Strategies for Reducing In Rem Foreclosures in the City of Milwaukee

Transcription

1 Strategies for Reducing In Rem Foreclosures in the City of Milwaukee Prepared by: Bryan Mette Joe O Connell Michelle Prost Erika Schoot Elizabeth Silverstein For the City of Milwaukee, Department of Administration, Budget and Management Division May 14, 2013 Workshop in Public Affairs Spring 2013

2 2013 Board of Regents of the University of Wisconsin System All rights reserved. For additional copies: Publications Office La Follette School of Public Affairs 1225 Observatory Drive, Madison, WI The Robert M. La Follette School of Public Affairs is a teaching and research department of the University of Wisconsin Madison. The school takes no stand on policy issues; opinions expressed in these pages reflect the views of the authors. The University of Wisconsin Madison is an equal opportunity and affirmative-action educator and employer. We promote excellence through diversity in all programs.

3 Table of Contents List of Tables... v List of Figures... vi Foreword... vii Acknowledgments... ix Executive Summary... xi Introduction... 1 Problem Statement... 3 Comparison to Other Cities... 5 Property Taxes and Assessment in Milwaukee... 8 Pre-Foreclosure Process Property Tax Collection Process Three-phase Tax Enforcement Process Phase 1: In-house Collection Phase 2: Collection by Private-party Law Firm Phase 3: In Rem Foreclosure Post-Foreclosure Process City of Milwaukee Constraints in Addressing In Rem Foreclosures Factors Associated with In Rem Foreclosure Characteristics of Properties Acquired by City through In Rem Foreclosure 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 Related to Property Acquired by the City through In Rem Foreclosure Tax Delinquency Special Charges Major Costs of the Foreclosure Process Regression Analysis: Factors of In Rem Foreclosure Independent Variables Regression Analysis Possibilities for Improvements to the Early Warning System Policy Options Option 1: Early Warning System Option 2: Separation of Special Charges... 52

4 Option 3: Credit Card Installments Option 4: Hardship Loan Fund Eligibility Requirements Suggestions for Future Consideration Conclusion Appendix A: Sample Delinquency Notifications Appendix B: In Rem Foreclosure Flowchart Appendix C: Wisconsin Constitution Uniformity Clause Appendix D: Wisconsin Statutes Covering Property Tax Delinquency Appendix E: Milwaukee Ordinances Covering Property Tax Delinquency References... 76

5 List of Tables Table 1. Comparison of Peer City/County Tax Foreclosures... 6 Table 2. General Fund Revenue by Source, in 2013 Dollars... 9 Table Taxable Parcels by Property Class Table 4. Property Tax Delinquency throughout Three-Year Tax Collection Enforcement Period for All Real Estate for Levy Years Table 5. Comparison between All Tax Delinquent Residential Property Owners for Levy Years Table 6. In Rem Tax Foreclosure Redemption and Acquisitions for All Real Estate in Milwaukee, Table 7. In Rem Foreclosures of Residential Property Assessment Class, Table 8. Residential Properties Acquired by the City of Milwaukee through In Rem Tax Foreclosure by Aldermanic District, Table 9. Average Estimated Rehabilitation Costs for In Rem Residential Properties Acquired and Inspected by the City of Milwaukee, Table 10. Average Estimated Rehabilitation Costs for In Rem Properties by Property Type Acquired by the City of Milwaukee, Table 11. Dispositions of In Rem City of Milwaukee-Acquired Properties, Table 12. Residential Class Tax Delinquent Properties for Levy Years 2008 and 2009 Acquired by the City of Milwaukee through In Rem Tax Foreclosure in 2011 and Table 13. A Comparison between Levy Years 2008 and 2009 Tax- Delinquent Residential Property Owners Whose Properties the City of Milwaukee Acquired through In Rem Tax Foreclosure in 2011 and Table 14. Model of Average Change in Delinquent Property Taxes from the Point of Initial Delinquency City of Milwaukee Acquisition for Levy Years 2008 and Table 15. City Costs for Tax Foreclosed Homes Table 16. Variable Definition, Expected Marginal Effects on Probability of Payment, and Source Table 17. Logistical Regression of Tax-Delinquent Residential Properties, City of Milwaukee, v

6 List of Figures Figure 1. Number of Properties the City of Milwaukee Acquired Annually Through In Rem Tax Foreclosure, Figure 2. Relationship between the Alternative Tax Foreclosure Measurements... 7 Figure Property Distribution Residential, Manufacturing, and Commercial Parcels Figure 4. Distribution of In Rem City Acquisitions for All Property Classes, Figure 5. Distribution of Owner Occupants and Investor Owners across All November Tax-Delinquent Residential Property Owners, Figure 6. Distribution of Owner Occupants and Investor Owners Across All November Tax-Delinquent Residential Property Owners Who Made at Least One Installation Payment, Figure 7. In Rem Tax Foreclosure Redemption and Acquisition Rates for All Real Estate, Figure 8. Residential Property Proportion of All In Rem Acquisitions in the City of Milwaukee, Figure 9. In Rem Tax Foreclosure Acquisitions, Figure 10. Percentage of In Rem City of Milwaukee Acquisitions of Selected Properties by Aldermanic District, Figure 11. Percentage of Total In Rem Tax Foreclosures of Residential Properties by Aldermanic District, Figure 12. In Rem Tax and Private Mortgage Foreclosure as a Percentage of Residential Parcels by Milwaukee Aldermanic District, Figure 13. Median Assessed Property Values and In Rem Tax Foreclosure Rates for all Residential Properties by Aldermanic District Figure 14. Percentage Change in Average Assessed Home Value by Aldermanic District, Figure 15. Average Percentage Change in Assessed Value Between Tax Delinquent Year and Year the City of Milwaukee Acquired the Property for Residential In Rem Tax Foreclosures, Figure 16. Percentage of Average Estimated Residential Rehabilitation Cost Relative to Median Assessed Value by Aldermanic District, Figure 17. Median and Mean Selling Prices of In Rem City of Milwaukee- Acquired Properties, Figure 18. Vacated In Rem Judgments, Figure 19. Percentage of Owner Occupancy of City of Milwaukee-Acquired Properties, Figure 20. Percentage of City of Milwaukee-Acquired Properties with Previous Private Foreclosure, Figure 21. Collections and Gross Tax Delinquencies Assigned to Kohn Law Firm vi

