Looking Up

Ending Home Equity Theft in the North Star State

WHEN GERALDINE TYLER, an elderly grandmother, moved out of her Minneapolis condo to an apartment in a safer neighborhood, she didn’t know she could lose tens of thousands of dollars in equity she had saved up in her home.

Geraldine could no longer afford to pay the property tax on her condo along with her new rent payments. To collect her property tax debt, Hennepin County took her condo and kept all the savings she had invested in it. Unlike most states, which return what isn’t owed to them after the tax debt is paid, Minnesota counties and localities seize and keep windfalls at the expense of their unfortunate residents.

While government has the power to collect unpaid taxes from homeowners by seizing and selling their homes, it is not entitled to keep all proceeds from tax sales—it can only keep what it was owed. Yet approximately a dozen states still sanction this kind of home equity theft.

A debt is a debt, including a tax debt, but taking more than what’s owed is theft.

Geraldine is suing Hennepin County for stealing her home equity—the savings she built in her Minneapolis condo. But Geraldine is not just fighting for herself.

She’s fighting for the hundreds of Minnesota homeowners who have been caught up in this system. From 2014 through 2020, governments seized and sold at least 1,200 Minnesota homes in 12 counties. Residents lost their homes along with all the savings they had built up. The lost savings amounted to an average of $207,000 per home, or 92% of the home’s value.

The lost savings amounted to an average of $207,000 per home, or 92% of the home’s value.

The U.S. Constitution protects homeowners’ right to just compensation for property taken and freedom from excessive fines. Just as citizens should follow the law and pay their property taxes, government must also abide by the law and stay within its constitutional limits.

Minnesota needs to ensure that homeowners’ savings are returned to them if their homes are taken for unpaid property taxes. It also needs to ensure that these homes are being sold for fair market value so that homeowners are not losing a crucial source of savings.

Geraldine decided to stand up for all Minnesota homeowners and families who have lost their homes and savings through home equity theft. She filed a class-action lawsuit against Hennepin County and its treasurer, arguing that the government violates the Fifth Amendment and the Minnesota Constitution by taking property without compensation.^{7 Source: Tyler also raised claims that the county violated the state and federal protections against excessive fines and the guarantee of substantive due process.} But a federal court in Minnesota dismissed her claims.

The court concluded that, because Minnesota’s tax statute divests a delinquent property owner of all rights to tax-foreclosed property, the victims of home equity theft have no property interests on which to stake their claims.^{8 Source: Tyler v. Hennepin Cty., 505 F. Supp. 3d 879, 890-91, 893 (D. Minn. 2020).} In other words, the legislature may destroy property rights without just compensation by redefining the rights.

But the legislature cannot override constitutional rights. The Fifth Amendment of the U.S. Constitution prohibits the government from taking private property for public use without just compensation. Property rights encompass more than just physical land and structures. When someone owns a home, they also have a right to the home’s equity—that is, the underlying value of the home after accounting for all debts.

While the government may levy and enforce taxes on real property, it cannot collect more than what is owed. And while it can impose penalties to punish the late payment or nonpayment of taxes, the Eighth Amendment of the Constitution prohibits excessive fines.

Indeed, a 19th-century Minnesota Supreme Court case strongly indicates that regardless of what the legislature says, surplus proceeds from tax-foreclosed property must be refunded to the former property owner.^{9 Source: See Farnham v. Jones, 19 N.W. 83, 85 (Minn. 1884).} The Court noted that “the right to the surplus exists independently of such statutory provision, the province of which would be merely to regulate the manner of enforcing the right.”^{10 Source: See Farnham, 19 N.W. at 85.}

The federal district court in Geraldine’s case disregarded that reasoning, observing that the legislature is free to alter the law.^{11 Source: Tyler, 505 F. Supp. 3d at 894.} Missing from the court’s analysis is the fact that when the government destroys pre-existing property rights, an unconstitutional taking of property has occurred.

That’s why Pacific Legal Foundation has taken on Geraldine’s appeal.

