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January 31, 2015

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We may need to rebuild Las Vegas — literally

The good news is creeping back into Las Vegas. So why is everyone still so gloomy?

Like everyone else, I am always heartened when MGM Resorts International and others report that they think Las Vegas is starting to bounce back, however slowly that might be happening. MGM’s numbers show tourism is rebounding, room rates are inching up and occupancy rates are rising.

That kind of news is so welcome amid the kind of news we have had to live with every day for the past three years. It is, however, just one indicator that this city, which fell victim to a most depressing recession that has the entire country in an economic tailspin, may be starting to come back.

Another indicator of economic health and vitality was the subject of a meaningful discussion I had with one of this city’s more well-known hotel owners this past week. I am not going to identify him because his name is not important to the story. What he says, how he feels and the observations he makes are. Besides, he is a longtime Republican who, if his views were known, would be shunned by those who control his political party. It is not my place to bring such good fortune upon him.

His question, in a discussion about the future, was “How do we fix this economy, specifically the housing crisis in Las Vegas, because this is really bad for our people.”

I know, I know, that doesn’t sound like a modern Republican talking. It sounds more like the Republican of yesteryear who cared about fiscal responsibility but also cared, often more than his Democratic colleagues, about the growth of a strong and vibrant middle class and, frankly, for those at the bottom of the economic ladder. Yep, that’s my friend!

In any event, the discussion went like this: My folks come to work every day, and I fear that the best time they have in their lives is when they are working because when they go home, there are bills they cannot pay, children who need help they cannot give, shoes they cannot buy and a future they can no longer see for themselves and their families.

I know, I know, it doesn’t sound like a modern Republican talking.

He followed that concern with his overarching worry: What are we going to do about the housing crisis that is at the root of this malaise? People are so far underwater in their homes that they are either losing them, or are in so deep they can never get out and are watching their values slide every day. And it is not their fault.

All that is true. Save for a few who overextended themselves at the worst time in modern history, the overwhelming majority of homeowners in Las Vegas are underwater and all they did is what everyone told them to do — their government, their bankers, their personal advisers — they bought homes by signing mortgages.

Today, those mortgages are worth more than the equity in the homes because everything has dropped so far in value. And, each time a foreclosure or short sale happens down the block or across the street, the value of homes in the neighborhood drops even more.

And that, my friend says, causes a most depressing state of mind. And that is the way his employees come to work. How can he possibly expect them to smile, and mean it, when a guest comes to town? If his team members are in a bad mood all day, his profits, such as they are, will also be depressed.

Finally, he is talking like a Republican!

I told him I had been hearing bits and pieces of what could be a very bold idea. So I improvised on the way through it.

We bailed out the banks and Wall Street, which most people will agree, grudgingly, averted a far worse financial calamity. So why not bail out real people, the folks who live and work in neighborhoods across America? And why not start in Las Vegas?

The federal government — yes, it has to do this because it is the only entity that can print the money — can create a program in which every bank that owns a mortgage on an underwater home would mark that mortgage to market. For example: a home-owner who bought a home for $300,000 and had a $240,000 mortgage on it. In today’s world, that home is now worth $150,000, and the mortgage is still hovering around $240,000.

Under this plan, the bank would lower the mortgage to $150,000, reset the interest rate to market, and both bank and homeowner would move on. The bank would have a mortgage secured by a home of appropriate value — removing the toxic asset from its balance sheet — and the homeowner would have a chance at a future. Happiness all around.

How that is paid for I will leave to the experts, but I am confident the folks who figured out how to save and grow the car companies can figure out how to save a few million Americans from financial oblivion.

The second part of the plan, especially for Las Vegas, is bolder yet. We have thousands of empty houses in Las Vegas because they haven’t been sold and can’t be rented. And the prospects for growth in the next few years are so murky that we can’t project when there will be enough new residents to use up the supply adding to depressed home values.

Here is where the government comes in, again. It creates an incentive for owners of empty homes — where it makes geographic sense — to raze them. All of them!

The result: Those who owned the homes would own the land where they once stood, land that will be worth substantial money when Las Vegas returns to a growth model, albeit a much saner one than the past 60 years.

With an equilibrium reached immediately rather than over a decade or more, the law of supply and demand would be engaged. Home prices would start to rise, and people in homes without equity would soon see that equity start to grow again.