7 Foreword This report is the result of collaboration between the Robert M. La Follette School of Public Affairs at the University of Wisconsin Madison and the Budget and Management Division of the City of Milwaukee s Department of Administration. Our objective is to provide graduate students at La Follette the opportunity to improve their policy analysis skills while contributing to the capacity of the city government to provide public services to the residents of Milwaukee. The La Follette School offers a two-year graduate program leading to a master s degree in public affairs. Students study policy analysis and public management, and they can choose to pursue a concentration in a policy focus area. They spend the first year and a half of the program taking courses in which they develop the expertise needed to analyze public policies. The authors of this report are all in their last semester of their degree program and are enrolled in Public Affairs 869 Workshop in Public Affairs. Although acquiring a set of policy analysis skills is important, there is no substitute for doing policy analysis as a means of learning policy analysis. Public Affairs 869 gives graduate students that opportunity. This year the students in the workshop were divided into six teams. Other teams have completed projects for the Wisconsin Department of Public Instruction; the Wisconsin Department of Children and Families and the Wisconsin Department of Health Services; the Wisconsin Department of Revenue; and the Wisconsin Legislative Council. After soliciting possible research ideas from various city government departments, the City of Milwaukee s Division of Budget and Management chose the topic of this report. Over the past few years, Milwaukee has experienced a sharp increase in the number of tax foreclosures. The five authors of this report were asked to investigate the process through which delinquent property tax payments result in tax foreclosures and propose ways in which the city might reduce the incidence of tax foreclosures. This report would not have been possible without the support and encouragement of city Budget Director Mark Nicolini and project liaison Aaron Szopinski. A number of other people throughout city government contributed to the success of the report. Their names are listed in the acknowledgments. The report also benefited greatly from the support of the staff of the La Follette School. Marjorie Matthews contributed logistic support, and Karen Faster, the La Follette School publications director, managed production of the final bound document. vii

8 By involving La Follette students in the tough issues confronting city government in Milwaukee, I hope they not only have learned a great deal about doing policy analysis but have also gained an appreciation of the complexities and challenges facing city governments in Wisconsin and elsewhere. I also hope that this report will contribute to the policymaking process in the City of Milwaukee. Andrew Reschovsky May 2013 Madison, Wisconsin viii

9 Acknowledgments We would like to extend our deepest appreciation to Aaron Szopinski, an analyst in the Budget and Management Division, who served as our contact with the City of Milwaukee and was invaluable in providing assistance to us during the course of compiling our report. We would also like to express our gratitude to Jim Klajbor, Robert Potrzebowski, and Sam Leichtling for taking the time to meet with us in order to better explain the foreclosure process in Milwaukee. Furthermore, we extend thanks to La Follette faculty and staff, including Professor Andrew Reschovsky for his editing and advice and Karen Faster for her help in this report s publication. ix

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11 Executive Summary The downturn in the housing market during the Great Recession resulted in a foreclosure crisis for the City of Milwaukee. Especially troubling has been the steep rise in tax foreclosures initiated by the City. To collect delinquent property taxes, the City conducts an in rem foreclosure, which is the final step in a process used to satisfy outstanding tax debts. In this process, the City takes ownership of a property in lieu of receiving back taxes. The problems surrounding tax foreclosure are twofold. During the past several years, the amount of properties going into in rem foreclosure has spiked. That many of the acquired properties are low in value, making it difficult for the city to sell them, exacerbates the problems. With the City facing fiscal constraints, the Budget and Management Division would like to investigate policies that could be implemented to decrease the number of in rem foreclosures in Milwaukee. In this report, we examine the characteristics of in rem foreclosures using data compiled from various city sources. First, we look at the processes used in property assessment and taxation, noting challenges and trends in the City of Milwaukee in recent years. Next, we construct a comparison of peer cities and counties in order to put Milwaukee s experience with tax foreclosures into a relative perspective. In addition, we examine the pre-and post-foreclosure processes employed by the City and the legal constraints that limit municipal decision-making. We also identify factors associated with in rem foreclosures and use regression analysis to assist in the City s future management of the situation. Finally, we recommend policies designed to reduce the number of in rem foreclosures in Milwaukee. Our analysis of city processes found significant factors contributing to in rem foreclosures. In particular, assessment classes, aldermanic districts, assessed value, and property quality all affected in rem foreclosures. The regression analysis also identified factors that may affect the likelihood of delinquent properties entering the in rem foreclosure process. Based on our research, we recommend the following policies to reduce the number of city-initiated foreclosures. First, we recommend that the City of Milwaukee implement an Early Warning System to identify delinquent properties that are at risk for in rem foreclosure. Second, we recommend adjustments to tax payment methods for the City by allowing special charges added to the tax bill to be spread over installments while also allowing installment plans for owners who choose to use a credit card to pay their property taxes. Our final recommendation is to create a Hardship Loan Fund, modeled on similar programs coordinated by local governments, that allows taxpayers to apply for microloans to satisfy delinquent taxes. xi

