Hard-money lenders face uncertain future

To put a twist on rock singer Huey Lewis' hit, the heart of hard money is still beating -- but just barely.

Hard-money lenders, sometimes called private lenders, solicit money from individual investors to make short-term mortgage loans backed by real estate.

Hard-money lenders, like the developers who borrowed from them, benefited from the boom in real estate. However, developers and lenders were hammered when real estate values crumbled in the wake of the subprime residential mortgage crisis.

The Mortgage Lending Division estimates that 90 percent or more of the loans made by hard-money lenders during the boom times are now delinquent.

At the end of June, hard-money lenders in Southern Nevada had 506 delinquent loans totaling $1.6 billion, according to the division. The loans were 60 days past due or longer, excluding those that have been foreclosed. During the first six months of the year, hard-money lenders in Southern Nevada originated 126 loans totaling $29 million.

Contrast that total to the 120 hard-money loans totaling $286.2 million that were made in March 2007 alone, just before the collapse of the real estate sector.

The area has 12 hard-money lenders who made no loans during the first six months of the year.

Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, predicts that both the local real estate and hard-money lending markets will recover later, rather than any time soon.

The local economist does see some signs of economic improvement nationally.

"(But) I don't see things in Las Vegas picking up until the national economy does," Schwer said.

He said the local real estate sector may never bounce back like it was.

"I don't think (real estate businesses) will come back quickly. I don't think it will come back the way it was," Schwer said.

Homeowners are selling houses for less than the cost of new construction, making it tough for builders to justify new projects, he said.

In addition, a large inventory of unsold and foreclosed homes is depressing housing prices, he said.

Other analysts mention two additional factors. Retirees who once received double-digit interest rates from investments in hard-money loans to developers are reeling from millions of dollars in losses.

In addition, hard-money lenders will likely recognize the significance of Tuesday's guilty plea by Joe Milanowski, 48, a former owner of failed hard-money lender USA Capital.

Attorneys for Milanowski negotiated a plea agreement in return for a prosecution recommendation that Milanowski be sentenced to 12 years in prison.

U.S. Attorney Greg Brower issued a statement, noting that his office "will be vigilant in pursuing individuals and companies who abuse their positions of trust to facilitate crimes."

A developer, speaking anonymously, said the Milanowski case could be the final blow for hard-money lenders here.

Hard-money lenders, who treat investors' money like it was their own, he said, now must realize that criminal prosecution is a real risk in Southern Nevada.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.