Sunday, January 06, 2008

Subprime crisis complicates property appraisals and tax collections; insurers get more careful; asymmetry makes for an unpredictable insurance market

Newspapers around the country are watching the trends in real estate appraisals and tax assessments in view of the subprime and foreclosure crisis. The ramifications of all of this can be complex, and most of it not too good. Typically, local governments appraise property every one to three years, and allow a brief period of appeal with exacting procedures and deadlines. They have tended to disallow foreclosure sales or late “stress sales” (such as those from “we buy homes” sites) as comps in making appraisals. For the Washington DC area, the visitor can read Elizabeth Razzi: “Local Address: Assessment Shock: Know Your Rights,” on p. F1, Business, The Washington Post, Sunday Jan. 6, 2007, here.
The issue may be even more complicated as appraisals are often done in a piecework fashion by independent contractors.

Local governments may fear increased pressure from the touted bond insurance crisis, as one major bond insurance company lost its rating in December (see this blog), and several bond insurers have been “warned.” That could make governments more determined to hold high appraisal values, or to raise rates. In northern Virginia, the picture is complicated by a new law that allows governments to charge more for commercial property, but some observers fear that local governments will be tempted to reclassify some residential or apartment properties “commercial” for various reasons such as telecommuting or the presence of home based businesses – all of which could involve relooking at zoning. Generally, local government officials deny this (although many of them have passed ordinances to authorize the new tax rates as a contingency), but it is hard to tell in the longer run. What’s interesting is the bad karma issue: the foreclosure crisis can affect people who rent and who never had any interest in trying to take out risky mortgages. In a free market, sometimes you have to be your brother’s keeper, just as in the New Testament.

The property and casualty insurance industry is starting to look at everybody, too. We hear a lot about underwriting problems in coastal areas. But now property insurers are sending homeowners in areas normally safer from catastrophes (such as more inland areas in the mid-Atlantic or New England) evaluation forms to recalculate replacement costs of homes. Insurers probably take global warming seriously. They know that in many areas, previously not controversial to underwrite in, there are increased risks of previously unusual super-storms, with hail, ice, tornadoes, and floods along streams and rivers. Hurricane Isabel seemed like a shock to the DC area in 2003 (Dominion Power called it a “giant washing machine” in a letter to consumers), but it may have made subsequent storms less severe by taking down a lot of weaker trees at once.

I would wonder if, in this asymmetric Internet age where all the sudden “reputation defense” has suddenly become a new media buzzword, insurers will look more at personal behavior, and even be tempted to mine the Internet as well as credit reports (for FICO). I hope not, as it was not designed to be used this way in a reliable way to check up on people. Reputation, a subjective concept, is very much in the eye of the beholder.
Yet, simple examples are already known: younger single men pay more for car insurance than young married men. Yes, that’s offensive. But I worry that this kind of thing can spread quickly. Free speech and free markets create two-way streets.

The casualty insurance industry also has a concept of "umbrella" insurance that combines normal property perils with extended liability. It is often offered with automobile insurance policies as well as homeowners. Such policies are not generally available (through normal casualty business) for "entertainers". That gets harder to define or pin down in the Internet age. People have sometimes asked umbrella policies to cover intellectual property liability risks associated with online activity. A few companies have actually looked at a person's activity and agreed to cover it. As a general principle, I don't think it is a good idea to bundle coverage or perils to physical property (or liability for physical injury or property damage) with intellectual property issues, as a trend like this could jeopardize or complicate homeowner's or auto insurance further for everybody.

Update: Monday, January 7.

The Washington Post has a major story this morning by Kirstin Downey, "Prospects Appear Bright for Tax Exemption for Va. Homeowners
Legislature to Consider Bill That Could Offer Rebates of Up to 20%, Easing Rocketing Valuations," link here.
This is a fairly complicated topic, involving the Virginia constitution and amending process, and then follow on legislation by the General Assembly in Richmond, and then further legislation by local governments. Again, during the foreclosure crisis, some governments may not be as able to be generous with breaks for owner-occupied homes. (Generally, it's expected that such legislation will apply only to homeowners who live in their homes.) As the story points out, there used to be a system in Virginia that prohibited charging residential taxpayers less than commercial, until the law last year. Offering further tax rebates could invite political complications, and attempt to regulate further what homeowners or relatives living in the homes can do with their property, particularly in the home-based business area. Pro-business lobbyists may tend to oppose further residential breaks. This sort of thing has been a problem in other states with heavier union interests (California, New Jersey) and may not be as likely in Virginia.

Picture: natural ice sculpture

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