SCOTUS Rules: Home Equity Theft is Unconstitutional

By Kimberly Rau, MassLandlords, Inc.

A May 25 ruling from the U.S. Supreme Court determined that local governments that foreclose on homes for outstanding tax bills must return any excess property equity to the homeowner, a decision that impacts current Massachusetts law.

Until the Supreme Court ruled it unconstitutional, home equity theft was legal in Massachusetts. (Image License: Unsplash)

Geraldine Tyler owned a condominium in Hennepin County, Minn., but owed approximately $15,000 in back taxes, including interest and penalties. The county took possession of the property and auctioned it off for $40,000. Instead of returning the excess $25,000 in equity to Tyler, the county kept it, which was allowed under state law. Tyler sued, and in Tyler v. Hennepin County, Minn., the U.S. Supreme Court unanimously ruled that such “equity theft” was unconstitutional.

In its opinion published after the ruling, the SCOTUS cited the Takings Clause in the U.S. Constitution, which states that governments may not take private property for public use without appropriate compensation.

“History and precedent dictate that, while the County had the power to sell Tyler’s home to recover the unpaid property taxes, it could not use the tax debt to confiscate more property than it was due,” the opinion read.

“Significantly, Minnesota law itself recognizes in many other contexts that a property owner is entitled to the surplus in excess of her debt. If a bank forecloses on a mortgage property, state law entitles the homeowner to the surplus from the sale…Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when the State does the taking,” it continued.

How Does Tyler v. Hennepin County Impact Massachusetts?

This decision will affect many states around the country. According to homeequitytheft.org, 13 states, including Massachusetts, allow local governments to retain excess equity after a home is foreclosed on and sold. Nine more permit such practices in more limited situations. These states will have to change their laws to reflect the SCOTUS ruling.

Massachusetts’ process for handling tax lien foreclosures is spelled out in MGL Chapter 60. In Massachusetts, municipalities may auction foreclosed properties themselves or sell them to private parties to auction off. MGL Ch. 60, Section 64, specifically states that a judgment of foreclosure gives the municipality or private party “full title of the property.” An informational page on tax lien foreclosures is clear what that means.

“The taxpayer does not receive their equity…in the property,” the page reads. “Even if the value of the property is more than the redemption amount, the taxpayer will lose all that value when a judgment of foreclosure issues.”

A 2017 study by Ralph D. Clifford, a law professor at UMass-Dartmouth, estimated that Massachusetts property owners lose around $56 million in home equity annually through the tax foreclosure process. A January 2023 story in the New Bedford Light found that many homeowners who lost all their home equity through tax foreclosure owed just a few thousand dollars in taxes. This represented a fraction of the equity realized through foreclosure sales.

How Will Massachusetts Comply with the SCOTUS Ruling?

What happens next? Previous efforts to prevent home equity theft in Massachusetts have failed in the Legislature as well as the courts, but this recent ruling forces the state’s hand. Municipalities can still foreclose on properties that are tax-delinquent, but they cannot take more than they are owed from the home’s equity. This is immediate relief from the highest court in the land, making any other law unenforceable.

However, this court decision refers only to state foreclosure. Banks may still be able to take your property and then steal equity and may need further legislation to end that practice.

If you have experienced equity theft for a property you once owned, we’d like to hear from you. Email us at hello@masslandlords.net.