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13 Introduction The City of Milwaukee, like many municipalities in the United States, continues to face increasing fiscal pressure exacerbated by reduced employment and declining home values. Homeowners facing long-term unemployment are less likely to pay their property taxes. Two of the most significant consequences of the economic downturn for the City of Milwaukee have been a declining tax base and an increasing property tax delinquency rate (PNC Financial Services Group 2013). As the only first class 1 city in Wisconsin, Milwaukee has the power to take ownership of a property in order to satisfy delinquent property taxes. Despite the efforts of the City to collect delinquent taxes, the number of properties ending up in tax foreclosure continues to increase. Declining property values, high-risk and predatory lending, and high unemployment have contributed to a sharp increase in tax foreclosures in the City of Milwaukee. Once the City has taken possession of these properties, many of them are not likely to be resold. A good number of the properties the City acquires are worth far less than the cost to maintain them. Tax foreclosures are disproportionately located in economically stressed areas. Many of the foreclosed properties are old and severely deteriorated by the time the city acquires title. In addition, abandoned, foreclosed houses may have become targets for thieves who strip the properties of their valuable contents, such as copper wire and fixtures. Vacant homes may fall into a state of disrepair without a resident to maintain the house, contributing to the downward trend in their values along with the values of surrounding properties in the neighborhood. The high cost associated with owning and maintaining many of these city-owned, tax-foreclosed properties represents a diversion of scarce resources. The properties need to be secured, critical structural problems corrected, and regular maintenance mowing and snow removal ensured. Increasing acquisitions in recent years translates to increasing costs. In addition to incurring these postforeclosure ownerships costs, the City loses tax revenue from these properties. Tightening state budgets, tax levy limits, and tax revenues that have not kept up with inflation have made the issues surrounding tax-foreclosed properties more pressing for the City (City of Milwaukee n.d.b.). Milwaukee Mayor Tom Barrett asked the state legislature to allocate more money from the national mortgage settlements to offset the impact and cost of foreclosures shouldered directly by the City. However, even if the City received additional funding, it would not help people avoid tax foreclosure. In response, the City has asked the authors to address tax foreclosures by making recommendations that will decrease the number of properties that come into the City s possession. To reach this goal, we 1 This designation requires a municipal population of 150,000 or more residents. Eligible cities must apply for this designation. 1

14 have identified possible alternative approaches to preventing tax foreclosure taken by taxing districts (usually counties) around the country facing similar spikes in tax foreclosures. We also created our own alternatives to address issues specific to the constraints faced by the City of Milwaukee, such as the Wisconsin uniformity in taxing clause of the State Constitution. If successful, these policy proposals should serve to lower tax foreclosure costs by reducing post-foreclosure ownership costs for the City. In this paper, we begin with a description of the issue and our statement of the overarching problem our paper addresses. We then describe the three-phase taxforeclosure process that the City has adopted. Next, we use a regression analysis to examine the characteristics that may affect the likelihood of tax foreclosure. Using the results from the regression analysis and the best practices we identified in other cities, we then propose some policy alternatives to the current process followed by the City and discuss the merits and drawbacks of each proposed course of action. Finally, we lay out the recommendations that we have for the City of Milwaukee to decrease the number of properties being acquired by the City. 2

15 Problem Statement Since 2009, the City of Milwaukee has acquired an unprecedented number of properties through in rem tax foreclosures, generating steeply increasing costs to the City and causing further stress to neighborhoods already experiencing high levels of mortgage foreclosures. The City pursues tax foreclosures as an in rem process, which means that the legal action is directed toward the property rather than a specific person. In 2012, the inventory of city-owned tax foreclosure properties stood at roughly 1, times that of 2008 levels. Of the total in rem foreclosures between 2008 and 2012, 65 percent have been residential properties. As shown in Figure 1, in rem tax foreclosures of residential properties have grown from fewer than 100 per year in 2008 to more than 700 in As the economic recovery continues to be slow, in rem tax foreclosures of residential properties are expected to increase. Figure 1. Number of Properties the City of Milwaukee Acquired Annually Through In Rem Tax Foreclosure, In Rem Tax Foreclosure Acquisitions Year City Acquired Property Source: Authors, using data from Department of City Development As we will demonstrate, the city incurs the most substantial costs during the postforeclosure phase. These costs include razing uninhabitable properties, securing the properties, renovating the properties, mowing lawns, removing snow, addressing other maintenance, and marketing the properties. Uncollected tax revenue is an additional cost incurred during the pre- and post-foreclosure phases. Because the City does not consider property management and marketing as either a core competency or in its long-term interest, it has identified addressing this growing problem as a top priority. Moreover, municipal expenditures on taxforeclosed properties have associated opportunity costs. Such funds cannot be 3

