From Deseret News archives:
Mortgage crisis felt in city halls
The meltdown is raising rates on municipal bonds
It's already taking a toll on the economy. Now it's looking at your sewer systems, your water lines even your plans to build a new police or fire station could be on the line. Suddenly, some of your city's most stable assets municipal bonds are being threatened by the barbs of someone else's greed. And that threat is going to cost you money.
"The bond market is part of the capital market that's been knocked around for a little while," said John Crandall, executive vice president for George K Baum Co., an investment banking firm that underwrites a majority of Utah's bonds. "The effect is our municipalities are paying more in interest rates because of actions of others and an unregulated mortgage market."
Last fall, a number of banks that dabbled in the subprime mortgage market and offered municipal variable-rate bonds with fluctuating interest rates started to fail. Underwriters started backing away from the variable-rate bonds, and simultaneously, nonfixed interest rates started to skyrocket.
The sudden shift made cities with variable-rate bonds, like West Jordan, where interest rates on a Utah Water Finance Agency bond doubled in one month, start to panic and scramble to replace their bond with a private investor before it was too late.
"If it wasn't for the perfect storm of fiscal distress the national economy has experienced, we probably would have still been using those variable-rate notes," said David Hales, West Jordan finance director. "It's had an impact. Whether it has an impact in the future will depend on what bond rating we can get as a city and whether bond insurance is available."
Bond insurance is becoming harder for cities to come by. Five of the seven bond insurance companies Hales could have gone to in the past no longer have an AAA rating. Those companies fell when they tangled with insuring the subprime mortgage market.
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