Equity theft is now illegal in Massachusetts, making it possible for some who lost their homes to get money back

A new law banning cities and towns in Massachusetts from “equity theft” is now on the books.

On Monday, Gov. Maura Healey signed the new law that stops municipalities from selling a foreclosed home and keeping more than what is owed in the former owner’s equity as profit as an amendment in the fiscal 2025 budget. 

Now, if a city or town forecloses on a home due to unpaid taxes and sells it, whatever equity remains after the tax is paid off must be returned to the former homeowner. 

“It’s a big deal,” said Pioneer Public Interest Law Center President and former Judge Frank Bailey.

Sometimes, the homeowners don’t always just owe the city or town money. In addition, several municipalities like Springfield, Worcester, and Quincy sell the tax liens to private debt buyers, who keep the entire equity windfall, said Todd S. Kaplan, senior attorney at Greater Boston Legal Services. Therefore, the excess money doesn’t even go back to the municipality but to private creditors. 

The new law helps those who are “house rich and cash poor,” said Kaplan, with property tax arrears, a path to stabilizing their housing and allowing them to stay in their homes. 

“This is not a problem for people who have money,” he said. “It’s a problem for people scraping by who can lose their entire home and all their life’s savings.”

With so many people’s wealth tied up in their homes, “up until now, they were at risk of losing everything,” said Kaplan. 

The state legislation lowers the interest rate on tax arrears from 16% to 8%, allows for waiving all interest, increases longer tax repayment plans from five to 10 years, and reduces the down payment needed for a repayment plan from 25% to 10%. Each municipality now has the option to offer more flexible repayment plans but is not required to. 

“The bill is a very good bill,” Bailey said. “We think it’s the most advanced bill passed in the country.”

The law could also apply to people who lost their equity up to three years ago.

Bailey said cases are being trialed in other states where similar laws were enacted, including class-action suits against cities and towns that took property and didn’t return the net equity to the homeowners. The statute of limitations on the lost equity is about three years.

Not everyone is in full support

Massachusetts Municipal Association Executive Director Adam Chapdelaine said in a statement that cities and towns are prepared to comply with the new law regarding the foreclosure process. 

However, Chapdelaine said that local leaders and the Massachusetts Municipal Association “are extremely concerned” about the portion of the law that makes the Supreme Court’s decision retroactive to two years before its ruling. 

“This punishes cities and towns and will put taxpayers on the hook for those who don’t pay,” Chapdelaine said in the statement. 

Chapdelaine said that cities and towns rely on property tax revenue to provide local services, and local officials have long committed to allowing residents to be flexible when they face difficult times. 

“The MMA worked hard to find a legislative solution that would bring Massachusetts into compliance with the federal ruling without harming cities, towns and local property taxpayers,” he said. “Unfortunately, this is not it.” 

Other states also allow this practice 

About 12 states in the U.S. allow this practice, according to the Pacific Legal Foundation. 

A senior National Consumer Law Center attorney, Andrea Bopp Stark, noted that Maine and Vermont passed similar property tax disclosure laws this past year. 

Stark said that Maine law requires a real estate agent to list the home first if the property owner doesn’t pay their property taxes to maximize profit. In Vermont, the new law provides better notice to homeowners and requires towns to have repayment plans. 

However, the law in Massachusetts “provides the highest level so far of safeguards, not only ensuring the highest amount of home equity surplus returned to the homeowner but also providing preventative measures to make sure the homeowner doesn’t fall behind in the first place,” said Stark. 

Where the fight began

In May of 2023, the Supreme Court unanimously ruled in Tyler v. Hennepin County that “equity theft” was unconstitutional because it denied just compensation to a homeowner. 

The ruling still left the question of whether a decision of law in Minnesota was close enough to the law on the books in Massachusetts to render it unconstitutional. 

So, a suit was brought forward by the Pioneer Public Interest Law Center, Greater Boston Legal Services, and the law firms of Morgan Lewis and Greenberg Traurig on behalf of Springfield resident Ashley Mills. 

Mills was about to lose her fully paid Springfield home, worth about $230,000, due to a $22,000 property tax debt that accrued before she inherited it. 

In April, the Massachusetts Superior Court ruled that the commonwealth’s tax foreclosure procedures were unconstitutional in this case. 

The court rulings were followed by the state’s legislation, which was passed into law on Monday.

Kaplan, who has been working on this issue for eight years, first became aware when he began hearing from clients who were surprised that the city would sell their property to a private company for late tax payments. 

It is often unclear why the repayment plans for late tax payments do not work like mortgages. If a person falls behind on their taxes, the mortgage company they work with will pay them off. However, if one doesn’t have a mortgage because they inherited the house or own it outright, the responsibility falls back on the homeowner.

So when the notice came in the mail, many woke up and said, “Oh my God, this is terrible.” They often had to juggle bills to pay it off or were forced to lose their home. It was especially a shock for owners who only owed a fraction of the worth of their home in taxes. 

“Who would think you could lose your entire home for one (missed) payment,” said Kaplan. “It doesn’t make sense.”