Prepared by:Bryan Mette Joe OConnell Michelle Prost Erika Schoot Elizabeth Silverstein Budget and Management Division, Department of Administration, City.

Strategies for ReducingIn Rem Foreclosures in the

City of Milwaukee

Prepared by: Bryan MetteJoe O’ConnellMichelle ProstErika SchootElizabeth Silverstein

Budget and Management Division, Department of Administration,City of Milwaukee

Prepared for:

May 14, 2013

Definitions

In Rem› Judgment against property› Used synonymously with tax foreclosure

In Personam› Judgment against person

The Tax Foreclosure Problem

Increasing fiscal pressure and decreasing property values

Spikes in tax foreclosures and inventory of City-acquired properties

Increasing costs to the City

Our Goal

Reduce residential properties that end up in

tax foreclosure

Roadmap

Milwaukee taxes and assessments› Comparisons to other cities› Trends in tax delinquency› Pre-/Post- foreclosure processes› Policy constraints for the City

Factors and costs associated with in rem foreclosure

Early warning system model Policy options Future considerations

Comparison of Peer City/County Tax Foreclosures

City or County Years Measurement

Average Number of Tax Foreclosures Per Year*

Population

Average Number of Tax Foreclosures Per Capita*

Milwaukee, WI 2008 - 2012

Tax Foreclosures (2008-2010); Residential Property Tax Foreclosures (2011, 2012)

414 597,867 0.07%

Baltimore County, MD (Baltimore)

2010 - 2012Tax Foreclosures for Sale

1,897 817,455 0.23%

Marion County, IN (Indianapolis)

2009 - 2012

Tax Foreclosure Sales for A List Properties (2010-2012); Tax Foreclosure Sales (2009)

3,664 918,977 0.4%

Hamilton County, OH (Cincinnati)

2008, 2009Property Foreclosure Cases

4,259 800,362 0.53%

Minneapolis, MN 2008 - 2011 Tax Foreclosure Sales 2,334 387,753 0.6%

Detroit, MI 2012 Tax Foreclosure Sales 19,001 706,585 2.69%

*Tax foreclosures based on measurement identified in table.Sources: Hamilton, Ohio 2012 Annual Information Statement; Minneapolis Finance and Property Services Department (2011); Christoff, Chris (2013); Baltimore County Office of Budget and Finance (2013); City of Indianapolis and Marion County (2013); Ryan, Sean (2010); U.S. Census Bureau (2011, 2012)

Distribution of In Rem City Acquisitions for All Property Classes, 2008 – 2012

Source: Authors, using data from the Department of City Development

Residential

Commercial

Condominiums

Apartments

Exempt

Special Commercial

Tax Delinquency Summary for All Residential Property, Levy

Years 2008 – 2012February

Delinquencies

November Delinquencie

s*

Total/Average

Average Total 13,370 3,405 16,775

Average Owner-Occupied 6,987 1,990 8,977

Average Investor-Owned 6,383 1,415 7,798

Average February Delinquencies as a % of Average of All Delinquencies

79.8%

Average Amount Delinquent

$2,993 $942 $2,577

Source: Authors, using data from Office of the City Treasurer

*November Delinquencies numbers include Levy Years 2008-2011.

Changes in Tax Delinquency for All Taxable Real Estate During Three-Year

Tax Collection PeriodFe

bru

ary

Apri

l

June

August

Nove

mber

Marc

h

Apri

l

Nove

mber

Dece

mber

August

Filin

gs

Acq

uis

itio

ns

Year 1 Year 2 Year 3

0%

2%

4%

6%

8%

10%

12%

Levy Year 2004

Levy Year 2009

Average Levy Years 2002-2009

Three-Year Tax Collection Period

Perc

enta

ge o

f Tax D

elinquent

Pro

pert

ies

Source: Authors, using data from Office of the City Treasurer

Pre-Foreclosure Process

Step 1: In-house Collection› Delinquency notices sent to owners › 4 notices from City Treasurer› 2 notices from City Attorney› Remaining cases referred to Kohn Law Firm

Pre-Foreclosure Process

Step 2: Collection by Kohn Law Firm› Gauges ability to pay on case-by-case

basis› Collects back taxes, devises installment

plans, pursues in personam judgment when appropriate

› All delinquencies found to be uncollectible are referred to City Attorney

Pre-Foreclosure Process

Step 3: In Rem Foreclosure› City Attorney initiates suit against

delinquent owners in Milwaukee County Circuit Court

› 8-week redemption period, 30-day answer period

› In rem foreclosure (City takes ownership) 90 days to petition Common Council

Post-Foreclosure Process

Policy Constraints

Uniformity Clause (Article VIII, §1)› “The rule of taxation shall be uniform…”

Special charges added to tax bill

Moral Hazard› Leeway for delinquent property tax payers

could decrease incentive to pay and lead to increased delinquency

Factors Associated with Properties Acquired by the City through In Rem Foreclosure

Characteristics of Properties› Assessment Class› Aldermanic District› Assessed Property Values› Assessed Value Changes During Foreclosure Process› Housing Quality› Disposition of Properties› Owner Occupancy› Previous Mortgage Foreclosure› Property Complaints and Violations

Characteristics of Taxes and Tax Collection › Tax Delinquency› Special Charges

Properties

Property Classes: Residential, Condominium (Improved Lots Only)

Property Types: › Duplex (40.0%)› Single-Family (53.3%)› Other (6.6%)

Total Residential/Condominium Properties: 1,599 (65.1% of total)

Percentage of Total Tax Foreclosures of Residential Properties by Aldermanic

District, 2008 – 2012

Source: Authors, using data from the Department of City Development and the Office of the City Assessor

