The first, and larger, is made up of all those who, having come of age since the 1978 passage of Proposition 13, will greet the news by asking, “What is an assessor?” The second camp, the graying and dwindling cohort of Californians who predate that famous property tax initiative, will nod sagely and muse, “Ah, yes, the Crooked Assessor. That’s how it all began.”

Before Prop 13, county tax assessors mattered. Before a previous generation of voters locked tax policy into constitutional amber, the property tax was set community by community, in decisions of local officials elected through the ordinary tug and pull of democratic politics.

If you owned a house or business property, your property tax bill was the product of two factors: 1) the tax rates set by your city, county, and school district; and 2) the value the assessor put on your property. Even if the city council or school board raised the tax rate, your tax bill might not go up as fast if the assessor, using his discretion, held down the assessed value of your house or factory.

And that is what assessors did. In California’s great post-World War boom, assessors up and down the state used their discretion to shelter homeowners from a gale of rising home prices and property tax rates.

As 10 million Californians became 20 million, all those new people needed roads and police and parks and teachers and schools. “I don’t think that they’ve built a new schoolhouse in Brooklyn in the last 20 years,” the Los Angeles County assessor explained in 1957. “But we’ve got to build a new one every week.”

Local elected officials, needing property tax revenue to pay for those public goods, had to raise tax rates. They also pushed hard on assessors to produce higher assessments as homes and businesses climbed in value.

But assessors were elected officials, too. Their discretion to set assessments at less than full market value gave them clout. They understood they could not earn their tickets to re-election or promotion by rapidly raising assessments on voters.

So as thousands of working and middle-class families in the late ’50s and early ’60s rallied in protest meetings and trooped off to berate their elected officials for rising property taxes, assessors held back on reassessing homes at higher values. And using their political clout, they pushed back against the efforts of local officials and technocratic reformers to take away their discretion and power to benefit homeowners and favored businesses.

When Russell Wolden, the tax assessor in San Francisco and statewide leader of county officials opposing reform, was asked by state legislators how he assessed businesses, he would say, “Well, let’s illustrate with a good example–the [San Francisco] Chronicle building at Fifth and Mission.” Lawmakers did not need an interpreter to read the subtext: With discretion came the possibility of making powerful friends.

But Wolden had pushed his discretion too far. In 1965 a whistleblower revealed to the Chronicle that Wolden’s judgment was for sale. The whistleblower delivered stacks of files, stuffed with cancelled checks and bribery fee schedules, detailing how businesses that paid Wolden or his partners for “consulting” services got their assessments lowered. Investigations around the state turned up more cases of assessors handing out low-ball assessments to businesses that had contributed to their campaigns or stuffed dollars into their pockets.

Wolden, dubbed the “Crooked Assessor,” went to jail. So did several assessors in other counties. The San Diego assessor committed suicide. The Los Angeles assessor was indicted but found not guilty at trial.

The convictions cleared the way for reformers. Even before the Crooked Assessor became news, the Assembly’s tax committee had uncovered the assessment racket and put together a far-reaching plan, supported by Speaker Jesse Unruh and Assemblyman Nicholas Petris, a liberal Democrat from Oakland, to overhaul the whole state-local tax system to reduce reliance on the property tax. The plan called the system of property tax administration “outmoded, discriminatory, unfair, economically destructive, and regressive,” bad in both theory and practice.

But this comprehensive approach foundered. County tax assessors still fought to keep their power, and Gov. Edmund G. (Pat) Brown didn’t want to kick off his upcoming reelection campaign by raising state taxes to make up the lost revenue to schools and other local governments if the property tax were reduced and reformed.

Instead, in 1966, the Legislature and Brown enacted a narrower bill, AB 80. It required assessors to set assessments at a standard level of 25 percent of market value. The assessors’ discretion was quickly replaced by computers running regression analyses of real estate data to determine how much houses were worth. And those computers churned out something entirely unexpected and unintended: soaring property taxes for homeowners.

As it turned out, the newspaper reports about crooked assessors had left out a key piece of the story: homeowners had been the biggest beneficiaries of assessors’ discretion.

Before AB 80 passed, homeowners in San Francisco were paying taxes on 9 percent of market value while commercial property owners were assessed at 35 percent of market value. Los Angeles homeowners were assessed at 21 percent of value while commercial property was at 45 percent. To protect homeowners (and their own careers), assessors had used their discretion to create an informal split roll, taxing business at a higher rate. By passing AB 80, the Legislature had inadvertently repealed that split roll and required local governments to lower taxes on business and shift the property tax burden to homeowners.

