Is Hurricane Harvey's Next Victim MUD Bonds?

  HOUSTON, TX - 09/12/2017 (PRESS RELEASE JET)

As people work through the wreckage of Hurricane Harvey, more damage may be on the way, and it won’t come in the form of more rain.

Investors in municipal bonds may be in for a surprise if they see credit ratings begin to downgrade and the potential for default appear in their portfolios. “It’s too early to know the extent of the damage and how far the tentacles will reach, but investors should be aware of how these vehicles operate and the possible implications,” says Gil Baumgarten, president of Houston-based Segment Wealth Management.

“The Texas municipal market in general will not feel the effects of Harvey,” says Baumgarten. “It is specific municipal utility district bonds and water control and improvement district bonds (MUDs & WCIDs) that are likely at greatest risk.”

Homes with outstanding mortgages that are in the special flood hazard areas are generally required to carry flood insurance which helps soften some of the risk, says Baumgarten. “However, homes that are already paid off may not have been carrying it when Harvey hit and most families don’t have the resources just sitting around to completely rebuild their home.”

Baumgarten explains that under extreme circumstances this could lead to mass abandonment and unfulfilled obligations on property tax payments. This could also lead to rising tax payments required of other homeowners within the district who did not flood or who carried adequate insurance, he adds.

“Clearly, this could be problematic for some municipal bondholders,” says Baumgarten. “If you own bonds in one of the many affected MUD districts throughout Houston, it may be worth a call to your financial advisor so that they can check on the risk level of your bond. We’ve done the research for our clients and have opened up the discussion about where to go from here.”

Segment Wealth Management is Houston’s seventh largest wealth manager with more than $1 million investment minimum according to the February 2017 Houston Business Journal. Gil has been named by Barron’s magazine as one of the 50 best advisors in Texas and most recently as one of America’s top 1200 Financial Advisors, while the Financial Times has named him one of the 300 best advisors in America. Segment is located at 3040 Post Oak Blvd., Ste. 1725. For more information, please call 713.800.7150.