Plan to help ‘upside-down’ homeowners rejected

State officials on Monday rejected a proposed plan to help homeowners who may owe more than their homes are now worth.

Mendy Elliott, director of the Nevada Department of Business and Industry, outlined a proposal for the Legislative Commission Subcommittee on Lending and Housing to help homeowners who may now owe more than their homes are worth, but she dismissed the idea almost immediately as being imprudent.

Many homeowners in Nevada who bought homes at the peak of the housing market bubble and financed the deals with adjustable-rate mortgages now find their homes are worth less than their mortgages. That's a problem for people who are trying to refinance their mortgages as some of the adjustable "teaser" interest rates end and they see their monthly mortgage bills balloon. They can refinance only the amount of the debt that is secured by the current value of a home.

To help those homeowners, Nevada officials briefly flirted with the idea of floating bonds to finance the portion of the debt that exceeds the property's value. Elliott mentioned the hypothetical example of a house financed with a $260,000 loan but now worth only $200,000. The state was considering issuing bonds that could be used to finance the homeowner's $60,000 unsecured portion of the mortgage so he could refinance at a lower interest rate.

"I don't think that we would be in a position, as the state of Nevada, to take that kind of risk," Elliott said.

The program also would put the state's bond rating at risk, she added.

Assemblyman Marcus Conklin, D-Las Vegas, chairman of the Legislative Commission Subcommittee on mortgage lending and housing, said the state could be left holding the bag if borrowers failed to repay their loans.

Other states are talking about adopting a similar plan, but Conklin said the subcommittee doesn't favor that approach.

"There's no solution" for people who are faced with homes less worth than their home loan, he said.

Former state Sen. Joe Neal also opposed using state bonds for unsecured home loans.

"I see this as a bailout for the bankers association in this particular area," Neal said.

State Sen. Michael Schneider, D-Las Vegas, criticized national home builders and mortgage lenders who helped drive speculative frenzy that helped fuel today's mortgage problems.

"They were just slamming people into these loans, because it was profitable for them," he said.

The nation's problem home loans are concentrated in Nevada, California, Arizona and Florida, as well as Michigan, Indiana and Ohio, said Douglas Duncan, chief economist for the Mortgage Bankers Association.

The last three states have declining economies and populations, but Nevada and the other states encountered a housing bubble and mortgage debacle because homes were built faster than the population increased.

"It probably indicates overbuilding," Duncan said. "You had speculative overbuilding related to a rapid run-up in housing prices, and now you're seeing the reverse of that."

The inventory of foreclosed inventory in Nevada increased to 1.57 percent in June 2007, up from 0.45 percent a year ago.

The association calculates that 42 percent of all loans are adjustable-rate loans, which have rates that change periodically, rather than traditional fixed-rate mortgages.

The value of homes in Nevada declined 9 percent to 10 percent over the last year, "and we expect it to fall further," Duncan said.

Nevada residential foreclosures tripled between June 2006 and a year later, Duncan said. A year ago, foreclosure represented 0.3 percent a year ago. In June, it reached 0.89 percent.

Duncan acknowledged that Nevada's past-due loan percentages are lower than some states. He said some home loans in Nevada were going immediately into foreclosure, because borrowers sometimes never made a payment or committed fraud in getting the loan.

Duncan expected the housing market nationally to bottom out around September next year. It will be the first time housing prices nationally have declined two years in a row since World War II, but he said that projection may be too optimistic, given the weakening economy.

Keith Schwer, chief of the Center of Business and Economic Development at the University of Nevada, Las Vegas, pointed to several factors affecting Nevada's housing market: A decrease in taxable sales, slowing in-migration and higher unemployment. Schwer counted 27,000 vacant homes.

"That represents the overhang that we are going to have to burn off," he said.

Jeremy Aguero, a principal in Applied Analysis, a Las Vegas financial consulting firm, said the news media is creating a bad image of Nevada as a boomtown state that went bust.

"It seems we have emerged as the Paris Hilton of states," he said.

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