Pay me now, and really pay me later


By Jeff Keeling

The go-go days of the mid-2000s housing boom included more than their share of misplaced optimism. I remember writing a column for the Johnson City Press in 2007 about “pick a pay” mortgage loans, which allowed borrowers to structure the early period of their loans such that the principal on their mortgages actually increased.

But hey, why worry, right? After all, the value of their homes was just going to keep climbing in perpetuity, so if a borrower’s 100 percent financed mortgage went from $300,000 to $310,000 in the first year, surely his house would be worth more than that $310,000 by then.

Reality came crashing in on people pretty quickly. “Homeowners” had engineered the lowest possible payments and bought other stuff with the extra money they had available, then seen their mortgages go way underwater. They walked away from those commitments in droves.

Profligacy, greed and, quite frankly, foolishness were exhibited by people up and down the real estate pipeline, from mortgage brokers, banks and investors to far too many buyers who really should have known better. Some buyers were exploited, true, but far too often the “exploitees” could be more accurately described as willing accomplices.

When it came to misplaced optimism and borrowing, though, the practice extended beyond the private sector. Back in the mid-2000s, Washington County needed a couple of new schools. The County Commission at the time went out and borrowed $105 million to pay for those new schools. In many ways, the commission’s behavior in that process mirrored that of many consumers at the time, and today the chickens are coming home to roost.

The good news is that the county has two fine, modern K-8 schools, Ridgeview and Grandview, that should serve us all well for years to come. The not-so-good news is that, until 2019, despite paying $4.9 million each year since 2009 on that $105 million in debt, the county (that’s you and me and our tax dollars) will still owe $105 million on the schools.

That means taxpayers will have paid $50 million over 10 years, essentially, without having knocked that principal down by one dime. Somebody’s getting rich somewhere.

Come 2019, the county’s annual payment is set to rise to $8.35 million a year so we taxpayers can finally begin paying down the principal for those no-longer-brand-new schools. That’s an extra $3.4 million a year, which would require about 12 cents added to your and my property taxes if there weren’t other money coming available as some debt rolls off.

Somewhat like the homebuyers thinking their home’s value would always continue rising, the county commissioners – according to someone who knows – figured that Washington County’s economy and tax base would just keep right on growing by 5 to 7 percent a year, so that by the time those higher payments kicked in, we’d be able to absorb the increased amount thanks to the intervening revenue growth.

There are two things wrong with that logic. First, it’s overly optimistic about economic growth, as the intervening years proved. Second, it’s a bit naïve to think that even if growth had stayed strong, elected officials who had lacked the discipline to structure the debt responsibly would squirrel away any increasing revenues responsibly.

I spent a couple of minutes this morning noodling around on a mortgage calculator, one of the odd things I like to do in my spare time. By my calculations, if the commission in the mid-2000s had done the responsible thing and structured the $105 million debt like a standard mortgage, the payments would have been $6.5 million a year instead of $4.9 million, but the county – we, the taxpayers – would only owe $85 million when 2019 arrived, and our payments wouldn’t be going up to $8.3 million for the remaining 20 years of the loan.

We would have paid $65 million total, $45 million of that in interest, and reduced the principal by $20 million. That course of action would have required more tax revenue up front, though, and who wants to face reality responsibly when you can sprinkle fairy dust on some pieces of paper instead and pretend everything will be just fine?

So now we’re left to deal with the remaining consequences of this decision at a time when significant other capital needs are pressing upon the county. The only silver lining is that a refinancing of the debt should result in a lower interest rate going forward from 2019. That’s cold comfort to me, and it should be to you.


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