Fiscal crisis coming soon to a state and county near you!

On many of the housing bubble blogs, bloggers like to banter about predictions for home prices. Prognostication is a risky business, as just about anyone who has tried it will tell you.

I am personally very bearish on home prices - far more bearish than the experts whose predictions you read in the press. I don't really like to say much more than "prices will fall" , but I have often said, and will continue to say that whatever prices do will depend on the mood of market participants. If the participants are optimistic they feel like taking on risk, be it a lender who wants to extend credit or a borrower who wants to take on a mortgage, or an asset market that adjusts mortgage interest rates so they are attractive, or a municipality that invests in infrastructure. Problems like fires or mudslides or earthquakes, though causing terrible inconvenience, are overcome with a gung-ho "we will rebuild" attitude. Home prices might be buoyed by such optimism. On the other hand, when participants become risk-averse - whether they shy away from taking on more debt or issuing more credit or investing in credit, the support for home prices crumbles as pessimism becomes the prevailing mood. Throw in fires, mudslides, earthquakes, and other violent phonomena of Mother Nature and these events become excuses to leave a particular market. Perceptions on what constitutes a desirable place to live can change dramatically. The more severe the change in perception as to the desirability of living in a particular place, the more severely property prices in that place will fall. That's my working hypothesis, period. No fancy charts or graphs needed.

It isn't just Mother Nature's rebellion that can serve up excuses to leave an area. In downturns, crime increases. Recently, there have been stories in the news of home invasions in Redondo Beach. Man-made fiscal disasters can do the trick just as well. I have here two Daily Breeze stories in the latter category that may foreshadow what is in store for us. (Does anybody remember New York City in the 1970's?) The links are posted but will expire.

Coffers filled by soaring property values could be drained over the next two years as the real estate market cools

Originally published Thursday, November 29, 2007
Housing crisis may put L.A. County in the red
Coffers filled by soaring property values could be drained over the next two years as
the real estate market cools.
By Troy Anderson
Staff Writer

Los Angeles County officials are bracing for a round of belt-tightening as property
tax revenues fall short of expectations on drooping home values and the state 
prepares to cut off additional funds.

While soaring property values have poured millions into county coffers in recent 
years, officials say they expect revenues to increase just 2 to 5 percent next year - 
compared with 9 percent this year - as the real estate market cools.

At the same time, California's fiscal woes are worsening as Gov. Arnold 
Schwarzenegger has asked all state departments to prepare for 10 percent cuts amid a 
slowing economy and unexpected setbacks that have created a nearly $10 billion budget 
shortfall over the next two years.

While county Chief Executive Officer Bill Fujioka said he is optimistic, he is 
preparing a report on the potential effects on the county budget as the first 
property tax checks start rolling in Dec. 10.

"We aren't seeing any negatives in that area yet," Fujioka said. "As far as the state 
budget, it's early. … I've been talking to friends of mine in the Legislature and 
they are saying the problem is much worse than what is being publicly reported."

In the past five years, property tax revenues collected countywide have nearly 
doubled to $4.6 billion, helping to boost the county budget to $21.8billion.

It's been welcome relief for the county, which nearly declared bankruptcy in 1995 and 
has spent years cutting health and law enforcement services.

Flush with cash, the Board of Supervisors has approved hundreds of millions of 
dollars on everything from pay raises to bonuses and pension and health benefits 
improvements for the 100,000 county employees.

Hundreds of millions of dollars also have been spent to reopen jails, hire new 
sheriff's deputies, probation officers and social workers, and set aside about $100 
million to address homelessness in the county.

Still, the county continues to face a variety of financial problems, including a 
health department deficit expected to hit as much as $854 million by 2010-11 and 
liabilities to pay for retirees' health care costs estimated at $13 billion to $20 
billion.

The city of Los Angeles collects about $1 billion in property taxes each year, 
providing 20 percent of the general fund. So far this year, property tax revenues are 
still strong and the collection rate is 97 percent, finance specialist Rex Olliff 
said Wednesday.

"There's no reason to think there will be a big drop in property tax this year. It's 
(in) the 2008-09 budget that we'll start to see the effect of the real estate 
downturn," he said.

Collection rates are expected to fall as foreclosures rise. And the boost in receipts 
generated by home sales and high new prices will slow.

But the cooling market already has had an effect on money generated by the real 
estate transfer tax, which is a fee charged when a property is sold.

Transfer tax receipts from November have dropped 35 percent compared with the same 
period last year.

"While the real estate decline has not played out fully in the city of Los Angeles, 
as it has in other surrounding markets, these latest numbers do not bode well for the 
city budget or local economy," Controller Laura Chick said.

Local governments nationwide are struggling with similar problems. Earlier this week, 
a U.S. Conference of Mayors' report on the housing foreclosure crisis estimated that 
nearly 400 metropolitan areas will lose $166 billion in economic activity next year - 
including $8.3 billion in losses in the Los Angeles area.

As the housing market slumps in California, local governments are seeing declines in 
property tax and sales tax revenues, said Paul McIntosh, executive director of the 
California State Association of Counties.

"So most counties are starting to take a look at their budgets in the current year to 
see how they are faring," McIntosh said. "I haven't heard about anybody having to 
make any cuts, but they are certainly concerned about the next budget.

Staff Writer Kerry Cavanaugh contributed to this article.

California Democrats seek special legislative session on foreclosures

By DON THOMPSON
Associated Press Writer

SACRAMENTO (AP) -- Urging swift action to combat a continuing wave of foreclosures, 
Assembly Democrats on Thursday asked Gov. Arnold Schwarzenegger to call a special 
legislative session to find ways to help troubled homeowners.

