Foreclosure impact: Next stop, tax drop

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Seniors face grim choices amid market shock October pending home sales slip 1% Tenants victimized by foreclosures Taxpayers: Furious over homeowner bailouts

NEW YORK (CNNMoney.com) -- Foreclosures have devastated whole neighborhoods in Cleveland and other cities, but the real impact on the finances of cities is still to come.

Treasurer's offices all over the country are bracing for the day when lenders stop paying the taxes on many properties in the worst hit neighborhoods.

Many houses in Cleveland's central city neighborhoods have been so damaged by looting, fires and weather that they are almost total losses. The lenders will eventually walk away from them.

"The lenders will come to us and say, 'We just can't hold the properties any longer. We don't want to pay the demolition costs. Here's the property,' " said Jim Rokakis, Treasurer of Cuyahoga County, which includes Cleveland, one of the cities hardest hit by foreclosures

The trend will not be confined to Midwestern cities like Cleveland, where the local economies have been clobbered by manufacturing job losses.

Many Sun-Belt cities now rank high on the list of foreclosures, especially in California. In a report released this week, the United States Conference of Mayorsforecast a reduction in property tax collections in California of nearly $3 billion for 2008.

"Across the country, there has been a boom in property tax volume growth. That's going to stop," said Jim Diffley, the Global Insight economist who put together the analysis for the Mayor's Conference.

Cities that counted on the continued growth, will have to scramble to close revenue gaps as tax growth flattens out.

Even if lenders sell off still viable homes to new owners, those homes could still bring in lower tax revenues. Many of these homes will turn over only at fire-sale prices and the new owners will want assessments redone.

Existing homeowners in areas with plunging values will ask for reassessments too. At a town meeting in Cuyahoga County this week, the first question residents raised was, "How do I get my property revalued," said Rokakis.

Rokakis reported that his county has already fielded 14,000 requests for reassessment in 2007 and he predicted between 20,000 and 25,000 more next year.

The housing bust will also affect state coffers. During the past two years, the number of homes sold has dropped some 40%. That has sent state transfer fees and deed and mortgage registration taxes plunging.

That will have an indirect impact on city governments. "Any time there's fiscal stress at the state level, that channels down to local levels as well," said Diffley.

What foreclosures and the housing bust do not reduce is the cost of services to heavily impacted communities. And many new costs arise along with foreclosures.

For example, the suburban city of Shaker Heights, Ohio, will spend $500,000 this year just to maintain empty properties. The cost to Cleveland Heights merely to keep lawns trimmed at abandoned homes has risen to $75,000 annually from a mere $6,000 three years ago.