And, here is the kicker. As Las Vegas starts to grow again, whenever that is, those who own the land will be able to hire — you guessed it — construction workers to build homes for the people moving to town.

Everybody makes money! My Republican friend liked that idea, too.

I watched him as the idea sank in. The plan would require the federal government’s help, which he would normally be against. But, he agreed, if President Barack Obama and Sen. Harry Reid could pull off this kind of pilot program — so that the rest of the country could avail itself of the benefits if it worked — it would really help Las Vegas. His employees would come to work without that depressing pall that hangs over them, which would be good for them — and for business.

It was an idea, he said, he would support, because it is far better than doing nothing. And doing nothing is just plain wrong and dangerous for Las Vegas. That’s what he said.

In the end, my friend did not sound like a Republican or a Democrat. He sounded like an American capitalist and a Nevadan. He sounded sane and, frankly, like the kind of person this city needs to help it survive.

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  1. Here is the problem inside the problem: If the banks voluntarily do what you propose, the insurers -- the folks who actually insured the mortgage or issued something called a Credit Default Swap (which is the totally unregulated version of insurance) aren't obligated to pay the banks for their loss. So that loss from rewriting mortgages comes straight out of the banks' capital, which for most banks puts them out of business. As it stands right now, the banks and the investors in the securitized loans have their losses covered (provided the insurance companies stay solvent and the Credit Default Swap counterparties can actually pay off any losses). The homeowners have a home, which may or may not go up in value depending on population growth, economic growth, and supply and demand. Just because it is cold now doesn't mean summer will never come again.

  2. Respectfully, this is similar to what I proposed years ago (search my comment history and you will find it). I'm not a fan of bailouts in general, but if there was going to be massive bailout (and there was indeed) I suggested that instead of bailing out banks directly, the Federal Governement simply "reset" the housing market as follows:

    1. Create a team of appraisers to reappraise every mortgaged home in the US.

    2. For any home underwater (as most were), pay off the difference.

    3. Refinance every home with a gov't guarantee (Fannie Mae/Freddie Mac) at 30 years fixed, 5%, no closing costs.

    4. Deny all home loans to anyone who fails to pay these loans, and deny HELOCS to anyone holding them (in other words, you must sell or refinance sometime in the future to get out of the restricted loan).

    Voila! The bailout money kills almost all birds with one stone, making the banks whole AND saving the consumer. I've been asking colleagues for at least two years, if the money was going to be spent at all, why this type of far-reaching bailout wasn't done. Nobody seems to have a financial analysis that suggests it would not have worked better than the banks-only bailout.

    As for your smart Republican friend, let's not forget that both Democrats and Republicans have become divisive economic extremists the past couple years; it takes two to Tango. The voter's answer is to disassociate oneself from any party and vote your conscience.

  3. It's a really nice concept and it does make some sense. Hopefully it would be restricted to actual occupants who own only one home and not investors.

    Of course, I suppose this would have to be a nationwide plan. I live in Las Vegas and naturally, I would want this for my home city, but fairness would dictate that everyone should have an equal opportunity.

    I suspect that there might just be too many people that need this help. So, the amounts involved would be massive.

    Destruction of abandoned homes, while it probably makes sense in some way, would be much more complex. I live in a townhouse in East LV and there are some units that are abandoned but I, for one, would not be happy to see my building partially razed. You would have to find completely unoccupied communities and I don't know they exist. No matter how overbuilt, there are somme homeowners in all of these communities so what do you do about them?

    Most of all, why do we still build more and more houses? One thing we could have done at no cost would be to raise the fee for a water connection to $50K or more to stop the incessant construction that is going on right now. But then we lose jobs......

    Disclaimer: I own my house outright and I have purchased several others as rentals. Every time I buy another one, the price is lower than the one before. It's pretty depressing really....

  4. Rather then raze a single home put a slow growth or no growth policy in effect until all the empty homes are rented. That has proven in other cities across America to raise the value of all homes within that city.

    No, it does not create construction jobs right away but does in the future, which you are talking about anyway since once those homes are full there is then a need for new homes. Right now this valley does not need new homes.

    Problem is when you restrict growth/building on a persons land they feel you have over stepped your bounds and sue for non-use of their land. You can't have it both ways. Either you rebuild this town in a healthy way or a selfish way.

