Friday, August 10, 2007

Real Estate Market Mess Causes Wall Street Meltdown

The Federal Reserve is adding liquidity into the markets because they are crapping out over credit concerns in the subprime mortgage arena. You get a snowball effect when the US markets closed over concerns, which spread overseas to Asia and Europe, and then boomeranged back to the US markets this morning.

Never mind that the Fed could have prevented the meltdown if they so chose simply by dropping the interest rates on the fed funds rate by a quarter point - but they apparently believe that the markets are overpriced and that the real estate market needs to shake out a bit. So, the subprimes and adjustables are going to continue to be hit hard.

Homeowners who are between a rock and a hard place aren't going to be helped anytime soon by the current conditions. President Bush has said that he isn't going to offer any bailouts to individual homeowners because of their predicaments. Fundamentally, he's right - market forces drove us into this mess, and they're getting us out of the mess because lenders are reevaluating the whole notion of subprime mortgages and no-money-down offers that opened up homeownership for no money down, but those who did so with adjustable rate mortgages did so under perilous conditions - no regard for the ability to pay when the fixed rate period ended with interest rates far higher than they could have anticipated.

Lowering the federal funds rate would provide some stability in the real estate markets, since homeowners in unstable situations could lock in to fixed rate mortgages at a lower rate than we're seeing currently and keep the market from cratering instead of a soft landing one would hope for.

However, it isn't simply interest rates and mortgages that have homeowners worried. Taxes are a big bite out of homeowner wallets. Indeed, in many cases, it isn't the interest rate and mortgage crunch that will drive people into foreclosure, but taxes. Revaluation in Paterson sent tax bills through the roof. Imagine paying $37 a month for an empty lot there last year, only to find that the new tax bill runs $765 per month. That means, instead of paying $444 per year, you're now paying $9,180. That is $8,636 more in taxes paid.

Paterson officials are blaming the situation on the failure to revalue the city for decades because of a lack of political will, problems with the assessment process, and rising property values, but taxpayers are going to be hit hardest because they suddenly have to come up with the money.

The state's property tax rebate/credit program covers only a fraction of that amount. If you want to know what might push homeowners in Paterson into default and foreclosure, it isn't going to be the credit push. It's the taxes.

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