For several years now the $8.5 Billion CityCenter project has been hailed as the savior of the Las Vegas economy. The 76-acre project has been called the most expensive private construction endeavor in the world. With a 4,800 hotel rooms, and 2,400 condo and condo-hotel units, it is slated to employ approximately 12,000 full-time workers.
A funny thing happened on the way to financial Nirvana – the real estate market collapsed. Condo sales were expected to total $2.6 billion, but the free-falling real estate market left many doubting whether the condos would be sold at all. MGM Mirage and Dubai World, the project’s developer, decided to take action. In October they announced that prices would be reduced by 30% in an effort to keep buyers already under contract from walking away.
While that was a big step. It wasn’t enough. Banks were reluctant to provide mortgage loans on hi-rise condos because of uncertainties in the real estate market. Without mortgages the units would have to be sold to cash buyers. The prospects looked dim, to say the least.
The New Plan
CityCenter decided to bring in their own lender, Private National Mortgage Acceptance Co. The company, known as Penny Mac, will offer financing to those buyers who can qualify. The twist here is that CityCenter will offer seller financing to those that don’t, with Penny Mac administering those loans.
According to CityCenter officials, the seller financing is only going to be offered to well-qualified borrowers. But if they are well-qualified why would they need seller financing? It would seem that a well-qualified borrower shouldn’t need help.
The developer needed to find a way to sell the condo units. On the surface seller financing seems like a good way to do it. But what happens if the “well-qualified” buyers turn out to be anything but? If the loans are pushed through and given to borrowers who shouldn’t have them they are asking for trouble.
Las Vegas has been the epicenter of the foreclosure crisis. The crisis was caused, in part, by giving loans to unqualified buyers so that they could buy real estate at ridiculously inflated prices. If traditional lenders won’t loan on CityCenter condos because they don’t feel there is sufficient value, aren’t they just repeating the mistake by becoming the lender of last resort?
Those who do not remember the past are condemned to repeat it. – George Santayana