There are few more cost-effective investments than foreclosure prevention. That’s because a single foreclosure can impose mammoth costs on society. This post will look at the direct costs of foreclosures on city governments. A single foreclosure can impose direct costs well in excess of $30,000. In later posts, we’ll continue looking at indirect costs.
First, some background: If you stop paying your mortgage and the bank takes your home, this is called a foreclosure. Meanwhile, if you stop paying your property taxes and the City takes your home, this is also called a foreclosure (sometimes, “tax foreclosure” for clarity). Some of the homes taken in tax foreclosure never had a bank foreclosure. But some homes taken in tax foreclosure had a bank foreclosure started but never completed–this was the “zombie foreclosure” we talked about previously.
For clarity, I will capitalize City to indicate a city government.
The best information on the cost of foreclosures to city governments comes from a study done in Chicago in 2005. The researchers meticulously tracked every single action taken by any city employee that involved a single foreclosure, and figured out a dollar value for each task. Here is a chart of what they found (h/t for figure):
The researchers realized there are six typical paths a foreclosure could take, and called them Scenarios A through E. The first scenario is so simple that they didn’t even assign it a letter. In this unnamed scenario, the foreclosure proceeded logically, as described in this inaugural post on foreclosures: the homeowner fell behind on her mortgage; the bank started and completed the foreclosure process; the bank became the legal owner of the home when the name of the bank replaced the name of the homeowner on the deed. In this scenario, court fees and fees from the Register of Deeds cover nearly all the costs to the City; in the end, the City of Chicago is only out $27.
So, when a foreclosure proceeds like it is supposed to, the cost to city governments is negligible. Of course, foreclosures still impose terrible costs on families who lose their homes. But in terms of direct costs to city governments, the cost is negligible.
As we learned in the post on zombie foreclosures, real problems can occur if the foreclosure doesn’t proceed like it is supposed to, and the single biggest problem occurs when a home is abandoned. Scenarios A-E consider some possibilities if a foreclosed home is abandoned.
In Scenario A, complaints from neighbors let the City know that a home has been abandoned. The City quickly sends out home inspectors to verify that the home has been abandoned.
The inspectors find that the home is in good condition and is secure–that is, wildlife, squatters, or criminals have not made use of the home, and it is adequately protected from the weather. The inspectors issue fines for code violations (if any) and must monitor the home until it is no longer vacant. However, because these homes are generally in good shape, these code violations get corrected and the corresponding fines paid. So while the City has losses from the costs of the building inspections, these are mostly recovered.
All told, the City typically loses $430 for a Scenario A foreclosure.
In Scenario B, the home is not secure–perhaps there is a broken window or a door without a working lock, making the building vulnerable to intrusion by wildlife, criminals, or squatters, or vulnerable to rapid deterioration due to exposure to the elements. Now, the City has to go to court to force the owner to secure the building. Costs for a Scenario B foreclosure are typically $5358, mostly in legal expenses. Even if the issue is a defective deadbolt lock that costs $30 to replace and can be easily installed with a screwdriver, the City must incur steep legal costs to force the home’s owner to act.
In Scenario C, not only has the home been abandoned (like in Scenarios A and B), and not only has the home been found to be insecure (as in Scenario B), but the home has deteriorated to a point where it puts the public at risk. Now, the City must pay for a demolition. Normally, there is no way for the City to recover the costs of the demolition; ordinary taxpayers pay for someone else’s home to be demolished.
However, as the property awaits demolition, it must have increased patrols from police officers since it poses a hazard to public safety. The researchers tallied a total cost of $13,452, but caution that this only includes the direct costs of demolition and “modest” increase in police patrols prior to demolition.
However, at the time of the study, Chicago had two paths for demolition. Homes that were a clear danger to the public were put in the Fast Track to Demolition (FTD), where they were quickly demolished, whereas homes in slightly better condition could not be immediately demolished. Rather, for non-FTD homes, the City had to take the owner to court. This imposes additional legal fees on the City and extends the time the building is vulnerable to criminal activity (and thus multiplying the cost of increased police patrols). In their estimates, the researchers use the cost of the FTD program, though they admit that not all Scenario C foreclosures are eligible for FTD, and non-FTD cases are more complex and expensive for the City to pursue. In other words, their estimate of the legal costs of a demolition are too low.
