It happens to more than a hundred homeowners each year. Governments and companies take home equity from the owners who run into hard times and can’t cover their property tax bills. In other words, these entities aren’t only recovering their legitimate past-due balances through foreclosures. They are also keeping all the value they can extract from the debtors’ homes.
Plaintiffs litigating against the practice call it unconstitutional. And now, they hope the Supreme Court will hear their cases.
Is “Surplus Retention” Government-Sponsored Property Theft?
Predatory debt collection is as old as debt itself. But when collectors go after an owner’s hard-earned home equity, and when governments actively condone or take part in this sort of activity, struggling debtors feel especially isolated and helpless.
Does this really happen? In most places, no. Local governments in many states put liens with low interest rates on homes with back taxes owed — low enough to allow debtors a chance to save their homes.
Generally, even where homeowners can’t pull themselves out of their tax debts, they don’t lose what they’ve built up over the years. When homes are foreclosed for tax defaults, creditors recover those back taxes. Any extra funds paid for the homes get sent to the former homeowners.
But in some states, the debtor loses the home and any extra equity unlocked from it during the sale. A home with a few thousand dollars of taxes, penalties, and interest due can be foreclosed and sold for many times the overdue tax bill. The extra profit, over and above the unpaid tax debt, would be surplus home equity. And in some states, the government body that seizes the home can take the whole sale price, without refunding the overage to the delinquent taxpayer.
Surplus retention seizures are legal in the District of Columbia, Alabama, Arizona, Colorado, Illinois, Maine, Massachusetts, Minnesota, Nebraska, Oregon and South Dakota, New Jersey and New York. In these states, tax default laws let counties sell off foreclosed homes for overdue taxes without returning extra profit to the struggling debtors. A county or city might resell the home or sell the owner’s property tax debt to a for-profit company that makes money off the interest. This swells the debt and confronts the debtor with impossible deadlines. Companies may then take valuable real estate titles.
☛ What about predatory foreclosure relief? Falling behind on the mortgage often happens at the same time as an inability to cover tax bills. Some companies charge upfront for supposed loan modifications, or promise a way out of debt stress if the cash-strapped homeowner agrees to “temporarily” sign over the house title. Find out more about the “save your home” promises commonly targeting struggling real estate owners.
Many homeowners, of course, are just one emergency away from a lapse on their monthly debts. Some are elderly homeowners who move out of their homes for medical care, and neglect their property tax bills. What kind of system preys on the vulnerable, or those who have simply entered a rough financial stage in their lives? And why would governments make any form of predatory collection legal? This is what two current legal actions are asking.
Could These Two Cases Bring a New National Standard?
Geraldine Tyler and Kevin Fair want the U.S. Supreme Court to hear them out. Here’s why.
Geraldine Tyler v. Hennepin County, Minnesota
Geraldine Tyler moved into senior living back in 2010 and neglected to pay property taxes on the condo she left. By 2015, these back taxes (plus penalties and interest) added up to $15,000.
The county foreclosed the condo and sold it for $40K. So the county netted an overage of $25,000 in home equity, built up over the years by Geraldine.
Lawyers took the case to court. They pointed to Geraldine’s deeply rooted property rights in the equity. They insisted that the state and county government had offended the Excessive Fines Clause of the Constitution, as well as the Takings Clause, which forbids government seizures without just compensation.
The state of Minnesota fought back, countering that the condo wasn’t Geraldine’s property any more by the time they retained the equity, so Geraldine had no case. On appeal in 2022, the Eighth Circuit held for the state of Minnesota, leaving Geraldine impoverished.
Kevin and Terry Fair v. Continental Resources of Nebraska
Kevin Fair had to stop working after a medical diagnosis. Prior to that time, the Fairs had faithfully paid the property taxes on their $60,000 property. But after the diagnosis and the resultant losses in household income, Kevin and Terry Fair let their 2014 property taxes (about $500) lapse.
In 2018, the county of Scotts Bluff, Nebraska popped up, billing the Fairs $5,200 for taxes, penalties, and interest related to the 2014 lapse. The Fairs couldn’t cover the bill.
Unbeknownst to the Fairs, the county had already sold a tax lien on the home to an oil and gas corporation named Continental Resources. The oil and gas firm had started paying property taxes on the property. They got the Fairs’ deed when the couple couldn’t pay the $5K+ bill.
Of course, the Fairs could not afford to lose their home equity. Like Geraldine, they were being left impoverished by the routine practices of their government. They went to court.
Nebraska’s highest court upheld Scotts Bluff County’s actions. As in Geraldine’s case in Minnesota, the Nebraska court weren’t persuaded that the Fairs had kept their property rights throughout the county’s moves.
Also parallel to Geraldine Tyler’s case, Nebraska defended its practice by citing the 1956 case Nelson v. City of New York. In that case, the U.S. Supreme Court had upheld a seizure by New York City over unpaid water bills. Confusion over how much influence that case should have could be best answered by the Supreme Court itself. That’s what Geraldine’s case and the Fairs have argued.
Both Minnesota and Nebraska have argued that they rightly seized their residents’ homes to recover property taxes, and then retained the former owners’ home equity because it’s standard practice.
Meanwhile, in Other Surplus-Retention States…
Many other households are at risk of losing their hard-earned home equity in states that allow the seizure of surplus sale proceeds. Opponents call it legalized theft. Across the political spectrum, plenty of groups want to end surplus-retention seizures. Among them are AARP, ACLU Nebraska, the Cato Institute, and the National Taxpayer Union.
Indeed, a number of courts have slammed surplus seizure as unconstitutional. These include the Sixth Circuit U.S. Court of Appeals, as well as the highest courts in Michigan, Mississippi, New Hampshire, Vermont and Virginia. Legislatures in several states have set restrictions on home equity seizures.
If the Supreme Court takes on the question, legalized home equity theft anywhere in the United States could become a thing of the past.
Supporting References
Christina Martin in The Hill: Government-Sponsored Home Equity Theft Robs the Elderly and Poor of Millions of Dollars (Dec. 5, 2022). This opinion piece cites a report titled called End Home Equity Theft, published by the Pacific Legal Foundation, a firm providing pro bono representation in the Tyler and Fair cases, where Christina Martin is a senior attorney.
Matt Ford for The New Republic: Plunderers – State Governments Probably Shouldn’t Be Able to Just Steal Your Money (Dec. 19, 2022).
And as linked.
Photo credits: Nicola Barts, via Pexels.