CoreLogic

CoreLogic Econ

# Proposition 13 Property Tax Legislation Adds to Challenge in Estimating Future Property Tax Amounts

## Underscores Need for Accurate Property Tax Estimating Algorithms

Estimating property tax amounts throughout the United States is a challenging task due to the complexity and differences in taxing agencies across the country. That challenge is even more complicated in areas in which legislation caps tax increases for existing residents.

In 1978, California amended its Constitution to add Proposition 13, officially named the People's Initiative to Limit Property Taxation. The Proposition 13 amendment limits the annual increases of assessed value of real property except in cases of (a) change in ownership, or (b) completion of new construction.

Whenever a property changes ownership or new construction occurs, the law requires the assessor's office to reassess the property at current market value. In the event that the change occurs outside of the normal assessment timeline, supplemental bills are created to collect the additional increase, and these bills provide insight into shifting tax estimates. During times of large increases of property values, Proposition 13 can create abnormal increases in assessed property values when a change in ownership occurs. These increases create a challenge for any lender trying to predict property tax amounts in order to assess the full cost of ownership and accompanying escrow amounts as part of the loan origination process outlined in the TRID (TILA-RESPA Integrated Disclosure) rules.

Supplemental bills can provide a useful measurement tool to examine tax amounts for the period following a change in ownership. To understand the potential magnitude of the effect of Proposition 13, CoreLogic conducted an analysis of 2015 supplemental bills for Sacramento County, California, for properties with new loan originations. The analysis computed the ratio of supplemental bills to original tax bills among 9,285 properties. The distribution of ratios is shown in Figure 1.

The distribution of the ratios is a non-normal distribution as seen in Figure 1. The lowest quartile of the ratios is 12 percent. The median ratio stands at 27 percent. The third quartile ratio stands at 54 percent.

The wide variation observed in the ratios emphasizes the importance of lenders to accurately predict future property tax values using a valid and accurate property tax estimator model. Relying on simple empirical methods is likely to result in incorrect estimates which can lead to miscalculations and, as a result, the borrower’s inability to afford future property taxes.

California is not the only state in which this effect can be widely observed. Florida also introduced legislation, referred to as “Save Our Homes,” which limits assessed value increases for existing homeowners. Massachusetts, Maryland, Michigan, Texas and Oklahoma also have limits on changes for assessed values at the state or county levels.

The use of analytics and robust historical data to predict tax amounts is critical to the successful origination and servicing of mortgages. It is particularly true in areas in which legislation can create abnormal variations in property tax amounts as a result of ownership changes.

Note: Ratios above 5 were eliminated from the sample graph to help readability.