    No elected official is willing to make the hard decisions because the people that elected them will hate them for making things right.

    No matter what is done at this point 50% is going to hate on it. Americans want it their way but they are no longer willing to work and save to have the life they feel they deserve right away. They want it all NOW! That is the true downfall of our country. The biggest problem with America is Americans and their lack of ethics and self responsibility.

  5. Detroit is razing abandoned structures, but there are prerequisites for doing so. The structure has to be considered a threat to public safety, a nuisance, etcetera. Those buildings could be razed without issue. As for razing structures just because they are vacant? No. There has to be other circumstances as well.

  6. James, if you deny loans to those who have missed payments, then you reduce demand and thereby reduce prices, perpetuating the "underwater" problem at new, lower house and loan values. In the meantime, you've killed off the ability of most banks to make commercial loans and ended the ability of small businesses owners to have enough collateral in their homes to finance business loans needed for operations and expansion.

    May I suggest that a better solution might be to have 50 year assumable loans, so that more people can afford to participate in the market? That way, market prices are supported by effective demand for homes. That way the mechanics of the free market help support pricing and keep us out of going back underwater.

  7. Very intriguing ideas!

    Even IF 50% of Americans were against it, well, they don't have to participate if that's how they feel. For the 50% that support this plan, it would definitely make a difference and bring a turnaround.

    There should be a building moratorium NOW. Should any building be permitted, it should solely be on previously built tracts and all utilities must be SUSTAINABLE resources and conservation devices must be installed. Las Vegas is in a DESERT with limited resources, and had overbuilt thanks to the greed and corruption of many--from builders to the Clark County Planning Commission. Don't continue to build new projects without the WATER for starters!!!

    Nevada, and Las Vegas in particular, are used to gambling. This plan is WORTH the gamble!

    Blessings and Peace,

  8. This plan would only help a select population, what about those who paid cash or did not refi and spend the money? They get nothing. The better plan is to reset the mortgages to 50 years with the same balance and let the owners carry the unpaid part of it to their new home if they want to sell or move. This would let people move up or down in housing creating a market, and begin a cycle of activity. The mortgages were signed for, nobody had to take the money or buy a home, so responsibility lies with the homeowner, yet these are very tough times. When home values rise the mortgages will begin to get paid off. There was a government loan program years ago administrated by Farmer's Home, and for rural areas. A person could buy a home at low downpayment and a interest much lower then what was current, the "unpaid" interest was added to the back of the loan making a 30 yr mortgage more like a 40-45 yr mortgage, but the home was affordable.As time goes on peoples' income rising making them able to pay more on the loan. This makes much more sense then printing money, trashing the investors who put up cash to loan these people, is fair to everyone and will spur housing demand making prices go back up naturally.

  9. You've got to be kidding, right? People bought houses for 100K, refinanced them for $400k, took the equity and spent it tax free, and now that the homes are worth $150k you want to forgive $250K that was spent on boats, fancy restaurants, vacation homes, etc. And you want the people who didn't do these things to pay for the people who did? People hate the banks but now the banks are supposed to forgive billions of dollars of borrowed money? Investors who buy bonds or stocks get slammed but nobody forgives them for their losses. Then the banks want to charge a $5 fee for a service so that they can stay in business and keep their employees employed and everybody throws a fit. Some people are upside thru mostly no fault of their own. Many people are upside down of their own doing. Maybe they bought a house for $100K, sold it for $400k, bought a new house for $400K and now it's worth $200K. Do they deserve a buyout? I'm upside on most of my purchases and investments the past ten years. Now I have to bail more people out? People I know who invested in a house simply walked away from their losses. Gee, can I borrow money for stocks and sell them if they go up but just walk away from my debt if they go down? The kind of talk in this article will lead to a recession that will last for decades. The ripple effect would be enormous. Somebody does pay everytime somebody doesn't pay. I just shake my head at this stuff. Maybe you let people who are upside down at a high interest rate refi the balance at a lower rate even if they are upside down but that's got to be the limit. Well, ok, this time I shook my head and responded. Let the personal attacks begin...