16 spent on vital municipal services such as public safety or road maintenance. City goals include maximizing the number of properties on the tax roll and reducing the negative impact of blighted, vacant, and demolished properties on its respective neighborhoods. Reducing the number of tax foreclosures would contribute to these goals as more properties would remain on the tax roll and fewer properties would become vacant. 4

17 Comparison to Other Cities More than 150 different systems for collecting the property tax exist within the United States. Alexander and Powell (2011, 4) believe that [c]omplexity, rather than clarity and simplicity, characterizes property tax collection procedures in most jurisdictions. For example, many jurisdictions have procedures that involve two, three, or four separate steps to enforce a property tax lien. Some states have two sales an initial sale of the property or lien followed by a statutory time period before the final sale. Other states conduct a sale of the property that is followed by a statutory redemption period. On average, completing a property tax foreclosure in the United States takes anywhere from two to seven years (Alexander and Powell 2011). Alexander and Powell (2011) advocate for several changes to tax foreclosure laws to make the system more efficient and effective. Milwaukee currently follows these recommended practices. For example, Alexander and Powell support shifting to in rem foreclosures, which the City practices. In rem procedures have different constitutional requirements than proceedings against property owners personally, known as in personam judgments. As a result, the in rem process should result in less time, effort, and money spent obtaining personal jurisdiction over irresponsible owners. Another recommendation is to require constitutionally adequate notice and judicial tax foreclosure proceedings, as this route creates a better opportunity to resolve all outstanding title defects. The City of Milwaukee provides constitutionally adequate notice and judicial tax foreclosure proceedings. Alexander and Powell also suggest increasing efficiency of the tax enforcement system by permitting bulk petitions, which the City also utilizes. Bulk petitions allow a local government to process hundreds or thousands of properties in one hearing. Table 1 compares the City of Milwaukee with other cities and counties regarding tax foreclosures per year. The table lists the City of Milwaukee as having the lowest tax foreclosure rate per capita among the comparable cities and counties. 5

18 City or County Milwaukee, WI Baltimore County, MD (Baltimore) Marion County, IN (Indianapolis) Hamilton County, OH (Cincinnati) Minneapolis, MN Table 1. Comparison of Peer City/County Tax Foreclosures Years , Detroit, MI 2012 Measurement Tax Foreclosures ( ); Residential Property Tax Foreclosures (2011, 2012) Tax Foreclosures for Sale Tax Foreclosure Sales for A List Properties ( ); Tax Foreclosure Sales (2009) Property Foreclosure Cases Tax Foreclosure Sales Tax Foreclosures for Sale Average Number of Tax Foreclosures Per Year* Population Percentage of Tax Foreclosures Per Capita* , , , , , , , , , , , *Tax foreclosures based on measurement identified such as tax foreclosures, residential property tax foreclosures, tax foreclosures for sale, tax foreclosure sales for A-list properties, tax foreclosure sales, or property foreclosure cases. Sources: Hamilton, Ohio (2012) Annual Information Statement; Minneapolis Finance and Property Services Department (2011); Christoff (2013); Baltimore County Office of Budget and Finance (2013); City of Indianapolis and Marion County (2013); Ryan (2010); U.S. Census Bureau (2012) The measurement of tax foreclosures in table 1 differs among the cities and counties due to available data. Ideally, the table would include only residential property tax foreclosures as a measurement because this paper s focus is on those foreclosures. The various measurements include number of tax foreclosure cases, tax foreclosures, tax foreclosures for sale, residential property tax foreclosures, tax foreclosures sales for A-list properties (a subset of properties within Marion County, Indiana), or tax foreclosure sales. The number of tax foreclosure cases as a measurement will likely be larger than all the other measurements because some cases result in owners reclaiming their property and, therefore, properties are not foreclosed on and put up for sale. The measurement of tax foreclosures and tax foreclosures for sale are likely to be similar to each other because cities and counties try to sell most of the properties that they acquire through tax foreclosures. In a limited number of cases, a city or county may keep the property to serve specific city or county interests. Tax foreclosures sales will likely be 6

19 smaller than the other measurements because properties sold may be less than tax foreclosures, possibly due to demand being less than supply. In addition, the table uses residential property tax foreclosures and tax foreclosures for A-list properties as a measurement. These two measurements refer to specific property types. Residential property tax foreclosures will likely be less than tax foreclosures because residential properties are a subset of all types of property. Tax foreclosure sales for A-list properties will likely be less than tax foreclosures for sale because A-list properties are a subset of properties within Marion County, Indiana. Figure 2 displays that relationship between the alternative tax foreclosure measurements. The measurement of residential property tax foreclosures is not included in figure 2 because its relationship with tax foreclosure sales and tax foreclosures for sale is unclear. Figure 2. Relationship between the Alternative Tax Foreclosure Measurements Tax Foreclosure Sales for A-List Properties Tax Foreclosure Sales Tax Foreclosures for Sale Tax Foreclosures Tax Foreclosure Cases Source: Authors Even though the measurements differ among the cities and counties, the tax foreclosures per capita are comparable because the various measurements are similar to one another. The City of Milwaukee tax foreclosure measurements include tax foreclosures and residential property tax foreclosures. In Milwaukee, about 65 percent of tax foreclosures are residential. Therefore, although Milwaukee s tax foreclosure per capita is the lowest among the comparable cities, its tax foreclosure measurement is one of the more inclusive measurements. This means that Milwaukee s foreclosure rate per capita is likely accurate, and the fact that it is lower than the other cities and counties not due to the alternative measurements of tax foreclosures. 7

