State plan could ease pressure of ‘tsunami’

By David McGrath Schwartz

Thursday, Oct. 23, 2008 | 2 a.m.

In May, Gov. Jim Gibbons’ administration saw the state’s housing crisis unfolding and tried to come up with a plan.

While other states hoped for a bailout of homeowners facing foreclosures -- a six- or eight-month reprieve in mortgage payments, for example -- Nevada officials thought it was more likely that the federal government would seek to help neighborhoods where banks had foreclosed on homes.

“We could see the tsunami on its way,” said Mendy Elliott, the governor’s deputy chief of staff who was director of the Business and Industry Department at the time. “While other states were concerned about keeping people in their homes, in Nevada people were already not in their homes.”

Sure enough, the foreclosure “tsunami” came. What started with 827 Southern Nevada foreclosures in March grew to 1,462 in April, 2,073 in May, 2,217 in June, and 2,566 in July.

Over those months, the federal government passed the Neighborhood Stabilization Program, which sent $72 million to state and local governments in Nevada.

Under federal rules, the money can’t be used to prevent foreclosures, said Lon DeWeese, chief financial officer for the state’s Housing Division.

“So we want to keep those areas from becoming a blighted situation,” he said.

On Wednesday the state announced its plan to deal with the foreclosure crisis, the first government agency in Nevada to do so. Though the pilot program is modestly funded — $6 million, with possibly more matching funds from local governments — it could provide a framework for governments’ responses to the crisis in Nevada.

The goal of the plan, modeled after a Chicago program, is to put qualified first-time homebuyers in bank-owned houses. The home buyers would get loans from the state’s First Time Homebuyer Program, and the $6 million would be used to assist with down payments or to fix up the foreclosed properties.

Here’s how it would work:

On the one side, the state and local governments, nonprofits and unions would identify buyers whose household income does not exceed 120 percent of the area median. (In Clark County, that would mean a family of three or more would have to have an income of less than $89,460).

The recipients would also be required to have good credit and not have owned a home within the past three years. The individuals would be required to take classes on home ownership and maintaining good credit.

Then, the state would prequalify them for the state First Time Homebuyer Program, which provides fixed-rate 30-year loans.

“Very vanilla,” DeWeese said of the loans, noting that the state program has never had a foreclosure.

On the other side, state and local governments would identify neighborhoods with clusters of foreclosed homes that are owned by a single bank. The state would then go to that bank, get the current appraised values, and ask the bank to cut an average of 15 percent off the values — a requirement under federal rules. In exchange, the group of prequalified first-time homebuyers would purchase the homes.

The banks win because they take the homes off their books. The homebuyers win because they get a house at a reduced price. The neighborhood wins because instead of streets lined with abandoned, bank-owned homes, there are happy residents.

At least, that’s the idea.

Will it work?

Elliott said there are hurdles.

The first is finding buyers with good credit. She noted that after 40 teachers went through a first-time-buyer program for educators, only six qualified.

The second is getting banks to agree to sell homes for less than the appraised values. Remember, banks are likely taking a loss on their loans. A house sold in Las Vegas in 2006 for $200,000 might be appraised at $160,000 now. A 15 percent reduction to that appraised value, $136,000, could give bankers pause.

Kirk Clausen, regional president of Wells Fargo, said he thinks banks will accept the cuts. Clausen headed Wednesday’s meeting of the governor’s Housing Recovery Act Implementation Task Force.

The task force also heard a proposal from Gibbons’ office that after the pilot program is funded, the state’s share of the federal money, $24 million, be divided among the counties based on population. That would provide money to Washoe and rural counties, which did not get money as local governments in Southern Nevada did. (The federal program directed $22.8 million to Clark County, $14.8 million to Las Vegas, $6.8 million to North Las Vegas and $3.2 million to Henderson.)

“Obviously, $72 million is not going to solve this problem by any means,” Gibbons said. “But in a time that money is so scarce, it offers an opportunity to do some good.”