Yes, the news on housing worsens

You can't take one more story about falling home prices in Las Vegas.

You've heard it all, from the forecasters at Forbes and Money magazines to those economists at UCLA and National City Corp. The Standard & Poor's/Case-Shiller Home Price Indices, numbers from the Office of Federal Housing Enterprise Oversight, the parade of bleak stats from local firms such as SalesTraq and Home Builders Research -- what else can anyone possibly say about the local real estate market? Prices fell a lot. They're still falling. They're going to fall some more. Yada, yada, yada.

But try to sit still for just one more report. This one's especially important because it comes from a major national mortgage insurer, a company that protects banks from default losses. Keying in on what mortgage insurers think of the local market can reveal just how hard a time consumers might face in obtaining home loans, and it can help predict whether a cold borrowing climate might heat up anytime soon. When insurers decline coverage on specific loan types, the funding well dries up for some consumer segments.

California-based PMI, the country's second-largest mortgage insurer, said in its Spring 2008 Risk Index that home prices in Las Vegas have a 91 percent chance of declining in the next two years. That's up from the 89 percent the company pegged in its Winter 2008 Risk Index from January. Only Riverside-San Bernardino-Ontario, Calif., at 93 percent, shows a higher likelihood of price declines in the coming two years, PMI's report said.

The company's assessment means local home buyers will struggle with stricter borrowing guidelines for the foreseeable future -- probably at least into 2010, said Howard Shapiro, vice president and senior equity analyst at investment bank Fox-Pitt Kelton in New York.

It's a vicious circle that both follows and feeds market trends, Shapiro said.

Mortgage insurers typically eye three indicators to gauge a market's prospects, Shapiro said. They look at mortgage delinquencies, home values and housing inventory. When delinquencies skyrocket, prices plummet and supply jumps, red flags fly. And Las Vegas, with its nation-leading foreclosure rate, its 20.2 percent decline in home prices in the first quarter and a 22,000-home stockpile of resales on the market, is raising more red flags than the Gulf Coast in hurricane season. Hence the battened-down bank hatches.

But when mortgage insurers restrict loan coverage, adverse conditions can worsen, Shapiro said. That's because a tightened market offers fewer consumers who qualify to sop up housing oversupply. Thus does the circle begin again.

So when might the cycle ease up and let in more home buyers?

Representatives from PMI and Wisconsin-based MGIC, the country's biggest mortgage insurer, said their companies don't publicly discuss time horizons for loosening reins on loan coverage.

They did disclose the data they'll watch to make their decisions, though. Savvy consumers could mine such indicators for glimmers of an improving economy and the easier credit that could ensue.

Katie Monfre, a spokeswoman for MGIC, said company officials look at least every quarter at the Office of Federal Housing Enterprise Oversight's home-price numbers, as well as pricing and sales figures from the National Association of Realtors, home price and unemployment figures from Moody's Economy.com and employment data from the U.S. Bureau of Labor Statistics. MGIC also conducts its own internal, proprietary analysis of how loans perform from market to market.

PMI also weighs Office of Federal Housing Enterprise Oversight numbers and unemployment trends, said spokeswoman Stephanie Corns. Plus, its risk index gauges foreclosures, housing stock and markets' housing affordability compared with a baseline year of 1995.

On top of PMI's poor two-year prognosis for Las Vegas, pending changes in mortgage-insurance guidelines show the local market continues to unnerve insurers. Both PMI and MGIC began in 2007 to deny protection on some riskier loans such as interest-only and option-adjustable rate mortgages, and they'll constrict their coverage standards once more before the summer.

In its distressed markets, including Las Vegas, PMI already declines insurance on 100 percent loan-to-value mortgages and limited-documentation loans worth less than $650,000. On June 1, the company will stop covering limited-documentation mortgages altogether in Las Vegas -- a city with a service economy reliant on thousands of self-employed and tip-earning workers who benefit from low-doc loans.

PMI will also lower its maximum loan-to-value proportion from 97 percent to 90 percent, which means buyers will have to come up with 10 percent down payments instead of the 3 percent they could shell out before. Qualifying for a loan on manufactured housing will require a credit score of 660, up from 620 in March.

MGIC, which considers the entire state of Nevada a distressed market, will on June 1 drop loan-to-value maximums on some mortgages to 85 percent, which means a 15 percent down payment. That's down from a low of 90 percent in April. The company will also demand a minimum credit score on a primary-residence loan of 680, up from 620 earlier in the spring. It's lowering maximum loan amounts on primary homes from $700,000 to $650,000 as well.

Even if economic indicators pick up sometime in 2008, it will be a while before the positive signs filter their way into mortgage-insurance guidelines, Shapiro said. Insurers won't relax loan standards at the first inkling of recovery; they'll want at least six months of improved data before they make changes.

"They'll want to see that trends are holding," Shapiro said. "They've gotten burned. Nevada, quite frankly, is one of the worst markets. There were a lot of investor loans there that magnified the downturn."

In the meantime, consumers will find themselves submitting to "traditional" mortgage rules, Shapiro said. Expect down payments of at least 5 percent to 10 percent, plan to provide full documentation of all income and assets and be ready to prove a house will serve as a primary residence rather than an investment property.

MGIC's Monfre emphasized that the company still protects mortgages with relatively affordable down payments of 5 percent, but borrowers will need "a solid credit history" to qualify.

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.