Jimmy Lathrop

'Panics Do Not Destroy Capital'

Frank - if the Democrats get voted into Congress and President Obama repeals the Bankruptcy Reform Act of 2005, will your opinion change?

Winners and Losers from the Mortgage Mess

This was a very interesting article. One point that I must disagree with is the claim that lower property taxes and lower insurance costs will be a result of lower property values.

Homes are generally assessed for property value purposes once every five years. Tax assessments are usually made at 70 percent of market value. Municipalities have a strong incentive to appraise properties at high values in order to maintain tax revenue. An example is a home that was appraised at $895,000 in April of 2007. The home is put on the market and there are no buyers at that price. Two offers for 500,000 are made in September. The municipality goes to the home with their appraiser in October. The house sits on the market over the winter, a seasonal period where there are low home sales because people tend to buy in the spring and summer. In April of 2008, the house sells for $685,000. Almost simultaneously, the municipality announces the house is assessed at $685,000 and will be taxed at that rate for the next 5 years. Notice that I have written the word "assessed" and not "appraised". Even though the home was on the market for a year and not one person offered the April 2007 appraisal value, the municipality used an inflated appraisal value in order to generate property tax revenue. The homeowner is forced to appeal the municipality's decision, where the homeowner has a high standard of proof to overcome. Even if the homeowner brings in the broker and shows that the market would, and could not sustain that inflated value, the municipality will fight to maintain that high rate because of the other properties which are vacant.

While property values may have skyrocketed from 2002 to 2006, they will not recover as quickly from 2008 to 2013. Many homeowners in cash strapped municipalities will have assessment rates at or above the market value of the home. This will result in further driving down property values, as the tax burden of homes will higher than what they should actually be.

As far as the author's claim to insurance being lower, the post-Katrina and post-Mississippi flooding is still being felt by the insurers. Many insurers have stopped writing flood policies altogether, leaving many seaside and riverside developments vacant. A look at the recent stock prices of the insurance companies shows massive losses off of their 52 week highs, which means that capital will be used to shore up the balance sheet as opposed to bringing growth, as Meridith Whitney would say.

I also would like to mention that the new administration and Congress may amend the Bankruptcy Reform Act which MBNA bought, I mean, lobbied heavily in favor. Certain congressional committees will look very hard at the prior claims of the credit card issuers made in favor of the bill, in that credit card rates would go down if the bill was passed. I don't have to say anything more than that.