20 Property Taxes and Assessment in Milwaukee The City of Milwaukee s primary local source of tax revenue is the property tax. The City also receives revenues from the State of Wisconsin through a variety of intergovernmental grant programs, the largest of which is the Shared Revenue program. Per capita shared revenue payments are generally larger in municipalities, such as Milwaukee, with relatively low per capita values of property. The State of Wisconsin does not allow local government sales or income taxes. As a result, the property tax is the City s only major source of tax revenue. The Wisconsin State Budget included limits on the property tax levy of local governments, constraining the City s ability to increase the levy to match its funding needs (Wisconsin Statutes: General Municipality Law Ch. 66, (2)). As a result, the City may only increase the property tax levy by an amount less than or equal to the percentage of value added due to net new construction relative to the previous year s equalized property value. The equalized property value is determined by the Wisconsin Department of Revenue. The total equalized property value for Milwaukee has declined by more than 3 percent in each of the past three years (Assessment Commissioner 2012). The economic crisis has slowed net new construction in Milwaukee to less than 1 percent growth per year. Net new construction includes new construction and land improvements offset by the demolition of buildings. In Milwaukee, net new construction from 2011 to 2012 was 0.72 percent (Wisconsin Department of Revenue 2012). The binding levy limit enacted with the State Budget severely restricts the City s ability to generate sufficient revenue to offset inflation-related increases in the cost of providing the current level of services (U.S. Bureau of Labor Statistics 2012). The Governor s proposed budget for the biennium calls for extending the existing levy limit. Further, as shown in table 2, from 2006 to 2013 the state reduced overall aid to Milwaukee, in real 2013 dollars, from $314.5 million to $259.6 million, or more than 20 percent. Once we adjust for inflation, Milwaukee s total general fund revenues have declined overall by more than 3 percent since The annual reduction in intergovernmental support strains the City budget and burdens property taxpayers and residents with covering the growing deficit through user fees and charges for services (City of Milwaukee n.d.a.). 8

21 Table 2. General Fund Revenue by Source, in 2013 Dollars Intra-Fund Charges Year Property Taxes and Offsets Intergovernmental Revenue Other Own- Source Revenue (Pensions and Benefits) Total Millions of dollars 2006 $212.0 $314.5 $152.2 $56.6 $ $211.7 $306.0 $150.6 $48.6 $ $213.5 $293.1 $150.3 $49.9 $ $219.8 $295.5 $160.1 $53.0 $ $220.9 $289.2 $158.6 $71.2 $ $215.8 $282.8 $169.0 $50.7 $ * $212.1 $263.1 $163.0 $55.3 $ * $214.0 $259.6 $169.4 $70.3 $713.3 *2012 and 2013 are budget figures, not actual revenues Source: From actual revenues, as summarized in the adopted City budget The City Assessor s office is responsible for assessing the value of property in Milwaukee. Assessments are revalued annually using computer models that determine a property s market value by considering factors such as age, size, condition, number of dwelling units, and location. Due to shifting market conditions, revaluations in 2013 included factors such as private foreclosures and board-ups, which may influence the market value of a property. The assessment process is intended to ensure that the assessed value of each property is consistent with its market value. Assessments on residential and commercial properties must be completed by January 1. These assessments are then used to determine each property owner s share of the property tax burden the following December, when the City Treasurer s office sends out tax bills. For administrative purposes, the City divides all property into several classes, sub-classes, and types. The primary property classes include residential, commercial, and manufacturing. The residential class includes two sub-classes: residential (one to three family units) and condominiums. The commercial class also includes sub-classes: local commercial, special commercial, and apartments (four or more units). The classes and sub-classes also contain a variety of property types. As illustrated in figure 3 and table 3, approximately 90 percent of the City parcels are residential, with commercial properties making up the majority of the remaining parcels. The City is responsible for the assessment of residential and commercial parcels, but the Wisconsin Department of Revenue handles the assessment of all manufacturing properties. Figure 4 illustrates the breakdown of in rem acquisitions by property class. 9

22 Figure Property Distribution Residential, Manufacturing, and Commercial Parcels Residential Manufacturing Commercial 0.42% 9.70% 89.88% Source: Authors, using data from Office of the City Assessor Table Taxable Parcels by Property Class Property Class Total Percentage of all City Parcels Residential 127, % Condominium 11, % Residential Total 138, % Manufacturing % Manufacturing Total % Local Commercial 6, % Special Commercial 3, % Apartments 5, % Total Commercial 14, % Total All Classes 154, % Source: Authors, using data from Office of the City Assessor 10

23 Figure 4. Distribution of In Rem City Acquisitions for All Property Classes, Apartments Residential Exempt Condominiums Commercial Special Commercial Source: Authors, using data from the Department of City Development For the purposes of this analysis, the City of Milwaukee requested that we examine certain property classes and property types data from 2008 to Of the six unique property classes, the City requested that we examine two: residential and condominiums. Of the 32 unique property types, the City requested that we examine 11: condominium, duplex, duplex 2, duplex and rear cottage, duplex and single family, multi-family, multi-family and duplex, multifamily and single family, single family, single family 2, and townhouse. The City considers residential properties to be either vacant or improved lots. Vacant lots do not have an existing structure or housing unit, whereas improved lots are parcels that have a residential building or house on them. For the purposes of this analysis, we consider the acquisition of improved lots only. Of all city-acquired properties between 2008 and 2012, the selected property classes and types on improved parcels account for 1,599 acquisitions about 65 percent of the total. Only these property classes and types are examined because they account for the vast majority and an increasing share of municipal acquisitions. The City Treasurer s office sends out tax bills for the coming year each December, and property taxes are due each year on January 31, after which the City provides a five-day grace period. Failure to pay the property taxes in a timely fashion results in late fees and penalties totaling 18 percent per year. The City 11