In Rem and Private Mortgage Foreclosures as a Percentage of Residential Parcels by

Aldermanic District, 2008 – 2012

Source: Authors, using data from the Department of City Development and the Office of the City Assessor

1 2 3 4 5 6 7 8 9 10 11 12 13 14 150%2%4%6%8%

10%12%14%16%18%20%

In Rem Foreclosure Burden Private Mortgage Foreclosure Burden

Aldermanic District

Residential Properties Proportion of All In Rem City Acquisitions,

2008 - 2012

2008 2009 2010 2011 201245%

50%

55%

60%

65%

70%

75%

80%

Acquisition Year

Perc

enta

ge o

f A

ll C

ity

Acq

uis

itio

ns

Source: Authors, using data from the Department of City Development

Percentage of In Rem City Acquisitions of Selected Properties by Aldermanic District, 2008 - 2012

Districts 1, 6, 7, 15 All other districts0%

10%

20%

30%

40%

50%

60%

70%

80%

Aldermanic District

Perc

enta

ge o

f A

ll C

ity

Acq

uis

itio

ns

Source: Authors, using data from the Department of City Development

Owner Occupancy of City-Acquired Properties, 2008 – 2012

Source: Authors, using data from the Department of City Development

2009 2009 2010 2011 201240%

45%

50%

55%

60%

65%

70%

75%

Year

Ow

ner

Occ

upancy

Rate

City-Acquired Properties with Previous Private Foreclosure, 2008 – 2012

2008 2009 2010 2011 201215%

20%

25%

30%

35%

40%

Year

Perc

enta

ge w

ith P

riva

te F

ore

closu

re

Source: Authors, using data from the Department of City Development

February and Post-February Tax Delinquencies in Conjunction with Tax

Foreclosures, Levy Year 2009

February Delinquencies Post-February Delinquencies

All Tax Delinquenci

es

Tax Foreclosur

es

Percentage of Delinquencies

that End in Tax

Foreclosure

All Tax Delinquencie

s*

Tax Foreclosure

s

Percentage of Delinquencies that End in Tax

Foreclosure

Combined Percentage of Delinquencies that End in Tax

Foreclosure

Total 12,981 643 5.0% 5,379 50 0.9% 3.8%

Owner-Occupied 7,176 293 4.1% 3,098 31 1.0% 3.2%

Investor-Owned 5,805 350 6.0% 2,281 19 0.8% 4.6%

February Delinquencies and Foreclosures as a % of All Delinquencies and Foreclosures

71% 93%        

Median Amount Delinquent

$2,726 $2,730   $1,063 $1,197 

Source: Authors, using data from Office of the City Treasurer

Amount of Property Tax Delinquent at the Point of Delinquency, Levy Year

2009

Less than

$1,000

$1,000-$2,000

$2,000-$3,000

$3,000-$4,000

$4,000-$5,000

$5,000-6,000

$6,000-$7,000

$7,000-$8,000

$8,000-$9,000

Greater than

$9,000

0

50

100

150

200

250

Amount of Delinquent Property Taxes Oustanding at the Point of Delinquency

Num

ber

of

Deliquent

Pro

pert

ies

Source: Authors, using data from Office of the City Treasurer

City Costs Associated with Tax Foreclosure

Inspection Property Maintenance Demolition Marketing

~$40 per tax-foreclosed home for each inspection*

$1.22 million in 2011 (about $1,300 per tax-

foreclosed home**)

~$10,000 - 15,000 per tax-foreclosed home

$60,000 in 2012

Source: City of Milwaukee Division of Budget and Management

* Cost estimated based on inspector pay and time required to inspect home and conduct relevant paperwork/data entry. Inspections are done monthly for each property in the City's inventory.

** This estimation uses vacant lots in the calculation of property maintenance.

Early Warning System Model

How can the City forecast properties that are at greater risk of tax foreclosure?

Factors:› Mortgage Foreclosure› Other Recent Tax Foreclosure› Owner-occupied/Wisconsin Resident› Year Property was Purchased› Property Type› Property Value› Aldermanic District

Regression Results

Increase likelihood of ending in tax foreclosure› Other Tax Foreclosures› Not Wisconsin Resident› Property Type (Residential Vs. Condo)› Aldermanic District

6, 7, 15 Decrease likelihood of ending in tax

foreclosure› Assessed Value Property › Aldermanic District

2, 5, 9, 11, 13, 14

Policy Options

Early Warning System› Based upon statistical analysis› Used to identify the likelihood of in rem

foreclosure for delinquent properties› Outreach to those affected e.g., housing

non-profits, other options

Policy Options (cont’d)

Separation of Special Charges› Reduces the amount on tax bills› Easier to manage delinquency› City has discretion in negotiating re-

payment if special charges are not added to tax bill

› Need effective collection of data to separate tax delinquencies from special charge delinquencies for each property

Policy Options (cont’d)

Credit Card Installments› Currently, property tax payments by credit

card must include the entire bill› Gives owners more options› Allow property owners to pay tax in

installments by credit card› Add 2.75% surcharge to cover costs

Policy Options (cont’d)

Hardship Loan Fund› Modeled, in part, on property tax

assistance programs implemented by other governments

› Fund managed by independent party, such as a private organization, community foundation, or housing non-profit

› Leverage funds from the private sector to give loans for property taxes

› Strict eligibility criteria

Future Considerations

Data set quantifying property taxes and special charges separately

Incorporate Department of Neighborhood Services data into analysis

Trend analysis

Acknowledgments

Aaron Szopinski, who served as our contact with the City of Milwaukee

Jim Klajbor, Robert Potrzebowski, and Sam Leichtling for meeting with us

Professor Andrew Reschovsky and Karen Faster

Questions?