One of those who did not was Warren Buffett.

Warren has plunged in with hundreds of millions of bond guarantees in his insurance company similar to both MBIA and Ambac Financial that went belly up.

It has been blatantly obvious for a long time that the majority of state and local municipalities had over spent and over committed their budgets. Many had issued their tax free bonds for favorite projects such as stadiums and new office buildings. They were not paying any attention to what was happening to the housing market.

The majority of income (usually about 80%) comes from real estate taxes based upon home and commercial valuation.

The subprime home defaults are now dragging down the value of the first class homes creating something called “upside down”. Very simply it means the home is worth less that the amount of the mortgage that was issued by the bank or other lender.

A $350,000 home with a $250,000 mortgage is now appraised at $200,000. Home values are continuing to fall. In this writers opinion they will continue to fall for at least the next 2 years, maybe 5 years before we hit final real bottom prices. There will be brief periods of “up”. Please don’t shoot the messenger. I am not causing this, just reporting it.

It is my opinion (and I know you hope I am wrong as I do) that those who are buying the current foreclosures will end up being foreclosed upon. It is not a pleasant anticipation.

Because of the tightening of credit restrictions the banks are loaning less and less. They have been badly burned and now every piece of paper must be filled out and double checked. No more “no doc” loans. You remember those. Anyone could put any exaggeration on a mortgage application and nothing was verified.

When folks bought those “safe” munis some even bought a guarantee that in the event of default a special insurance would pay the full amount. Now those insurance companies (like MBIA and the one Mr. Buffett owns) are in trouble. They seem to have under estimated the rate of default.

A muni bond holder should check the balance sheet of his guarantor to see the liability to cash ratio. Also it wouldn’t be a bad idea to see the cash flow of the municipality.

Investors should become aware of not only the decreased Mall traffic but also the number and amount of packages people are carrying. There are now more and more empty store fronts. Mall municipal bonds are questionable also.

To find out how businesses are being affected talk to the UPS and FedX drivers. They know.

Unless the economy picks up dramatically municipal bonds remain a questionable investment.

Copyright 2009 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"