Commentary

Maine should end the practice of home equity theft

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In Maine and 12 other states, local governments have the ability to steal the equity you’ve built in your home or property over unpaid taxes. Imagine owing $8,000 in unpaid property taxes to a municipality and they foreclose on your home. After the government forecloses, they oftentimes sell the home at auction and could obtain more in the sale than what was owed in property taxes. 

For example, they could sell a house for $40,000 after foreclosing for $8,000 owed in unpaid property taxes. The difference between the amount owed in taxes and amount received through the transaction is known as “excess funds” under state law. In this hypothetical situation, the government would have collected approximately $32,000 in excess funds, more than simply recouping the amount owed through unpaid property taxes. 

In most states, excess funds are returned to the former homeowner and municipalities retain the amount owed through property tax debt. Under Title 36 §949, Maine’s municipalities have the option to retain or return the excess funds to the former owner of a property post-foreclosure. The process of a municipality keeping excess funds is called home equity theft, because the former owner of the home lost the property as well as the equity they built over the course of owning the property. 

A former owner could spend years building equity in their home before being foreclosed on by their local government, and would then be unable to reap any of the benefits of that equity. Municipal government should be able to foreclose and sell the property to pay the outstanding debt and other costs incurred, but should not be able to keep money beyond the amount owed — this is home equity which individuals and families worked hard to build. 

According to the Pacific Legal Foundation, the phenomenon of municipalities retaining excess funds for property tax foreclosures has occurred on numerous occasions across the country. In 2014, Uri Rafaeli, an 83-year old retired engineer in Michigan, underpaid his taxes to Oakland County by $8.41 on a property he was renting. Oakland County eventually took his home, sold it at auction for $24,50 and kept all of the excess funds that should have been returned to Rafaeli. 

While he underpaid his tax bill in 2011, he fully paid his property tax bills in 2012 and 2013, indicating that the mispayment was an honest mistake. He is now suing Oakland County to recoup the equity it stole by seizing, selling and making a profit off his home. The oral arguments before the Michigan Supreme Court, delivered on November 7, 2019, can be viewed here

Massachusetts also allows towns to commit home equity theft. According to Ralph D. Clifford, a professor at the University of Massachusetts School of Law at Dartmouth, towns in the Bay State collected $57,963,000 on a total of $1,352,000 in tax liens in one year. In other words, towns stole approximately $56 million from property owners. 

At the public hearing for LD 1629 during the 128th Legislature, a bill that would have required towns to return excess funds to former homeowners, among other reforms, several different opinions were shared about the practice of home equity theft. David Little, the tax collector for the City of Bangor, called the loss of equity in one’s property the “penalty” for not paying property taxes. While there should be repercussions for unpaid taxes, those penalties should not exceed the value of the taxes owed and result in the loss of equity individuals have put into their homes. The fact that these people are already losing their homes should be punishment enough for not paying their taxes. 

In contrast, Frank D’Alessandro, an attorney at Pine Tree Legal Assistance, said, “a homeowner can lose a home worth more than $100,000 as the result of failing to pay a few thousand dollars in taxes.” This means the municipality could sell the home at value and collect thousands in excess funds that never make it back to the former homeowner. 

Regardless of whether individuals or families intentionally neglect to pay their property taxes or make a mispayment error, the government should not be able to seize their entire livelihood due to unpaid taxes. Instead, municipalities should be required to return the excess funds from foreclosure to the former owner and keep only the amount owed in property taxes. This would be a benefit to both parties involved because the municipality would collect its property taxes and sell the home to another party (who will hopefully pay the property taxes) and the homeowner would be able to recoup the equity they built in their home

About Adam Crepeau

Adam Crepeau serves as a policy analyst at The Maine Heritage Policy Center. He can be reached at acrepeau@mainepolicy.org.

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