Increasing foreclosure levels in Atlantic County, N.J., are a credit negative for the government, hit hard by Atlantic City's recent casino struggles, according to Moody's Investors Service.

A RealtyTrac report found that Atlantic County had the highest foreclosure rate in the nation during the first quarter.

Foreclosures in Atlantic County, which is rated Aa2 with a negative outlook by Moody's, rose 80% in March over the previous month and were 168% higher than the same period last year, according to the RealtyTrac data. One out of every 252 homes in the county were in foreclosure during March, almost double New Jersey's average and well-above the U.S. rate of one in 1,092.

"The increased foreclosures will suppress property tax collections for municipalities and be a drag on future tax base growth in the county," said Moody's analyst David Strungis in an April 23 report. "The recent collapse of the casino and gaming industry in Atlantic City brought about the increased foreclosures."

Strungis noted that Atlantic County's tax base contracted significantly between 2008 and 2014, falling 45% in that period with another 38% decline expected by 2016. Four of Atlantic City's 12 casinos closed in 2014. Moody's downgraded Atlantic City six notches to Caa1 in late January after the state appointed an emergency manager to oversee its finances, which include a $101 million budget gap in 2015.

New Jersey, which is rated A2 with a negative outlook, had the second highest backlog of foreclosures behind only Florida during the first quarter due to a "judicial" process that Strungis said has hindered the state's housing recovery. He said the same challenges will likely face Atlantic County on a more local level.

"Over the next year, the high level of foreclosures will suppress property values and hurt property tax collections, particularly for the county's municipalities," said Strungis.

"Although the municipalities could implement a tax lien sale on a foreclosed property, there is no guarantee that there will be sufficient bidders to purchase the lien and the economic distress in Atlantic City may keep potential buyers away, forcing municipalities to carry tax liens for multiple years."

Strungis noted that Atlantic County is "insulated from the immediate shocks of tax base declines" because its municipalities bear the risk of any tax delinquencies due to guaranteeing the county's tax collections in full.

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