Geraldine owed $15,000 in taxes and fees on her home. Hennepin County sold it as a foreclosure for $40,000 and kept every penny—pocketing $25,000 of Geraldine’s savings. While the government may be empowered to take and sell her condo to collect taxes, reasonable penalties, interest, and fees, it cannot take her equity in the home.

The U.S. Constitution requires Hennepin County to return to Geraldine the difference between what she owed and what the county took. In the context of private mortgage foreclosures, Minnesota law requires that surplus proceeds be paid back to the former owner.^{12 Source: Minn. Stat. Ann. § 580.09–.10 (West 2021).} But in the case of tax foreclosure, where government stands to profit from the transaction, it stacks the odds in its own favor. That’s a type of unethical self-dealing that the government would never allow private sector businesses like mortgage lenders to engage in.

But the legislature cannot override constitutional rights.

In the early days of our republic, and up through the 20th century, state laws and cases from courts across the nation affirmed the common-sense principle that government cannot take more than it is owed in taxes. In fact, prohibitions against similar predatory tax-enforcement practices can be found as far back as Magna Carta in 1215.^{13 Source: For example, the 26th Clause provided that the king could take only so much personal property as required to pay the debt of a deceased crown tenant. Prior to Magna Carta, when someone died owing any form of taxation to the king, the king’s officials “were in the habit of seizing everything they could find on his manors, under excuse of securing the interests of their royal master. They attached and sold chattels out of all proportion to the sum actually due. A surplus would often remain in the sheriff’s hands, which he refused to disgorge. Magna Carta sought to make such irregularities impossible.” William Sharp McKechnie, Magna Carta: A Commentary on the Great Charter of King John (2d ed. 1914), 322–23; Vincent R. Johnson, The Ancient Magna Carta and the Modern Rule of Law: 1215 to 2015, 47 St. Mary’s L.J. 1, 8 (2015).}

Today, however, approximately a dozen states employ some form of home equity theft. But one by one, these predatory tax regimes are being challenged through lawsuits or legislation.

A lawsuit recently ended Michigan’s home equity theft scheme. Uri Rafaeli, a retired engineer, miscalculated the interest on one late property-tax payment by $8.41. That missed amount resulted in the complete loss of his Michigan house and equity, even though he continued to pay future taxes on time without realizing that he had previously underpaid his taxes. Uri bought the home in 2011 for $60,000. When the county government seized his house and sold it at auction for $24,500, they pocketed the proceeds.

Pacific Legal Foundation argued his case, Rafaeli v. Oakland County, before the Michigan Supreme Court and won. The court held that property owners have a right to the surplus proceeds from tax-foreclosure sales under the Takings Clause of the Michigan Constitution.^{14 Source: Rafaeli, LLC v. Oakland County, 952 N.W.2d 434, 470 (Mich. 2020).} Uri ultimately got his house back.

Some states are avoiding the potentially heavy financial liability of losing such a lawsuit by enacting legislative change. This year, North Dakota passed legislation restoring property owners’ right to their home equity. The law requires the government to refund surplus profits to the former owners after selling tax-foreclosed properties.^{15 Source: N.D. Century Code 57-28-01, et seq.} And in 2019, the Montana legislature passed a reform bill protecting most homeowners’ equity.^{16 Source: S.B. 253, 66th Legislature (MT 2019), https://leg.mt.gov/bills/2019/billpdf/SB0253.pdf.}

Massachusetts legislators recently introduced similar legislation. Massachusetts is a state where both the government and private investors are allowed to keep the previous owners’ home equity. The legislation came after the Boston Globe reported on the lawsuit brought by PLF clients Mark and Neil Mucciaccio.^{17 Source: Sean P. Murphy, “In Mass., private companies can make a killing legally, if you can’t keep up with your property taxes,” Boston Globe, January 18, 2021, https://www.bostonglobe.com/2021/01/18/business/mass-private-companies-can-make-killing-legally-if-you-cant-keep-up-with-your-property-taxes/.} The Mucciaccio brothers had struggled to keep up with their tax bills while they faced a medical crisis, resulting in a $4,355 tax debt in 2016. The town of Easton took the Mucciaccio brothers’ home—worth $276,500—and transferred the home’s title to a private investor who purchased the $4,355 tax lien.