  10. "This plan would only help a select population, what about those who paid cash or did not refi and spend the money? They get nothing"

    To start, in my idea above, any price gains on future sales would be taxed at 100% up to the amount paid down by the "mortgage bailout." In other words, if the program bailed out a homeowner with a $180k loan by $30,000 to a new home value of $150k, and then the home was sold in the future for $200k, then $30k of that would go back to the gov't as a "bailout tax" and $20k in the seller's pocket as a gain.

    Homeowners who paid cash and lost value? Perhaps the "bailout" differential could be set aside as a grant, for education or a small business or other such benefit. Just throwing out ideas.

  11. exactly what lightfoot says.

    what about the people that didnt get into mtg trouble? they get nothing? the people that enjoyed the spoils of their own spending get my tax money now? I dont think so.

  12. "James, if you deny loans to those who have missed payments, then you reduce demand and thereby reduce prices, perpetuating the "underwater" problem at new, lower house and loan values."

    Leric, I understand this point, but I don't think I suggested denial of loans to those who missed payments in this instance. I think *everyone* should have benefited somehow from such a program.

    I am a fan of the letting the market do its thing, and as you pointed out, any "plan" is going to have to have an exit strategy to permit the market to take over. The plan needs to be clean, helping people without having the gov't completely take over mortgage loaning forever.

  13. "Las Vegas is in a DESERT with limited resources, and had overbuilt thanks to the greed and corruption of many--from builders to the Clark County Planning Commission. Don't continue to build new projects without the WATER for starters!!!"

    Off topic, but the big, gaping hole in this argument is that the EARTH is an ISLAND with limited resources. The amount of water on Earth is a fixed quantity. It is neither created nor destroyed, just recycled through the ecosystem. And we just passed 7 billion residents on Island Earth -- with 1 billion added in just 12 years.

    This is not a "Las Vegas" problem, this is a global problem. Until we address population, all other eco-causes are moot.

  14. "cmcommish" is missing the point. Unless a person is unstoppably wealthy with global diversification in both types and locations of assets, this problem is going to affect them negatively. I'm a fiscal conservative, and no fan of "bailouts," but you have a large number of people who:

    1. Did nothing fiscally wrong, and perhaps purchased a home they could afford with a good mortgage in 2002, that is now underwater.

    2. Have suffered some form of economic malaise during the recession and have been scraping to meet obligations.

    3. Are getting exhausted -- financially, emotionally, and physically -- from sitting right on the fence of defaulting, declaring bankruptcy, and walking away from it all. These are people that would never have considered these actions in the past, but are sensing no other way to resolve their issues; they do not want to sacrifice their own future when they see big business getting help, or declaring bankruptcy. They are losing their "moral reasoning" for standing fast, and when they do that, they are bailed out one way or another by the taxpayer.

    It's better to help now than wait for that collapse.

  15. Just to throw a little more fuel on the fire...

    I know a lot of folks who moved here because they wouldn't have to pay state taxes. Reducing taxes was a huge reason to move here. Now the same people who distained taxes are asking for those who do pay taxes to bail them out. Perhaps just another irony that created the local mess.

  16. Nobody wants to pay on a $200,000 loan for a property worth $70,000 but people do have to live somewhere and there will be a housing expense you have to pay whether you rent or own. Rewriting loans to current cheap interest rates and making the payment 33% of gross income while adding the balance to the back of a 30 yr loan is the best way to go. It allows people to stay in their home. If someone wants to sell that back end portion would be added to their new loan so to provide mobility and spur home buying among different groups of people, ie, those to retire, those needing bigger homes for growing family, transfer to a new job, change vacation homes etc. It is kind of like a student loan, it follows you until paid but not a burden on your life. The housing market could change very quickly if people were allowed to move, and it would correct the imbalance of pricing.

  17. "The housing market could change very quickly if people were allowed to move"

    There may be some serious validity here; immobility is antithetical to the United States, and particularly to a place like Nevada and Las Vegas. Being immobile makes Americans feel trapped.

  18. "The housing market could change very quickly if people were allowed to move"

    This is exactly the correct stance to take. When people are not upside down on their mortgages, they can sell their house and go live somewhere that is more amenable to their current income level - an apartment or condo rental or whatever. They can move to a different city where they might find employment. A person who can afford their house will move in, and things are right in the world.