24 allows payment of the property tax portion of the property tax bill to be distributed over a 10-month installment plan under Wisconsin Statute (3). This number of installments far exceeds that used by other Wisconsin counties and municipalities, which typically permit only two installments. Despite this generous installment payment option, each February a number of property owners of all classes of property fail to pay their property taxes in a timely fashion and become tax delinquent. The City Treasurer s offices reports that more than 99 percent of real estate property taxes are collected over the course of the enforcement period. However, as shown in table 4, between 9 and 11 percent of taxpayers were delinquent at the end of the five-day grace period in February from levy years 2002 to Because the City relies heavily on the property tax to fund basic services, it must borrow money to cover the cash-flow deficit. This short-term debt is repaid by collections of delinquent taxes throughout the year. Table 4 also demonstrates that the City s tax delinquency rates have remained stable throughout the private mortgage foreclosure crisis. One reason may be that banks that initiated the foreclosures have been paying the property taxes to keep them current until the banks can resell the properties. A lien on the property allows the City of Milwaukee to foreclose on the property ahead of other liens that may be against the property. If the bank failed to keep the property tax payments current, the City would initiate its tax foreclosure process. Even though the overall tax collection rate remains high, property owners are taking more time to pay their delinquent taxes (see table 4). For example, by August of the final year of the three-year tax collection enforcement process, delinquent taxes accounted for less than 1 percent of property taxes for levy years 2002 through However, from levy years 2007 through 2010, delinquent taxes exceeded 1 percent and were trending upward. Further, the longer delinquency periods appear to be correlated with an increase in in rem filings and acquisitions as a percentage of initial delinquency rates. As the economic recovery continues to be slow, this trend is expected to continue. 12

25 Table 4. Property Tax Delinquency throughout Three-Year Tax Collection Enforcement Period for All Real Estate for Levy Years Levy Year February April June August Year 1 Year 2 Year 3 November March April November December August In rem Filings In rem Acquisitions % 9.08% 9.11% 9.08% 8.31% 4.52% 4.11% 1.86% 1.70% 0.73% 0.40% 0.18% % 9.02% 8.57% 8.40% 7.10% 3.68% 3.08% 1.61% 1.49% 0.59% 0.28% 0.11% % 8.36% 8.18% 8.00% 6.93% 3.57% 2.90% 1.42% 1.30% 0.56% 0.26% 0.10% % 8.59% 8.40% 8.39% 7.43% 3.92% 3.21% 1.63% 1.50% 0.58% 0.34% 0.12% % 9.63% 9.53% 9.46% 8.50% 4.92% 4.04% 2.11% 1.90% 0.82% 0.59% 0.30% % 9.98% 9.97% 10.07% 9.26% 5.58% 4.88% 2.76% 2.54% 1.02% 0.71% 0.35% % 9.92% 10.03% 10.28% 9.39% 5.35% 4.74% 3.01% 2.78% 1.29% 0.64% 0.39% % 9.33% 9.42% 9.87% 9.14% 5.50% 4.85% 3.31% 3.14% 1.55% 0.76% 0.49% % 9.18% 9.21% 9.46% 8.56% 5.62% 5.18% 3.42% 3.16% NA NA NA % 9.38% 9.37% 9.66% 8.95% 5.94% 5.34% NA NA NA NA NA % 9.27% NA NA NA NA NA NA NA NA NA NA Average 10.25% 9.25% 9.18% 9.27% 8.36% 4.86% 4.23% 2.35% 2.17% 0.89% 0.50% 0.25% Source: Authors, using data from the Office of the City Treasurer 13

26 Table 5 illustrates the changes in tax delinquencies for owners of residential properties from levy years 2008 to 2012, comparing property owners who become delinquent in February with those who become delinquent during the 10-month installment period and are still delinquent in November. February delinquencies declined between levy years 2008 and 2010, when they reached a low of 12,002. February delinquencies then reached a five-year high in levy year 2012, suggesting that more property owners were unable to or were choosing to not pay their property taxes. The total amount of delinquencies that occur between March and October and remain delinquent in November has been trending downward since 2008, with a slight increase in levy year The average amount of delinquent property taxes due at the time of delinquency has remained stable across both those who went delinquent in February and those who later become delinquent and remained so into November. This suggests that even though the amount of property taxes owed may be shifting very little, the property tax burden on property owners may be increasing. Property owners may have less ability to pay their property taxes, despite relatively small changes in the nominal amount of delinquent taxes. Table 5. Comparison between All Tax Delinquent Residential Property Owners for Levy Years Levy Year February Delinquencies Owner- Occupied Investor- Owned Average Amount Delinquent Average 8,400 7,176 6,063* 6,563 6,731 6,987 5,610 5,805 5,939* 6,906 7,657 6,383 Total 14,010 12,981 12,002 * $3,031 $3,032 $2,872 * 13,469 14,388 13,370 $3,111 $2,920 $2,993 November Delinquencies** Owner- Occupied Investor- Owned Average Amount Delinquent 2,561 2,053 1,591 1,755 NA 1,990 1,575 1,600 1,264 1,220 NA 1,415 Total 4,136 3,653 2,855 2,975 NA 3,405 $961 $964 $966 $877 NA $942 *The February 2011 delinquency report was not available, so these numbers are from March **The number of delinquencies reported in this category are less than the total delinquencies that occur between March and October, the end of the 10-month installment period. The numbers are taken from November delinquency reports. Therefore, property owners who went delinquent between March and October and who completed payment of their property taxes prior to November are not counted in the delinquency totals. Source: Authors, using data from the Office of the City Treasurer 14