Any property owner can be a victim of home equity theft in Minnesota. However, vulnerable homeowners who are in a medical or financial crisis are more likely to be affected. Home equity theft only worsens the crises, as these homeowners lose their property and a major source of savings.

From 2014 through 2020, 12 county governments took more than 1,200 Minnesota homes from homeowners, who lost all the equity they built in their homes.

The size of home equity theft is in the eye of the beholder. For a homeowner, it is the full estimated market value of their property minus their tax debts. For the government and in the courts, it is often viewed as what the property sold for minus the debts—even if the property sold for far less than its market value. We break down both values in instances where the property records are complete. See Appendix 1 for an explanation of the data.

To estimate the amount of home equity loss the homeowners felt, we must look not at how much their homes sold for through the tax-foreclosure process, but how much their homes would have sold for in the competitive real estate market.

Across the 12 Minnesota counties, homeowners felt a loss of approximately $118 million in home equity taken (see Table 1). Available data were sufficient to determine the size of home equity theft for 570 of the 1,217 homes in our study.

The lost savings amounted to an average of $207,000 per home. These homeowners lost everything for tax debts that were, on average, worth just 8% of their estimated home value. Thus, they lost 92% of their home equity over and above what they owed in taxes. In extreme cases, homeowners lost over 99% of their home equity.

Across the 12 Minnesota counties, homeowners felt a loss of approximately $118 million in home equity taken.

Where Geraldine lives, Hennepin County, owners of 271 homes lost over $67 million in home equity during those years—by far the largest home equity loss among the 12 counties.

Sources: Taxes and fees due on homes come from public records supplied by Minnesota jurisdictions. Home values come from data collected and standardized by Estated, a property data company.

Notes: This table only represents the foreclosures with complete data (570 out of 1,217). Stearns County had no properties with complete data. Total taxes and fees due on homes refer to slightly different things in each county. In addition, some counties may be missing up to three months of data at the end of 2020. See Appendix 1 for clarification on total taxes and fees due on homes and date ranges.

Meanwhile, not everyone loses. State and local governments profit from stolen home equity. Multiple government entities, including the counties, divide the equity they take from former owners (see Appendix 2 for the breakdown).

Across the 12 counties, governments kept more than $11.6 million in homeowners’ equity. Available data were sufficient to determine the size of government gains for 772 out of the 1,217 homes in our study.

The large discrepancy between the $118 million figure for the measure of what homeowners lost and the $11.6 million figure for the measure of what governments gained reflects the fact that properties forfeited through tax foreclosure are usually sold at prices significantly below their full estimated market value.

Governments are not in the real estate business, but the difference between how much the government typically sells a home for in a tax foreclosure and how much a bank typically sells a home for in a mortgage foreclosure is inexcusable.

When government entities sell tax-foreclosed properties, they are typically trying to recoup only the properties’ unpaid taxes and costs. Hence, they are more likely to engage in a simple transfer of title or auction than go through a competitive sale process.^{18 Source: Government entities typically do not have the resources to put tax-foreclosed properties up on the real estate market for a competitive sale process, at least not without contracting out the process to other professionals.} From 2014 through 2020, bank-foreclosed homes in the 12 counties in this study sold for a mean value of 60% of the homes’ estimated values. Meanwhile, tax-foreclosed homes sold for a mean value of 20% of the homes’ estimated values.

Also, the $11.6 million figure in our sample understates the total gain the governments actually netted because government keeps some properties, and some tax sales may involve multiple government transactions:

1. The State of Minnesota sells the home to a county or city for an amount as small as $1.
2. The locality turns around and sells the same home to third parties for tens of thousands of dollars more a few months later.

Our figure of $11.6 million only captures the first government sale, substantially undercounting the true gain in these multi-round sales or when government keeps the property. From 2014 through 2020, almost one out of every 10 homes in the 12 counties in the study was sold or transferred for $100 or less.

Minnesota must stop home equity theft.

About the Authors

Acknowledgements

The authors thank Angela C. Erickson for help with data analysis. We also thank Alexandria Tatem for help with data collection. Finally, we thank our peer reviewers, including Richard Epstein and Dan Alban.