    But when people are upside down, they cant move out, they just get foreclosed on. And that process takes forever between the volume of them to go through and the mediation requirements, its a long ways from stopping payment to a new family moving in. And that is the problem. I'm not saying just throw people out willy-nilly, rather a two pronged approach...

    1. Mark to market, with the new loan at the incredibly low rates we have now. Banks get 94% of the proceeds from any future sales until the money lost on the mortgage balance is recovered (why not 100%? realtor's fees!). So a house financed at 320K and current balance of 280K, which is now worth 170K would get refi'd at 170K at the going rate, and whoever took the 110K hit would receive 94% of future profits from the home. So if prices rebound and the house sells for 250K in 2017 or 2020, the bank gets just about all the profit above 170K, or 75K. The only exception is for major home additions that improve value (replacing a roof doesn't count, but adding a new addition, or solar panels to the roof or electric car chargers in the garage does). The difficulty going this way is that the homes are less attractive on the resale market. Long-term homeowners and cash-up-front investors might not mind, but people who move every few years would rather buy a house where they get to keep the appreciation.

    2. Mark to market, and unsecured loans for the difference. This is a bit more simpler, but the problem is that its an unsecured loan. Maybe they make it like student loans where they aren't dischargeable in bankruptcy. Selling the house would be what initiates the action - the person has to pay back the rest of the balance on a new loan financed over 5, 10, 15 or 20 years. Knowing what they have to pay to cover the old balance - they can factor those payments into whatever lifestyle they can afford from that point forward.

  19. Also the idea of demolishing homes is bad unless its a hazard. If you must, then get rid of the foundation too, and turn it into a community garden. Let the community come together and grow their own fruits and vegetables.

  20. Enjoyed the editorial, Mr. Greenspun.

    I am very confused about one thing in your editorial.

    You mean to tell me there is an actual voting member of the Republican Party out there that actually makes sense? One that don't toe the party line stupidity?

    In the modern day Republican Party, that kind of thinking is definitely not a requirement in order to hold public office.

    I can understand why he/she remains nameless though.

    Because if the person you talked to were revealed in the light of day, that person would IMMEDIATELY disappear underneath a dogpile of other ultra-conservative Republicans jumping on him/her in a ravenous feeding frenzy of right wing nutballism.

    And if that person were actually an elected Republican official, they would immediately be crucified and slapped out of power through a primary from an even nuttier one at the earliest possible moment.

    The longer the Tea/Republican Party holds America hostage and doesn't perform and do what the hell they are supposed to be doing, the more the movement grows that will totally obliterate them in the polls in November 2012.

    It's guaranteed the American people can't wait for something to be done to fix this economy, but all indications show the Republican Party willingly stands in the way...holding a virtual gun to the heads of all Americans.

    Their efforts to protect the too big to fail entities will hit a brick wall when they meet the people out here...who will let them know we are too numerous to ignore.

    Republicans don't lead nor govern. They only hold hostages and perform like a protest movement.

    The longer they do this, the worse it's going to be at the next elections. The people out here will exact retribution and vengeance at the voting booths. Mark my words.

  21. The negative balance is the key to fixing the mess, but should not be forgiven. I propose Obama set up a direct government funding operation that turns upside down homes into regular financed homes. It would work like this: You owe 300,000 your home is worth 100,000. The federal government pays your bank 200,000 and the bank re-fi's the loan to current market and rates. You now have a loan with the government equal to the underwater amount. You pay this loan, with interest set at T bill rates back to the government based on your gross income as the starting payment point. Every 2 years your income/ home payment ratios are evaluated to raise or lower your payments. This allows you to sell and move to your next destination, as the underwater part is a loan that moves with the person, not the property. You can buy another home and realize the gains that will ultimately come. I realize some people will ultimately fail on payments, like student loans or SBA but this gives people a chance to keep their credit and dignity. This is not a bail out but a package deal to bridge a much needed gap. If packaged right the loans could be sold to funds meaning less government cash involved.

  22. I bought the least expensive home I could find at the worst time. I owe $180k in a neighborhood where homes are currently listed for under $30k. I didn't take equity loans. I bought what my income (at the time) allowed. I lost my 18 year manufacturing job 2 years later when they closed and now make 1/3 less. I've got "too many assets" to get any restructuring from my lender and I can't imagine there's a chance I'd be able to short sell.

    Not everyone was greedy with equity.