OPINION: States must finally end the unconstitutional scheme of home equity theft

If someone were to borrow a cup of sugar to make a cake and doesn’t return a similar amount, is the lender entitled to the cake? The lender would be viewed as excessively greedy to acquire so much in recompense. A fairer outcome would be for the borrower to offer a slice deemed equivalent to the value of the sugar.

Yet, prior to the Supreme Court ruling in Tyler v. Hennepin County in May 2023, governments were allowed to “take the cake” from many citizens through home equity theft.

Home equity theft is a method by which governments can remediate property tax debt by acquiring a person’s home, selling it to a third party, and keeping all the money, including any excess above the debt. The equivalent of taking the cake in payment for one cup of sugar.

As ruled in 2023 by the U.S. Supreme Court, this practice violates the Fifth Amendment’s takings clause. Legal traditions of our nation and state laws recognize that home equity is private property. When a government confiscates this type of private property and keeps the surplus for public use without compensation, a taking occurs. These takings can and do occur for tax bills of only a few dollars, with many states delivering poor notification to the debtor.

The majority of states already recognize the unconstitutional nature of home equity theft, prohibiting the sinister funding method. These states recognize that permitting home equity theft creates a double standard for government and private creditors. In every state, private creditors are required by law to return excess value to debtors after seizure and debt satisfaction have occurred.

However, for the twelve states with home equity theft and the nine with loopholes, there is an exception for government lenders.

Among the 19 states that still have unconstitutional home equity theft provisions on the books are Idaho, Montana, and Oregon.

Idaho is referred to as a loophole home equity theft state. Home equity theft is not permitted within the state unless a government entity gifts the property to another government body. If this occurs, the state law does not require compensation to the debtor. Idaho lawmakers need to remove this exception and require that all property owners and other lien holders be fairly compensated.

Montana is a peculiar case because it wholly protects residential property equity but leaves all other classes of property unprotected. As the state law leaves all non-residential property open to equity theft, the law still violates the takings clause. To become compliant with the takings clause, all property, including commercial should be recognized as exempt from home equity theft.

Oregon’s use of home equity theft is particularly egregious. Victims of home equity theft include children who have lost parents and were unaware of the property until fines were accumulated and the children had no means of resolving the debt. Oregon lawmakers should ensure that government officials are not allowed to keep the equity above the tax debt owed.

Letting home equity theft go unaddressed by state legislatures is a problem for citizens and governments. As home values increase, so does the incentive for equity theft. Property owners already encumbered by rising inflation, high housing costs, and poor wage growth are more at risk for governments to target their equity to fund public budgets.

Governments are also at risk if their budgets use home equity theft dollars. Budgets will be exceeded when court fees and repayments come due, to compensate home equity theft victims. It is better for both property owners and governments to abolish the existence of home equity theft laws quickly. 

Protecting property owners from home equity theft does not mean protecting them from repaying tax debts owed to the government. Ending home equity theft means preventing governments from taking advantage of property owners through nefarious means. Just like taking the whole cake after loaning one cup of sugar is pure greediness on the part of the neighbor, the government taking all the equity for a few dollars in debt is sinister.

U.S. Supreme Court Chief Justice John Roberts said it best: "The taxpayer must render unto Caesar what is Caesar’s, but no more."

It is time for Montana, Idaho, and Oregon to fully ban home equity theft and protect the interests of vulnerable property owners from governments seeking to take more than they’re owed.

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Madi Clark is a Senior Policy Analyst for the Mountain States Policy Center, an independent research organization based in Idaho, Montana, Eastern Washington and Wyoming. Online at mountainstatespolicy.org.