In San Francisco, cars carried bumper stickers with a plea: “Bring back the Crooked Assessor.” It was not to be.

With the economy booming and people still flocking to live in the sun, home prices by the mid-1970s were jumping by 2 or 3 percent a month. And because California had put assessment on auto-pilot, property taxes rode the same upward trajectory, with assessments more than doubling from 1975 to 1978–not just for new buyers but for people who had bought a cheap bungalow decades earlier and now found themselves owning, and paying huge taxes on, a house newly worth far more than they could ever afford to buy on their incomes.

No one ever intended for property taxes on homes to go so high. It happened inadvertently, the result of one of California’s spasms of reform, enacted in the modern faith that rules and experts were a better way to run California than politics and politicians’ discretion.

Instead of returning to the past and to democratic decision-making, with all its uncertainties and occasional frailties, as those bumper stickers in San Francisco urged, California would soon choose the path of even more rules. Prop 13 set property tax rates at a uniform 1 percent and set the assessed value at the purchase price, plus an inflation factor of no more than 2 percent a year.

It thereby removed not just the discretion of assessors (who now matter only in the rare instances, like the recent housing bust, when property prices decline, leaving houses worth less than their purchase price). It also took away or limited the taxing discretion of local elected officials and legislators–and even of majorities of voters. This lack of discretion–and democracy–is at the heart of California’s present fiscal and governance turmoil.

The Crooked Assessor has a lot to answer for.

Mark Paul, formerly deputy state treasurer of California, is co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It.

*Photo courtesy of JefferyTurner.

The post ‘Bring Back the Crooked Assessor’ appeared first on Zócalo Public Square.

But four years on, economists estimate that underwater mortgages are subtracting a full percent from GDP growth–out of two–while entrenching abysmal new norms of unemployment.

So how does it end? As a financial industry friend counseled, “If someone asks when markets will recover, say, ‘A year for stocks, two for the economy, and three years for real estate.’ And if that doesn’t pan out, tell them the same thing next year.” Well, that worked too, for a while. But folks have quit asking.

Wall Streeters aren’t the only one-percenters shrugging for answers. The vox populi, long on hand-wringing and blame-gaming, have been short on solutions.

I’m here to offer one. In the interest of bipartisan comradeship, there will be blood. Shared blood. Call it “Right-Sizing the American Mortgage.” (Can’t ya just see it in backdrop?)

First, try to move on. This is a no-blame zone. Whether you’re a Reaganite blaming Clinton and Fannie or a seething 99-percenter who holds Goldman and Greenspan responsible, we can all concede there’s plenty of blame to go around. And those blessed 2006 market highs are goner than Colonel Qaddafi.

Lukewarm backward-looking fixes–like the modest financial relief in the legal settlement between banks and the states, and the Obama administration’s recently revised refinancing rules–don’t get it done. Merely lengthening the rope for homeowners does not a new solution make. We must redirect the risks and defuse the hazards. The good news? It’s not too late.

Here’s what Obama’s Depression-era salve fails to defuse: How do you give good people an incentive to carry on, without the moral hazard of forgiving the mistakes of the buyers and the banks?

That moral hazard says to us, “Wash your hands of your underwater mortgage, and start over. Leave the keys. Stick it to those sneaky lenders who made you accept a mortgage you couldn’t afford.”

But such a retreat would not only exert a deleterious effect on your personal credit rating. Far worse, if performed en masse, such an evacuation would fatally exacerbate the lenders’ main problem. “Under”-performing loans would devolve into voids, zeros, a tornado of double-wide defaults shot straight through those elegantly hedged portfolios. Wouldn’t that just be the bankers’ problem? Unfortunately, no. Unpleasant is the truth: when lenders and bankers fail, the economy gets hurt too.

Which brings us to the other half of our moral dilemma: the big banks’ reluctance to “mark to market”–i.e. honestly account for–the real-world prevailing value of all those inflated mortgages they’ve been left holding. And denial of reality is understandable, for if any of the Freddies, Morgans, or Citis–operating as they do on rampant leverage coupled with wafer-thin capital requirements–were to acknowledge the stark reality of current home and commercial real estate prices on their balance sheets, they would each go belly up that very day. Which wouldn’t be nearly as funny as it sounds.

So marked-to-market’s a non-starter, leaving the market mire, and the paralyzing status quo: whether you’re a homeowner or a lender, you can’t hope to sell what you’re unwilling to price. And without a price, none of us can move on. The underwater owner stays in his home. The bank holds onto its money. The owner won’t spend and the bank won’t lend and so the economy won’t heal. Someone must go first, but who? You or them? Wait, what? You? Them?

