Support our non-partisan non-profit newsroom 💜 Donate now

‘A’ stands for ‘Another risky mortgage’

Marketplace Staff Mar 16, 2007

TESS VIGELAND: Hard to miss the drumbeat of nasty news in the mortgage market this week. The key words: subprime loans. Those are loans made to borrowers with bad, little or no credit. More and more subprime lenders are in deep trouble because their borrowers are defaulting. Fact, this week former Fed chair Allan Greenspan warned all this could seep into the rest of the economy.

Next up: Alt-A loans, just a step above subprime. Chris Mayer of the Columbia Business School is here to explain. Chris, how big is the risk of infection at this point?

I think we’re seeing concerns that that’s going to happen. But I think so far, the evidence has been fairly limited that these mortgages that are a little bit safer than the subprime mortgages are getting into trouble. But there’s at least a little bit of concern of this at the moment.

VIGELAND: I have to say that one of the questions that just pops into your head when you hear about some of these mortgages that we’re giving out where you didn’t have to prove your income, there was no documentation that you had to sign, that sort of thing . . . why would any mortgage company, whether it’s subprime or not, give someone a mortgage without that kind of documentation?

MAYER: The initial idea of no-documentation mortgages was for people who own small businesses, or were conducting the kind of business where they didn’t have easy W-2s where you could verify their income.

VIGELAND: OK. But these subprime and alt-a lenders were giving these loans to people who didn’t exactly fit that profile, where they’re just small-business owners who didn’t want to hand over that documentation.

MAYER: Yes. And I think some of those mortgages have in fact . . . are turning out to be fraudulent. Some of the mortgage fraud involved people who were getting appraisals on their houses for much more than they’re worth. And they’re getting a lot of cash, and that cash is gonna disappear. The second is, I think, a category of people who the mortgage broker was putting down information on their behalf that they might not have fully known or understand. And, you know, there are a third category of people who really were purchasing houses that was a big stretch for them. And I think some of those people are gonna still be OK.

VIGELAND: Why do you say that?

MAYER: For many people, this is their primary residence, this is where they’re living and they don’t really want to lose that house. And the other thing I think which has been lost in some of the headlines has been that many of the banks are working quite hard right now to tray and find payment schedules that are gonna allow those people to stay in their houses. That’s not to say that the banks will do this with every mortgage, but when the bank forcloses on a property, they’re typically gonna lose at least 50 percent of the value of the mortgage. So they have every incentive to work with borrowers.

VIGELAND: One thing that we are starting to see in light of this crisis in the subprime mortgage market is that lenders overall are really tightening up on the credit that they’re giving out. What does that mean for the overall housing industry?

MAYER: I think as long as what the lenders are doing, and what I’ve read so far, is they’re tightening standards such that you can no longer buy a house with no-money down, but you have to put down a little bit of cash and that you’re required to document your income. The fear, of course, is that investors are gonna start really pulling back from anything with the word housing or real estate on it. But I don’t want to overemphasize that, because my sense is we’re not in that position right now and we’re not likely to be there.

VIGELAND: All right, well Chris, thanks so much for your help in deciphering this news that we seem to be hearing a whole lot about this week.

MAYER: Well, nice talking to you Tess.

VIGELAND: Chris Mayer is director of the Milstein Center for Real Estate at the Columbia Business School.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.