Household Asymmetric Risk of Foreclosure From Tax Assessment Limits

Authors: Sebastien Bradley, Da Huang, Nathan Seegert

Abstract: Homeowners face risk due to variation in annual property tax liabilities which may result in financial distress and eventual mortgage foreclosure. We show that an unintended consequence of a common property tax feature, assessment limitations, exposes households to more systematic risk despite decreasing the variance of property tax payments. Using a state border discontinuity design for the universe of U.S. residential properties, we show that this increase in risk translates to homeowners facing relatively larger increases in property tax obligations during market downturns. As a result, short-tenured homeowners in assessment limitation states experienced a significantly higher probability of mortgage distress at the height of the Great Recession. The magnitude of this unintended effect is comparable to the increase in probability of mortgage distress associated with owning a home in disrepair and is approximately one tenth as large as the effect of moving between the first and fourth quartiles of the loan-to-value distribution.