You AND them.

A-ha. Solidarity.

So what if the banks, who live in steadfast denial of the liquid value of these loans, were to act in concert with those homeowners encumbered by same?

Meet each other halfway, like a hostage exchange.

There should be blood. To begin with, each party concedes a 15-percent haircut on their values from inception.

Read that again. First you accept a 15-percent cut on the value of your home; then the lender accepts another 15-percent cut on the value of your home.

So your lingering million-dollar mortgage on a formerly million-dollar house is now an $850,000 mortgage on a $700,000 house. Fifteen plus 15 equals a 30-percent writedown. Sound harsh? Not when compared with reality–you’re already down at least 25 percent from peak. There can be no absolution without penance, and everybody seems to prefer that others pay that penance. And if you’re in one of those markets that haven’t fallen, well, this is an optional game. You don’t have to play. But if you won’t play, you don’t get the lender’s side of the writedown.

And this is the right kind of writedown. Said mutual bloodletting would do a lot to alleviate those perverse moral hazards–you can’t get a break by walking away scot-free, and the bailed-out bankers finally have to pay a price for what they did. The good news is: this plan would split the pain down its middle, relieve capital constraints, unleash Yankee frontierism, and let the invisible hand get on doing its business. The banks won’t be happy, but they can survive, because a diminished mortgage payment is better than none at all. Homeowners won’t have all their problems solved, but they get a nice boost in the right direction.

So here’s where politics takes a smoke break and behavioral economics assumes the conch. We still have to solve the equation of those families who, because of, say, job loss, or regional economic failure, still would not be saved by the above re-valuation. Give them a choice. By that I mean: new life.

Deep-underwater homeowners get an out. Provide them the chance to divorce their misshapen palatial dreams and give back the house, not just the keys. But don’t walk away: right-size yourself!

Right-size your mortgage by enrolling in the plan, quitting your current residence, even your city or region, to relocate directly to a more income-appropriate property, in Promisetown, USA, that’s been similarly relinquished, by a smaller-sized struggler, in our interstate household relief program. With scale-size loan to fit. A patiently coordinated de-escalation.

How might it all look? Imagine a nationwide housing database. Shouldn’t be hard; we’ve already got one. It’s called MLS, and almost anyone contemplating a mortgage has trolled its waters. Suppose back in the salad days you codgered your way into a $600,000 mortgage when it probably ought to have been $300,000. Read on. You’re in luck. Simply come clean, acknowledge your over-reach, and sign up with the program. Now move out.

Simply put your home, along with your outsized payment, back into this MLS housing pool, and pick yourself another property, downstream, with its attendant monthly bill, and move there instead. Could it possibly be so simple? It can. Operation twist and torque worked. No broker necessary, although enterprising agents willing to master this boom will surely encounter lots of For Hiring signs. Ding, ding, and ding.

Oh I know, sounds politically unpalatable, with a new public-private partnership (read: bureaucracy) required to administer this. But it shouldn’t be too much of a bureaucracy, and establishing such a database wouldn’t take much. A Harvard Comp Sci could have this new right-size MLS site programmed and operational within a week. (A Cornell kid would have it up and running overnight.) Dig.

And the bill for this “Public-Private Partnership” would be footed by those selfsame zombie banks that fear nothing on earth worse than having to reacquaint those deadbeat pools with reality. They’d take a loss, yes, as people down-sized. But banks would gladly absorb a one-time payment if it came with legal amnesty for all their sins. Stuck it to ’em after all, didn’t ya?

Sure, the swap may compromise your living space, but the peace of mind, relaxed monthly burden, professional freedom, and reinvigorated economic activity should more than compensate for the loss of capitalist pride.

Just imagine the relief, the empowerment, of going online and selecting the house and mortgage you would’ve been better off taking in the first place. All of this can be yours.

Not to mention the instant vaulting economic relief of an unstuck housing market taking a bold leap forward. The Dow would rally 2,000 points within days (faster than the year our industry friend forecast). Housing inventory levels, currently mired at a dismal 14 months’ supply, would drop dramatically, as cash-strapped strivers accept this second chance lifeline. And the economy would blossom, freed from the suffocating yoke of a housing glut and attendant construction famine.

But above all else, it would keep the dream alive. I’m finished.

Jordan Wallens is a Cornell graduate and author of Gridchronic. He has worked in the investment business for 17 years and lives in Los Feliz with his wife and son.

*Photo courtesy of bbcworldservice.

The post There Will Be Mortgage Blood appeared first on Zócalo Public Square.