The Hidden Costs of Inflated Tax and Loan Appraisals

There is a hidden cost to artificial inflation of home prices. The tax valuation tends to reflect increases in prices even though the prices are a departure from fundamental lower valuations based upon median earnings or rent. We know that fundamentals will eventually force a correction but being able to spot a bubble does not mean that you are able to identify when or even if it will burst.

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A mutation of lending transactions has occurred with the advent of false claims of securitization of transactions with homeowners. They are false because the loan must (a) exist and (b) be subject to a sale in which the payor receives title to the loan account receivable on the accounting ledger of the buyer (maintained in accordance with GAAP). Wall Street brokers are currently able to offer money to homeowners without any risk to themselves and at a considerable profit. As incentives increase for homeowners to sign on the bottom line, the apparent “cost” of apparent “credit” declines, even as homeowner risks are increased and compounded.
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The brokers are creating concealed transactions in which homeowners are unknowingly “invited” to participate as actors without any possible participation in the revenue or profits from the scheme. If anything they are paying for it — because under the guise of a “loan agreement” they’re forced to pay back the incentive they received.
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Credit is a necessary device to spur economic growth. But overused, credit has repeatedly been the main contributor to booms and busts. In the last 40 years, it has been used to replace appropriate increases in wages and median income. But went the bust comes, as it usually does, the cities, counties, states are left with overvalued properties, and homeowners are paying inflated taxes far in excess of true fundamental valuation. The cost of credit is thus increased while the risks of losing the property are correspondingly increased.
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As for the time of a crash, if any, that seems to be entirely dependent upon how long the Wall Street brokerage firms can keep up or somehow legalize the extra-legal scheme they have devised in which there is no loan account, no lender, no successor and no economic loss incurred as a result of a homeowner not making a payment that is scheduled but not due.
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If they legalize the behavior that they have pseudo-institutionalized, that will mean throwing out many parts of the UCC as it applies to transactions with homeowners or even consumers generally. This will create massive gaps in protection for a controlled, normal dependable marketplace for commercial paper.
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The value of commercial paper will be negatively affected causing a  weakness in credit arising from the uncertainty of the effectiveness of negotiable paper. If virtual creditors are given the same status as real creditors then the holder of commercial paper must discount to the value that reflects the risk that a virtual creditor will come along and collect it ahead of the real holder. Although seemingly an attractive option to maintain the status quo, the continued diminishment of value, caused by both moral hazard and negligence, could most likely produce a crash at a later time.
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If the virtual loan account and virtual creditor are exposed and treated appropriately under current law, asset prices will correct to asset values based upon fundamental ratios with other indices like median income, rent, etc. And of course it possible and I would argue preferable that homeowners receive their fair share of the enormous generation of revenues arising out of each homeowner transaction — something that would reduce Wall Street profits without tearing down the entire “securitization” infrastructure.
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The default problem is not the default of consumers or homeowners. It is the default knee-jerk reaction to upheavals in the market caused by players who are not properly regulated and restrained.  That knee-jerk reaction is entirely based on the premise that losses to consumers and homeowners don’t matter. What matters, within the current paradigm, are losses to future revenues by large institutions. It seems that only politics can change that.
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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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2 Responses

  1. And we did not fix 2008 explosion. Can we do it this time around? Up to this administration. Are they listening? Doubt it. They were around for the last explosion, and did nothing. Anyway – in the words of Paul Volcker – KEEP AT IT. And, watch for that inflation — slowly creeping up, and will eventually rear its ugly head which is difficult to control. Of course, if it does not, then we have significant other problems – which may be even worse. Economists are lost. Guessing. Not good. Crap shoot.

  2. America, according to main media, is experiencing unprecedented “home boom” where property PRICES (not values) go up since Federal Reserve lowered interest rates on “mortgages” so people are lured to buy “more home” as soon as they can because tomorrow homes will be more expensive . All as planned by Wall Street Banks; all like 2002-2006.

    At the same time property TAXES went up dramatically in last 12 months, thanks to artificial increase in property prices.

    And this dramatic increase in TAXES – which went up 50% in some places – created undue burden on ALL communities, not only on new home buyers.

    Increased property prices will cause increases in assessments and insurance costs.

    While the entire economy is falling apart and most people rely on unemployment benefits and stimulus checks to survive.

    Based on my observation of previous facts and statistics, in about 12 months most of new home buyers will be in foreclosure.

    As soon as unemployment ends and homeowners will be left with overpriced assets and under huge burden of draconian taxes and other expenses.

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