vermont, Virginia, and Mississippi, have found a taking or other constitutional violation when government took more than it was owed.2
Wisconsin and North Dakota recently ended their state’s tax-and-take scheme legislatively, requiring all foreclosed property to be sold to the highest bidder, the debts to be collected, and any surplus profits to be returned to the former owners.3 In Montana, the legislature overwhelmingly enacted bipartisan legislation ending most home equity theft in the state.4
Property tax foreclosure is a complex issue with several factors that make a model policy impractical. The reform principles, however, are simple, aiming for a fair process to make every party whole. Below are principles all tax foreclosure laws should embody.
Property taxes fund schools and other local government programs. Localities rely on property taxes and must be able to collect what they are due. Unfortunately, sometimes that means foreclosure.
Before foreclosure, the owner must receive adequate notice, including a straightforward explanation of the process and consequences in plain English. Too often, such notices are highly technical and difficult for laypeople, or even attorneys, to understand.
Foreclosure and Sale
To better protect homeowners and any other interested parties, the foreclosure should be a judicial proceeding rather than an administrative one. When a foreclosed property is sold, it should be advertised online and sold in a manner designed to retrieve a dollar amount as close to fair market value as possible—similar to what private sellers undertake to secure a reasonable price.
Whether a state is a tax lien state or tax deed state should not determine whether a debtor’s interest in the property is protected. Regardless of whether the government forecloses on tax-delinquent properties itself or requires private lienholders to handle such foreclosures, the entity foreclosing must collect the debt with interest, penalties, and reasonable costs associated with selling the property—but nothing more.
Disposition of Sale Proceeds
The disposition of proceeds after the sale should operate like priorities on a bank mortgage foreclosure. After the tax lien investor or the taxing jurisdiction collects what it is due for taxes, penalties, interest, and fees—and after any other debts or levies on the property are paid—the law must require the surplus profits to be returned to the prior owner.
Tax Liens vs. Tax Deeds
A tax lien is an interest the government takes in a property to fulfill a tax debt. A tax lien can be sold to a private tax lien investor, who is then entitled to collect the debt plus interest. The interest rate can be set by statute, or the locality can have a bid-down system, whereby the investor who bids the lowest interest rate gets the lien. This type of system is used in states like Florida and Arizona. Selling tax liens can be an efficient way to ensure taxing jurisdictions have cash flow even when residents are not paying their property taxes. When the property owner does not redeem the tax lien by paying the taxing jurisdiction or private lienholder what is owed, the lienholder can foreclose on the property.
Tax deeds grant ownership of property to the government if the debt, along with interest and penalties, is not paid within a specific time.
Home Equity Theft Is Unconstitutional
Homeowners Can Lose in Both Tax Deed and Tax Lien States
States Are Ending Home Equity Theft
Private Investors: Bad Laws Can Attract Bad Actors
Model States for Protecting Equity
States with Loopholes That Allow Home Equity Theft