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31A case in point: Leaving the Las Vegas strip, after just a few miles of driving on Interstate 15 on the way to Los Angeles, you will come to the “Blue Diamond Road” exit, which takes you west toward the mountains. Within five miles, you will run into what was at one point the fastest-growing master plan community in the United States: Mountain’s Edge. Intended to hold 12,000-plus homes, along with a network of schools, professional offices, restaurants, and neighborhood shops, the community was a model for Las Vegas’ growth. Development started in 2004, with home prices appreciating more than 50 percent per square foot in the following two-and-a-half years.
64 Mountain’s Edge outside of Las Vegas represented the sweet spot of the new business model of the GSEs. With median home values at $450,000, down payments as low as 8% still potentially qualified for the conforming mortgage limit of $417,000: the one rule that the GSEs were subject to without exception. While the LTV ratio of 80% was also hard wired, a little credit enhancement in terms of private mortgage insurance on top of the mortgage enabled the GSEs to securitize the mortgage. And then FICO scores below 660, or low documentation on the income front – well, that was between the regulator (OFHEO) and the GSEs. The GSEs were becoming just another non-prime mortgage lender. By early 2008, Mountain’s Edge of Las Vegas had become a poster child for the troubles of the housing market. With only two-thirds of the homes completed, mega-grocery stores half finished, and construction not yet begun on local parks, Mountain’s Edge resembled other communities stretching from Stockton CA to Phoenix to Miami. As an illustration of the problem: At the peak of the crisis, in February 2009, 57 homes in the Mountain’s Edge community were sold from the group of homes that had also been sold in 2006 -- the peak of the “housing bubble.” The average drop in price for these homes was a staggering 48 percent. With homeowners’ committing very little equity to the underlying values of these homes, almost all of these losses were borne by the creditors -- the biggest of which were most likely the GSEs. More broadly, national house prices peaked in the late spring of 2006. Since then, they have fallen back to levels not seen since 2003. Specifically, the 10-city Case-Shiller index fell from 227 in April 2006 to 152 in May 2009. The three-year 40% decline is by far the largest on record. The previous decline, which started in 1990, also lasted three years but was only 9% from peak to trough. The states of Nevada, California, Arizona, and Florida were especially hard hit. Las Vegas, Phoenix, Miami, and San Francisco saw declines of 60% or more. The Freddie Mac conventional mortgage house price index shows a more modest 17% nationwide decline.