‘You’re getting a glut of short sales’

Well-meaning regulation often results in costly unintended consequences. The 2007 Legislature fell into this trap when it passed a law aimed at preventing another wave of home foreclosures; now that new law is holding back the recovery of the battered Nevada housing market.

Assembly Bill 440 outlawed "stated-income" loans, products that allowed hotel-casino workers to qualify for mortgages based on tips they hadn't reported.

An agreement with the federal tax man allows Strip cocktail waitresses, valet parkers, bartenders and others to calculate their annual tip income with formulas based on where they're employed and the days and shifts they work. As a result, their tax returns are generally nothing more than guesses at their income, allowing most tip earners to take home thousands -- or tens of thousands -- of dollars under the table.

However, these tip earners -- and almost anyone else, from small business owners to strippers -- used to be able to walk into nearly any lender and declare that, yes, they actually bring home much more than the amount reflected on their W-2. Banks would then qualify them for larger mortgages, at some risk to both parties.

"It's always been a nod and a wink with certain segments of our economy on what they make," said Ed Jamison, chairman of Community Bank of Nevada.

This practice benefited both lender and borrower for years, especially when home prices skyrocketed in 2003 and 2004. But when home values began plunging, stated-income loans were among the first to fail, according to Cory Frey, senior loan officer for Southern Fidelity Mortgage.

Lenders that didn't go out of business tightened their qualification standards. But it wasn't enough for an industry to learn from its losses and modify its practices during an economic downturn. Lawmakers decided that thousands of would-be home buyers couldn't be trusted to choose a mortgage product that hadn't worked out for less-responsible parties. The Legislature banned stated-income loans through statute.

So tip-dependent Strip workers who bought homes with adjustable-rate, stated-income mortgages and have excellent payment histories "will not be able to refinance their house just because the loan program no longer exists," Mr. Frey said.

And now that home values have fallen enough to let many tip-earners buy their first home -- the valley's median resale price is down to $235,000 -- these workers are finding they still can't qualify for a loan, even if they have some money for a down payment, solid credit scores and the lender wants their business.

"I guarantee because the cocktail waitress can't get her loan, you're getting a glut of short sales," Mr. Frey said. "Those people that are our core economy, they're going to continue having trouble getting loans."

Which means the valley's inventory of existing homes won't decrease as quickly as it could. Which means the housing industry will have to wait longer for prices to find bottom. Which means the economic rebound the valley so desperately needs is being unnecessarily delayed.

Time and again, lawmakers declare that home ownership is a "right," and that everyone deserves their piece of the American dream. And time and again, they create legislation that makes home ownership more expensive -- or completely impossible. Democrats and Republicans share the blame here. AB440 passed both houses of the Legislature unanimously, and GOP Gov. Jim Gibbons signed it into law.

Tip-earners still have one painful option to improve their chances of qualifying for a loan: properly declaring all their tips, and paying federal income taxes on them.

But with food and energy prices rising, sending thousands of dollars to the black hole of the federal treasury just to be able to buy a home isn't a choice many people can afford these days.

This is one hurdle the economy shouldn't have to clear. In 2009, the Legislature needs to remedy its mistake by repealing AB440 and giving credit-worthy tip-earners and lenders the freedom to enter contracts that carry risks both parties deem acceptable.