States receive crumbs from mortgage settlement

February 10, 2012

The $25 billion mortgage-fraud settlement that was announced yesterday came after 18 months of coordinated action by the Department of Justice, the Department of Housing and Urban Development and 49 state attorneys-general. The settlement is carved up so that homeowners and governments at the state and federal levels each receive some compensation. Given the scale of national losses, it’s a tiny penalty for banks that engaged in egregious servicing and foreclosure practices, and it will do little to repair the widespread economic damage.

More important for states, the amount they are set to receive far from covers the shortfalls they will suffer from lower property tax collections, which are pegged to property values.

A little background: Municipalities and school districts collect substantial revenues from property taxes, and they benefited from inflated housing values during the boom. With higher property tax collections, they ramped up municipal services. Starting in the first quarter of 2010, property taxes began to flatten, but property appraisals did not, as they lag behind property values by several years. We are just now starting to experience what could be a big decline in property tax collections.

National residential real estate values have dropped from $22.7 trillion in 2006 to $16 trillion in 2011, according to the Federal Reserve. The Tax Foundation has calculated that the median nationwide property tax is 0.97 percent of home values. If residential real estate values were fully appraised at lower levels, losses to local and state governments would equal $60 billion a year.

The ability of communities to raise property tax rates to make up for this shortfall will vary tremendously. New Jersey, for example, already has the highest rates in the country and is seeking ways to reduce this tax burden.

An extreme example of this property tax problem is Henderson, Nevada, which was at the epicenter of the housing market collapse. Nevada’s state and local governments are generally well run and keep robust reserves. Unlike most communities, which reappraise property values every three to five years, Nevada reappraises its property values annually. Henderson’s property tax collections (which include commercial properties) dropped from $131 million in fiscal 2009 to $34 million in fiscal 2012, according to a recent bond offering documents (page 31).

Back to the mortgage-fraud settlement and its inadequacy for states and municipalities. While the city of Henderson alone had a loss of $97 million in property tax revenues over three years, the settlement will give the state of Nevada $60 million, or approximately $51 per housing unit. The economic losses to the state are so much higher than that. But the settlement does nothing to account for these losses.

Once reduced real estate values are accounted for, tax revenues will likely be substantially lower and stay that way for a number of years. The mortgage-fraud settlement is providing a total of $2.65 billion to the 50 states. I think once the dust settles, state attorneys-general may wonder why they settled for so little.


U.S. Census Bureau: Table 1. General Housing Characteristics for the United States, Regions, States, and Puerto Rico: 2000 and 2010

U.S. Census Bureau: National Totals of State and Local Revenue, By Type of Tax

Federal Reserve Flow of Funds Z.1: December 8, 2011, B.100 Balance Sheet of Households and Nonprofit Organizations, page 106

National Mortgage Settlement: State settlement amounts

Adam Levitin: The Servicing Settlement: Banks 1, Public 0

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