Listen closely and you'll hear the croaking sound of nearly 40 subprime mortgage lenders nationwide, including Las Vegas-based Silver State Mortgage, that have either shut down operations, filed for bankruptcy or have been acquired through last-ditch mergers since late last year.
The trend will reverberate through Las Vegas, strengthening Nevada's position as the No. 1 state for foreclosure filings and driving home prices down by 3 percent to 5 percent, said Debi Averett, founder of Phoenix-based Housingdoom.com.
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She said the latest reports about New Century Financial, Accredited Home Lenders and Fremont General ceasing operations signal that housing will continue spiraling downward this year and into 2008.
With the inventory of homes for sale at record highs in both Las Vegas and Phoenix, it's taking longer to sell homes. Some are sitting on the market for six months until prices are slashed.
"Could the subprime lending problem make that worse? Yes, it could," Averett said during a visit to Las Vegas. "One thing I wasn't bearish on enough was lenders. I check (The Mortgage Lender) Implode-o-Meter every day to see which mortgage companies have gone broke."
The www.ml-implode.com Web site tracks problems in the housing finance sector, or as Averett describes it, "a saga of corruption, stupidity and government complicity."
Scott Bice, commissioner of the Mortgage Lending Division of Nevada, said New Century had 317 subprime loans in Nevada totaling $76 million. The company had $6 billion in the pipeline across the country, he said.
Other than Silver State Mortgage, which was stuck with $500 million in closed loans, Nevada companies have been spared from the fallout so far, he said.
"It's really a liquidity crunch," Bice said. "There's no liquidity for these loans. We looked at Silver State and what we found is $100 million loaned to some guys with average FICO (credit ratings) of 707 and another $150 million to guys with an average FICO of 687. Here's the problem. The terms when these loans were made, the characteristics and criteria, were such that you could get 80-20 (80 percent first mortgage, 20 percent second) or 100 percent loans.
"I could give you horror story after horror story over here of a maid owning eight rental properties, a Clark County worker making $30,000 a year who got into an investment club and now she's got a $2.5 million mortgage in her name. At some point in time the purging process will be good for the industry. It'll be painful as we go through it," he said.
There's no way to spin this into good news, investor Gary Anderson of Reno said.
He wants to know how people with low credit ratings -- the target for subprime lenders -- are going to come up with just 5 percent, or $20,000, to buy a $400,000 starter home. And where are people with good credit going to turn when they want to refinance out of their exotic loans?
"We're in for some serious economic trouble," Anderson said. "It is a disaster, the party is over and the fat lady is singing. (Federal Reserve Chairman Ben) Bernanke may lower rates, but the dollar will tank if he does."
Nevada replaced Colorado as the state with the highest foreclosure rate in January after an 8 percent increase in filings from the previous month and a slight decrease in Colorado filings, reported RealtyTrac, an online source of foreclosure information.
Nevada reported 2,397 new foreclosure filings in January, a rate of one new foreclosure filing for every 362 households, or 2.4 times the national average. Nationwide there were 130,511 new foreclosure filings reported in January, up 19 percent from the previous month and 25 percent from January 2006.
"Creative financing, a hot housing market and overloaded speculation are all responsible for the current foreclosure trend in Nevada," said David Stone, president of Nevada Association Services, an agency handling collections for more than 1,000 homeowners associations in Nevada.
RealtyTrac reported 6,900 foreclosure filings in Nevada in the fourth quarter of 2006, compared with 5,600 in the third quarter and 2,300 in the fourth quarter of 2005.
Nevada's delinquency rate for subprime loans was 10.48 percent at the end of last year, up 1.91 percentage points from the previous quarter, the Mortgage Bankers Association reported.
"I think the meltdown on subprime lending is probably going to extend the recovery period for the housing market," John Restrepo of Restrepo Consulting Group said. "People still have memories of the S&L crisis."
Averett, who's not as bearish on the Las Vegas housing market as some experts who are predicting a 30 percent decline in prices, said the fallout from subprime lenders is going to reduce the pool of home buyers. That means it's going to take longer to chew through the 20,000 homes on the MLS in Las Vegas and 48,000 in Phoenix.
Fifteen years ago, you needed a down payment of 10 percent to 15 percent on a home and the mortgage loan couldn't be more than three times your income.
What happened with subprime lending, Averett said, is that someone who doesn't necessarily have bad credit but can't come up with the down payment is able to buy a home with "wild and wonky" financing such as 40-year and 50-year mortgages, nothing down with 100 percent financing, interest-only and option ARMs, or adjustable-rate mortgages.
"They look at home appreciation and figure it won't make any difference because I'll refinance down the road," she said. "With subprime dropping out, now everybody with lousy credit won't be buying houses."
Chris Biaggi, president of Las Vegas-based All Western Mortgage, said his company underwrites many subprime loans for "credit challenged" individuals and he already has one home buyer in contract who won't be able to close escrow because of the subprime fallout.
"You now have lost the ability to finance a certain segment of the home-buying community as they tighten guidelines," Biaggi said. "Anytime you lose product and flexibility, of course it's going to impact us. I think for the new buyers with better credit -- 680 (FICO score) and above -- the world of credit has not changed for them."
Kyle Nagy, director of Comm Cap Advisors, said subprime residential lending will have a ripple effect on commercial real estate markets as mortgage and realty companies close.
