Foreclosures May Cost California Communities $4b in Lost Tax Revenue

There is an interesting report from the California Home Defenders League this morning that details the damage foreclosure is doing to California communities.  The report does appear to have a fair amount of bias (note the title: “Home Wreckers: How Wall Street Foreclosures Are Devastating Communities”), so the numbers in it should likely be taken with a grain of salt.  Nevertheless, I still think the report does have some merit and includes some illuminating information.

The housing market in California is in pretty dire straits.  Approximately one third of California homeowners with mortgages have negative home equity (owe more on their mortgage than their home is worth).  One in five foreclosures in the United States is located in California.

The first revelation in the report is that foreclosures will cause a decline in home values of $631 billion in California through 2012 ($207 billion in losses for foreclosed homes, and $424 billion in losses for homes near foreclosures).  The estimate is based upon the projection of 2 million foreclosures in California through 2012 (thusfar there have been 1.2 million foreclosures).  The $632 billion estimate is based upon numbers from RealtyTrac that say the average foreclosed house loses 22% of its value, and that houses within 1/8 mile of a foreclosure lose approximately 1% of their value.

Second, the report estimates that California will miss out on $3.8 billion in property tax revenue due to the foreclosure crisis.  Additionally, foreclosures cost local governments $17.4 billion in maintenance, trash removal, evictions, inspections, and other costs.  I think that the drop in property taxes will become a much bigger issue as time goes on.  As property tax revenues fall, communities will inevitably have to cut spending, raise taxes, or go further into debt to provide basic services to their citizens, and I think we are going to hear a lot about this in the coming year.

Several laws have been proposed in the California legislature that would aim to alleviate the situation.  The first bill is from a California state Assemblyman and would charge banks $20,000 for each home they foreclose upon in the state.  Assemblyman Bob Blumenfield says that the money would be used to pay for schools, police, and fire-fighting among other purposes.  He says that the foreclosure charge would help make up for loss in property tax revenue and other foreclosure associated costs.

Another proposed law would require loan servicers to give a definitive yes or no answer on loan modification before beginning the foreclosure process.  A third bill would require recording of all mortgage deeds/trusts and assignments, and would also require a mortgage note be on file before foreclosure proceedings were initiated to ensure the party foreclosing on the house has the right to foreclose.

While I am not a legal expert nor an expert in California politics, common sense tells me that the first proposed bill would have little chance of being enacted.  The second and third bills seem somewhat more reasonable to me, and I would guess they have a better chance at being ratified.  It will be interesting to see what happens.

About Michael Kraus

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