Fiscal Policy

Watch Out for Home-Equity Theft on the Horizon

Street of suburban homes (Image via Getty Images)
An unpaid tax debt should not make a homeowner lose his entire investment.

As businesses closed and staff were laid off as a result of COVID-19, millions of Americans were faced with a personal financial crisis. As a result, some local governments have temporarily adjusted policies that might have threatened residents’ ability to stay in their homes. For example, counties in Michigan suspended all 2020 property-tax foreclosures or extended repayment deadlines. Likewise, in New York, counties extended property-tax payment deadlines or provided tax-debt relief.

But governments won’t continue these policies indefinitely, especially once they face the budgetary shortfalls that follow economic trouble. The history of the previous downturn tells us what will happen if policymakers and courts fail to protect property rights from some of the country’s worst tax-collection laws.

Take Michigan, for example. When housing values collapsed in Michigan as a result of the 2008 financial crisis and subsequent recession, property taxes remained high, imposing a heavy burden on many distressed homeowners. Unable to pay their tax debts, many owners lost their homes, along with all their home equity (a major source of family savings), to the government — helping to fill the government coffers in a time of low tax revenue. That abusive practice extended well beyond the recession and into the recovery: Between 2008 and 2015, property-tax foreclosures quadrupled in Michigan.

For retired engineer Uri Rafaeli, an $8.41 underpayment error was all it took to lose the full value of his Southfield, Mich., property. Rafaeli had missed a tax bill on the rental home he had purchased in 2011 for $60,000. When he tried to take care of the balance, he accidentally failed to account for some of the accumulating interest. The county government seized his house, sold it at auction for $24,500, and kept all the proceeds.

Under laws like Michigan’s, homeowners lose their nest egg, including years of equity, no matter how small the tax debt was. This transfer of equity from families to governments is unjust and unconstitutional. That’s why it’s called home-equity theft.

Thankfully, Rafaeli’s case has a silver lining. He sued the county, and last month the Michigan Supreme Court ruled in his favor. The court said that counties can’t take more than what they are owed from tax foreclosures. Other state supreme courts have struck down similar unconstitutional laws, and more challenges are coming.

In a dozen other states, though, governments or private investors can still steal home equity.

In Nebraska, 94-year-old Gladys Pearl Wisner, who suffered from cognitive decline, lost her farm worth $1.1 million because she failed to pay $50,000 in taxes, penalties, interest, and costs. An elderly widow in Colorado owed less than $2,000 when the county sold a lien on her home to a private investor. In exchange for paying the taxes due on the property, an investor walked away with the title to the $400,000 home. And in North Dakota, Williams County took the Glasoe family’s home in to collect $7,517. The county sold the property for $187,600 and kept all the profits — a $180,083 windfall for the county.

As the economy sputters and people struggle to keep up with their property taxes, we’ll see more of this abusive theft, unless policymakers take steps to put an end to it.

Pacific Legal Foundation launched a campaign to remove, through lawsuits or legislation, laws that use property-tax debts to steal everything from people. Though completing litigation can take years, it can help discourage home-equity theft long before a court enters a verdict. That was certainly the case in Michigan: Since Rafaeli filed his lawsuit in 2015, property seizures by Michigan county treasurers have dropped by 74 percent.

Moreover, other states are recognizing the importance of restraining officials’ ability to target homeowners. For example, last year, the Montana legislature passed a reform bill that protects homeowners by requiring local government to return the remaining proceeds after a home is sold to settle a tax debt. Other states should follow suit.

In the face of a sputtering economy, policymakers have understandably taken steps to help homeowners retain their homes. But when the bill comes due and counties are facing gaping budget holes, they’re likely to ramp up their attacks on homeowners, as has happened before. Now would be a good time for lawmakers to step up and ensure the end of home-equity theft once and for all.

Christina Martin is a senior attorney and Angela C. Erickson is the strategic research director at Pacific Legal Foundation.

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