Orange County Register: Ending home equity theft in California, once and for all

March 15, 2023 | By CHRISTINA MARTIN
San Francisco house, architectural charm by the bay.

When the government seizes private property for a public use, the Constitution requires that the original owner must be compensated for the loss. But in California, the law provides a loophole for officials to take that same property for a public use without any compensation if the owner falls too far behind on property taxes. State lawmakers should take action to better protect property owners.

Over the last several years, Pacific Legal Foundation has been defending homeowners around the United States from “home equity theft.” This is a practice that occurs when governments take a windfall when seizing homes to satisfy delinquent property taxes. Usually when anyone seizes real estate to collect a debt, the property must be sold and the collector can take only as much as it is owed. Any extra proceeds must be returned to the property owner. But in some states, the government or private parties take the home, satisfy the debt, but then keep all of the excess equity, no matter how valuable the property or how small the tax debt. This is unjust and unconstitutional.

For the homeowners, the losses are devastating, with many losing tens of thousands of dollars in hard-earned home equity. My firm — Pacific Legal Foundation — recently published a study which found that in just a subset of these states between 2014 and 2021, homeowners lost at least $860 million to home equity theft seizures. Perhaps unsurprisingly, it’s usually the most vulnerable – the elderly, working people facing health problems or sudden loss of income, the mentally disabled, or others who lack resources to defend themselves – who suffer the greatest losses.

Yet it’s legal in 12 states plus the District of Columbia. And in an additional nine states, including California, while the government usually protects equity, loopholes allow the same abuse in some limited cases.

Under California law, if the government wants the property for public use, or if a nonprofit wants the property for low-income housing, they can skip the auction on a foreclosed home, pay the tax debt, and take ownership of the property. The previous owner receives nothing for his or her equity in the property.

These supposed public purposes do not justify the government stealing from its citizens. The California legislature should take action to fortify state law to restrain abusive property seizures and, in instances where a foreclosure and tax sale are unavoidable, ensure homeowners are compensated for their lost equity.

Of course, property owners must pay taxes, and when an owner fails to pay what is owed, foreclosure and seizure of the property remains an option. But that should be reserved for the most egregious cases, and when a property must be foreclosed and sold, the remaining equity must be returned to the property owner.

The good news is that, even in today’s era of polarization on a wide range of policy issues, Americans agree that home equity theft is abusive and unjust. In fact, a wide array of public advocacy organizations from across the political spectrum have gone on record saying that home equity theft needs to end, including the AARP and Howard Jarvis Taxpayers Association. As the coalition to end home equity theft grows around the nation, we’ll continue to make progress.

In the meantime, whether legislators like it or not, they may soon have to fix the current law. PLF is representing an elderly homeowner in a case challenging home equity theft at the U.S. Supreme Court. If we win, California municipalities may be on the hook to pay back owners whose equity was stolen by this state law. In several instances, we’ve managed to get fair compensation for the original property owners; in some states, litigation is in progress. At the same time, we’re consulting with state legislators in various states on how to reform their laws to better protect property owners, with gradual success.

In the diminishing number of states where home equity theft remains legal, we’re determined to end this predatory abuse of vulnerable homeowners once and for all.

This op-ed was originally published in The Orange County Register on March 14, 2023.