Additionally, as we saw in a previous post, abandoned buildings can become exceptionally dangerous. Non-FTD legal cases are more complex and therefore more time consuming, multiplying the need for increased police patrols. A “modest” increase in police patrols is not a reasonable assumption; the true cost of increased police patrols is much higher.
So it is clear that the researchers’ estimate of $13,452 for a Scenario C home is too low. They underestimated the legal costs of demolition cases by looking only at FTD-eligible homes. And they also underestimated the need for increased police patrols.
Indeed, in 2014, it cost the City of Milwaukee $15,700 to demolish a home. This does not include the costs of increase police patrols. This higher cost may reflect increased costs of demolition (the study in Chicago was done in 2005), and it may be more expensive for Milwaukee to go through the court system to actually get the right to demolish an abandoned home. Whatever the case, the cost to the City of Milwaukee for a Scenario C foreclosure is far greater than the researchers’ estimates for Chicago of $13,452.
Scenario D is a zombie foreclosure. Since I spent an entire post on zombie foreclosures, I won’t repeat that information here. But the researchers estimated the cost for a typical zombie foreclosure at $19,277.
In Scenarios A through C, there were no unpaid property taxes. But zombie foreclosures typically have large, unpaid property tax bills–cash that the City can never collect. Additionally, the researchers tallied the costs of unpaid utility bills, which also cannot be collected, and the cost of mowing the lawn and shoveling snow. None of these costs can be recovered, and are included in the figure of $19,277.
However, this estimate, too, is too low. The researchers are still assuming “modest” increase in police patrols, as well as a quick FTD demolition case, and lower demolition costs. Yet Milwaukee had homes that stayed as abandoned zombie foreclosures for years. As mentioned above, an earlier post in this series examined the staggering amount of crime committed in and around abandoned buildings. A “modest” increase in police patrols does not reflect of the public safety threat of abandoned homes.
In sum, the direct costs to a city government of a zombie foreclosure are much higher than the authors’ estimates of $19,277.
Scenario E is a Scenario D zombie foreclosure that catches fire. The researchers estimated the cost of fire suppression at $14,020. They stress that this is only the financial cost and does not consider the danger to the firefighters who respond to fight the blaze.
Scenario E is all too common. Though it’s not necessarily clear why, abandoned buildings are more likely to catch on fire. Sometimes, thrill seekers set abandoned buildings on fire. Other times, squatters light fires for warmth in winter since the utilities have been disconnected, and these fires can get out of control.
When a small fire starts in an occupied building, chances are good that a resident with quick reflexes will put the fire out by smothering or dousing water it with water. If not, they will quickly call the fire department, who may arrive before the blaze is out of control.
But since an abandoned building is unoccupied, nobody will notice the fire until it is out of control. In terms of dollars and cents, this increases the costs of fire suppression. But it also puts firefighter’s lives at greater risk.
In sum, the authors estimate a total cost of $34,199. However, this estimate has the same problems as Scenario D: the estimated cost of demolition is far too low, as are the estimated costs of increased police patrols.
For more detailed information, here is the original study, and the exact dollar values for everything are on page 11. Remember that these are only direct costs. Indirect costs to people, like increased crime or loss of wealth as property values fall, are not included here. And indirect costs to the city, like falling property values leading to lower property tax receipts, are also not counted.
Nevertheless, it is clear that failing to prevent foreclosures leads to extraordinary costs for the City. The demolitions alone cost $15,700, but the legal, fire suppression, and other costs are also very expensive. Though I don’t know how to find information on demolitions, 2014 seems to be the peak of the crisis, when the City of Milwaukee demolished 500 homes (though more than 600 homes had an open demolition order, but the City ran out of money). In 2013, the City demolished 166 homes.
The City of Milwaukee faced costs well in excess of $20,000 to $30,000 for literally hundreds of foreclosed homes in the past decade. If we consider just the 500 homes demolished done in 2014 and conservatively estimate a cost of $20,000 per foreclosure (even though the average cost was likely much higher), the City of Milwaukee spent $10 million dealing with abandoned zombie foreclosures, just in 2014.
Much of this spending was totally unnecessary. Remember, only a few thousand dollars would have been enough to prevent many of these foreclosures. Of course, by 2014, it was far too late to prevent these homes from falling into disrepair. By 2014, demolition was the only option. But by spending a little at the beginning of the crisis, we could have prevented extraordinary costs down the road.
Image: A building inspector put this notice on the front door of an abandoned zombie foreclosure with an overgrown yard.