Foreclosures spell grief for Prince William

By Cheryl Chumley

Published: October 31, 2008

More foreclosures are on the way and the impact on Prince William County's five-year fiscal budget plan beginning 2010 - federal bailout bill influences to the side - is one of projected shortfall, tightened pocketbook and delayed capital improvement projects.

That's according to presentations from budget, finance, administrative and departmental staff to supervisors at a day-long meeting Friday aimed at clarifying the county's economic outlook in hopes of taking steps to prevent the worst case from

occurring.

At the same time, some good news in the county's housing market is beginning to sprout: In August, 934 homes were sold, compared to 305 a year ago. Put in context, though, the damper is that most of those sales in-volved bank-owned properties, said Chris Martino, county finance director.

The reality is the rate of bank-owned properties has soared to such heights that the method by which housing valua-tions are determined may be changed.

"Unfortunately, we're looking at … over 80 percent of the market is bank sales," Martino said. "Banks are not motivated to drive a hard bargain. Banks are driving those sales prices lower."

In a normal market, the county doesn't figure in the prices of few and far between distressed properties as part of its housing valuations.

"Now those sales are the market," said Craig Gerhart, county executive, and future assessments are going to have to take these low sales prices into consideration.

It's a sure buyer's-priced market that nonetheless leaves the county in a financial crunch. While cur-rent fiscal year numbers estimated residential values would drop 10 percent by 2010, the latest predictions are for a 30 percent drop—and dwindling revenues from real estate taxes aren't likely to disappear from the list of county budget considerations for quite a while.

Nationally, the housing market is at the tail end of a period that saw the resetting of subprime rates and the subse-quent inability of many homeowners to pay. That drove the foreclosure rate; the country faces a similar scenario in the coming months with homeowners who chose optional adjustable rate loans.

This is an example of what's to come, according to Martino: Say a homeowner borrowed $500,000 to pur-chase a home a few years ago. Rather than choosing the 30-year, fixed rate path, this homeowner instead contracted to pay only the interest each month. As such, monthly payments never decreased the principal.

Under such terms, the amount owed would in effect increase each month.

"Interest each month would be added to the principal," Martino said. "So the next month, the loan amount would be $502,000, the next month, $504,000, the next month, $506,000."

After the first five years, the interest rate resets—and it's into this time period that the nation is about to enter.

Homeowners with optional adjustable rates could see their low 2 or 3 percent interest charges suddenly jump by several points. Those without the extra income—the extra hundreds of dollars needed each month to pay the mort-gage—could default and head to foreclosure.

"That's exactly what happened with the

subprime loans," Martino said. "So that's on the horizon and we've been concerned about that. The bailout bill is … tied directly to address this problem. Otherwise, nationwide, this will be another wave of loans that will go bad, go into foreclosure and drive the market down."

Still, the success of the bailout bill depends on the cooperation of banks to release money for lending, and as Super-visor Martin Nohe, R-Coles, said, the legislation did not contain such a mandate.

It's with this in mind that supervisors heard preliminary suggestions for fiscal 2010 tax rates. For homeown-ers, the news ranged from decent to better: not one of the four rates discussed resulted in higher real estate tax bills for residents. The worst that could happen, according to the numbers presented, was that bill amounts would remain the same.

That only holds true if homeowners don't add to the value of their property by building the likes of a garage or a swimming pool, Nohe reminded.

A flat tax rate of 97 cents would lower the average residential bill by 30 percent—the minimum would be 20 per-cent—and the average commercial bill by 10 percent, the numbers show.

"A wonderful scenario for the taxpayer," Gerhart said, "but I think this has some pretty catastro-phic effects" on the county.

At the other end of the spectrum, he continued, was a flat tax rate of nearly $1.39 that could subject some homeown-ers and some commercial entities to increases of 14 percent and "even more startlingly," 29 percent, respectively. The average homeowner, however, would see no change in the tax bill with this rate.

Under the third considered rate, $1.21, residential bills would drop on average by 13 percent, while commercial bills would increase on average by about the same. The fourth rate, $1.13, would decrease residential bills between 7 percent and 18 percent, but increase commercial payments by 5 percent.

Rates were for discussion purposes only, to give supervisors a sense of what effect different rates in this tight budget climate might have.

Staff writer Cheryl Chumley can be reached at 703-670-1907.