27 Delinquent property owners can be divided into two categories: those who own and occupy their property (owner occupants) and those who invest in property and rent to tenants (investor owned). As shown in table 5, between levy years 2008 and 2012 the share of tax delinquencies between these two groups shifted. Figure 5 shows that owner occupants who were delinquent in February exceeded delinquent investors between levy years 2008 and In levy year 2010, the delinquencies of these two types of property owners were approximately equal; however, in levy years 2011 and 2012, however, investors comprised a larger share. Figure 5. Distribution of Owner Occupants and Investor Owners across All November Tax-Delinquent Residential Property Owners, % 60% 50% 40% 30% Owner Occupied Investor Owned Source: Authors, using data from the Office of the City Treasurer Figure 6 illustrates the tax delinquency distribution of the two types of property owners who completed at least the first installment payment but were still delinquent in November. From levy years 2008 to 2011, owner occupants have consistently made up a larger share of property owners becoming delinquent during the 10-month installment period and remaining delinquent in November. 15

28 70% Figure 6. Distribution of Owner Occupants and Investor Owners Across All November Tax-Delinquent Residential Property Owners Who Made at Least One Installation Payment, % 50% 40% 30% Owner Occupied Investor Owned Source: Authors, using data from the Office of the City Treasurer Table 6 shows that the City of Milwaukee filed in rem foreclosure against more real estate properties during the economic recession than it did at any point during the recent housing crisis and Great Recession. However, consistent with the trend of increased delays in property tax payments, the City has seen a lower percentage of properties redeemed after filing in rem foreclosures (see Pre- Foreclosure Process and Post-Foreclosure Process for a more detailed review of the in rem tax foreclosure process). This may suggest that low-income homeowners have been slower to recover economically from unemployment. This may also indicate that investors are increasingly more likely to walk away from their properties or perhaps that underwater homeowners who took out peakvalue home equity lines of credit loans in the mid-2000s have abandoned their properties to avoid loan repayment and subsequent taxes. 16

29 Table 6. In Rem Tax Foreclosure Redemption and Acquisitions for All Real Estate in Milwaukee, Parcels Filed Parcels Redemption Acquisition Year Against Acquired Rate Rate , % 36.63% , % 26.24% , % 23.65% % 38.30% % 43.58% % 43.98% % 38.37% % 40.26% % 36.22% % 51.68% , % 48.85% % 60.24% , % 64.58% Total 12,419 4, % 40.10% Source: Authors, using data from Office of the City Treasurer As fewer property owners redeem their tax-delinquent properties, the City s acquisition rate has continued to grow. As shown in table 6 and figure 7, the City acquired only 37 percent of the properties it filed against in However, by 2012, the acquisition rate rose to 65 percent. 90% 80% 70% 60% 50% 40% 30% 20% 10% Figure 7. In Rem Tax Foreclosure Redemption and Acquisition Rates for All Real Estate, % Redemption Rate Acquisition Rate Source: Office of the City Treasurer 17

30 Prior to 2008, the City s acquisition of properties through in rem tax foreclosure was at a level that the Department of City Development could manage. The real estate market allowed for the City to acquire and re-sell properties at a rate that resulted in a stable turnover of inventory. The city s process of acquiring properties allowed for the recoupment of lost or delinquent taxes through the acquisition and selling of properties. Beginning in 2008, however, the inventory of in rem city-acquired properties began to grow as house sales slowed. Despite an expansion of its marketing efforts, the Department of City Development has been unable to sell the majority of properties that the City acquires through in rem foreclosure due in part to stricter underwriting standards by banks and a lack of demand in the housing market. Another factor is the poor condition of the in rem properties themselves, which are increasingly located in economically stressed portions of the City. In general, Milwaukee s housing stock is aging and in need of rehabilitation. An analysis of 2008 U.S. Census American Community Survey data completed by the Department of City Development (2010) found that more than one-half of the homes in the city were built prior to 1950 and more than 90 percent before As the credit market tightened in the wake of the housing crisis and recession, resources for homeowners to purchase and renovate properties were substantially reduced, diminishing the City s pool of potential buyers. Due to the declining value of the housing stock and state-imposed levy limits, the City has sought to generate additional revenue to reduce reliance on the property tax. One result was an increase in user fees through the adoption of fees that directly correspond to the user benefit (Government Finance Officers Association Annual Conference 2012). However, the Wisconsin State Legislature has restricted the user fee charge to the actual cost of service. The weak economy plus the increased use of fees has resulted in a marked increase in the late payment and delinquency of fees. To encourage the timely payment of fees, the Milwaukee City Council passed ordinances that allow for many delinquent municipal fees to be applied to the property tax bill as special charges. The Department of Neighborhood Services, Public Works, and the Milwaukee Water Works issue more than 99 percent of the municipal fees that, if delinquent, are added to the property tax bill as special charges (Berger et al. 2011). The municipal fee collection process includes bill notification, the imposition of late fees, and the availability of multiple payment options. While each of these factors varies among each of the three primary municipal fee-issuing departments, after a municipal fee is delinquent and placed on the property tax bill, the City Treasurer assumes responsibility for collection. Once municipal fees are added to the property tax bill, they must be paid in full with the first property tax payment and are treated for collection purposes as a property tax balance. 18