Assembly Speaker Fabian Nunez called the rate of foreclosures in California a greater 
threat than long-term water shortages or health care reform, the other topics the 
Legislature is supposed to be addressing in special sessions the governor called in 
September.

Lawmakers so far have failed to reach agreement on either of those topics.

"It's a more immediate crisis," Nunez said of foreclosures. "You better believe this 
is the biggest crisis we're facing today."

California was second to Nevada in the rate of foreclosures filed last month, 
Irvine-based mortgage research company RealtyTrac said Thursday. More than 50,000 
foreclosures were filed in California in October, or one for every 258 households.

That compares to a national rate of one foreclosure for every 555 households in 
October.

The foreclosures are the most visible symptom of a state housing market that is 
dropping quickly from the sky-high prices of the past few years. Home prices and 
sales are declining in most California markets, leaving local governments with less 
property tax revenue.

The ripple effects of the housing slowdown are being felt throughout the state's 
economy. The nonpartisan Legislative Analyst's Office projects a $10 billion state 
budget deficit over the next two fiscal years, a forecast that has lawmakers and 
Schwarzenegger concerned.

Nunez, D-Los Angeles, said those economic ripples could cost state and local 
governments $4 billion in lost revenue.

"We need to strike right now while the iron is hot," he said during a Capitol news 
conference.

Assembly Democrats proposed a legislative package that would assist financially 
troubled home owners and ensure strict standards for lenders. The bills would:

- Ban prepayment penalties that are sometimes applied when home owners refinance into 
more affordable loans.

- Increase state oversight of lenders and require them to create a uniform way of 
dealing with delinquent mortgages.

- Require lenders to send homeowners a list of their legal rights and require them to 
employ full-time ombudsmen to address complaints and help borrowers who are in 
financial trouble.

- Restrict some types of loans and mortgage fees.

- Increase the number of credit counselors employed by private community agencies by 
providing the agencies with more money.

The California Association of Mortgage Brokers supports efforts to prevent 
foreclosures and protect borrowers, president Pete Ogilvie said in a statement. But 
he warned the Legislature against going too far and enacting laws that discourage the 
types of loans that have helped thousands of people buy homes.

The bills could go to an Assembly committee next week if Schwarzenegger called a 
special session immediately, Nunez said.

He predicted the Assembly could pass the bills by mid-December, with the Senate 
sending the bills to Schwarzenegger's desk by year's end to take effect immediately. 
Waiting until the next regular legislative session begins in January could delay the 
bills for months.

A fast-tracked process could severely limit input from Republicans, however. 
Republicans in the Assembly and Senate have their annual retreat scheduled for next 
week.

But Nunez said Democrats, who control both houses of the Legislature, could pass the 
bills with simple majorities and thus would not need Republican support.

Threatening to bypass Republicans "is like saying we're not concerned about the 
issue. That's just outrageous," Senate Minority Leader Dick Ackerman said. "There is 
no need for a special session. I think Nunez is doing this to try to get publicity."

Ackerman, R-Tustin, said foreclosures are a serious problem but often result from 
foolish decisions by borrowers and lenders. The Legislature must take care not to 
overreact and harm the long-term lending market, he said.

Schwarzenegger spokesman Aaron McLear said Nunez's news conference was the first he 
had heard of the Democrats' proposal.

He could not immediately say whether Schwarzenegger, a Republican, would agree to a 
special session.

The Center for Responsible Lending predicts California will see about 500,000 
foreclosures from all loans made between 1998 and last year. The Durham, N.C.-based 
consumer advocacy group projects more than one-in-five subprime loans in California, 
or those made to borrowers with shaky credit histories, will end in foreclosure.

In a report last week, the center estimated that California cities will see 180,000 
foreclosures just from loans made in 2005 and 2006.

The Democrats' bills would affect about 60 percent of lenders regulated by the state, 
said Assembly Finance and Banking Committee Chairman Ted Lieu, D-Torrance.

The legislation would help limit practices in the future that helped promote the 
mortgage meltdown.

He also said the legislation should be structured so it applies only to 
owner-occupied homes. In that way, it would not become a bailout for those who were 
trying to get rich quick from soaring housing prices and got stuck with their 
properties when the market began to dive.

"We don't want to help speculators and investors," Lieu said.

The speculators who were trying to take advantage of the market are a big reason for 
the housing troubles now facing California.

In the Sacramento area, for example, investors from the San Francisco Bay area 
flooded the market over the past five years, sometimes buying multiple houses with 
little or no money down.

Their game was to get in and out quickly, buying homes and then flipping them within 
months to take advantage of home prices that were experiencing double-digit 
increases.

Many of the speculators are now stuck, facing mortgages they can't afford and homes 
that are worth less than when they bought them. Much of that speculation occurred in 
new neighborhoods that are now riddled with abandoned homes.

At the same, historically low interest rates allowed lenders to offer risky mortgages 
with low introductory rates that are now resetting, swelling monthly payments. Many 
of the people who took advantage of those low initial rates cannot afford the higher 
payments.

The lending and buying mania of recent years helped inflate home prices beyond 
practical levels of affordability.

Assembly Minority Leader Mike Villines, R-Clovis, said the Democrats' proposals 
should be handled through the regular legislative session starting in January. He 
also said they will not solve the housing market's larger problems.

"What we need is people to be very careful about the decisions they make, and 
companies need to be careful about the loans they make," Villines said.

The Democrats' proposal came the same day Schwarzenegger announced a $1.2 million 
campaign to tell homeowners about options that could help them avoid foreclosure.