31 Pre-Foreclosure Process The City of Milwaukee has a standardized process for redeeming delinquent property taxes. This process consists of three phases in which the third and final phase begins with the City Treasurer filing an in rem tax foreclosure action in Milwaukee County Circuit Court. This section describes the City s property tax collection process and tax enforcement procedure. Property Tax Collection Process The City of Milwaukee Treasurer s Office maintains the responsibility of tax collection for all six taxing jurisdictions within the city limits, including the City of Milwaukee, Milwaukee County, State of Wisconsin, Milwaukee Public Schools, Milwaukee Metropolitan Sewerage District, and Milwaukee Area Technical College. Tax bills are sent out once per year and are due on January 31. A property taxpayer who does not or cannot pay the entire balance due by that date may have the option of going on an installment plan. That plan allows for up to 10 payments interest free with each payment due by the last day of each month between January 31 and October 31. This is the maximum number of payments allowed by state law. Any fees and charges, however, cannot be included in the installment plan and must be paid in full by January 31. Anyone who pays less than the total balance due but more than what the first installment would be automatically qualifies for the installment plan. The city provides a number of payment options. One option is to pay the entire balance due or the installment amount via electronic funds transfer or in cash or with a personal check at City Hall, by mail, or at any one of the 13 US Bank locations in the city (City of Milwaukee 2012). Additionally, property taxes may be paid by credit card, but only for the entire balance due. A 2.75 percent convenience fee is added to the charge to cover the City s transaction charges as a credit card merchant. Three-phase Tax Enforcement Process If neither the entire balance due nor the first installment has been paid by January 31, a five-day grace period begins. After that period has passed, the property tax bill is considered delinquent. At this point, the Office of the City Treasurer begins its tax enforcement process beginning with collection attempts, and if necessary, ending with foreclosure on the parcel. This process is outlined below. Phase 1: In-house Collection During the first phase, the City Treasurer begins by sending out a series of four collection letters, followed by two collection letters containing the signature of an Assistant City Attorney. Monthly interest of 1 percent plus a monthly penalty of 0.5 percent are applied, retroactive to February 1. This phase takes place over a period of 14 months. Samples of these letters can be found in appendix A. 19

32 Phase 2: Collection by Private-party Law Firm During the second phase, any remaining delinquencies are turned over to the Kohn Law Firm, a private firm contracted to the City that specializes in collections. The firm begins by assessing each property owner s ability to pay and then makes attempts to collect. Collection attempts begin by attempting to work out payment arrangements with the property owner may take the form of up to 10 monthly payments and include the interest and penalty. Payments may not exceed 10 months without approval from the City Attorney. Unlike most collections, however, the firm has no authority to reduce the balance due by any amount. Collection attempts are made via mail and telephone. No in-person visits are made. The firm may pursue an in personam judgment, which consists of obtaining a court order for the property owner to pay the City. After this point, the firm may have the option of pursuing wage garnishment, tax refund interception (essentially a garnishment of the property owner s tax refund), and possession of personal property. Additionally, if the property owner has investments, the firm may pursue those, but retirement, social security, and other similar funds are exempt. If the property owner is a landlord, the firm may pursue a rent attachment, which is similar to wage garnishment and tax refund interception in that the firm collects rent payments to the landlord. The Kohn Law Firm handles these cases for a period of six months, after which time they are returned to the City for further processing. The firm may hold onto a small fraction of cases, however, if they feel that there is a significant likelihood of collecting payment from a property owner in a relatively short period of time (typically about one month). Phase 3: In Rem Foreclosure Upon receiving cases back from the Kohn Law Firm, the City Treasurer begins the third and final phase of the tax enforcement process, called in rem foreclosure, by filing an in rem tax foreclosure action in Milwaukee County Circuit Court. When this occurs, the City s lien takes precedence over all others that may exist and the City is listed as the first lienholder. Upon the publishing of the action in The Daily Reporter newspaper, an eight-week redemption period begins, during which a parcel may be saved from tax foreclosure by payment of the entire balance due. After this point, a four-week answer period begins during which a property owner may prevent tax foreclosure only by showing one of the following three circumstances: 1) the affected parcel was not liable to taxation, 2) the balance due was paid in full before the last day of the eight-week redemption period, or 3) the tax lien is barred by the statute of limitations. If none of those three circumstances are met, the City is granted a foreclosure judgment by the court and ownership is transferred to the City. The final option for a property owner to retain ownership of the parcel is to petition the Milwaukee Common Council to vacate the in rem foreclosure judgment. The property owner must do this within 90 days of the in rem foreclosure judgment and the petition must also include an administrative fee of $1,370. The council s Judiciary and Legislation Committee then holds a hearing on whether or not to vacate the judgment. If the 20