KAI RYSSDAL: It’s a company called New Century Financial. Based right here in Southern California. And it’s on the undesirable edge of the unraveling of the subprime mortgage market. Developments have been a couple of weeks in the making. Coming to a head today with more than one analyst speculating New Century might well be facing bankruptcy. New Century’s far from the first lender to run into subprime problems. Yet investors didn’t seem to notice until quite recently.
And now they’re asking how the industry got in such a mess in the first place. Step by reality-ignoring step, as Marketplace’s Steve Tripoli reports.
STEVE TRIPOLI: Just days ago former Fed Chairman Alan Greenspan said he’s worried that investors have become too complacent about risk. The current meltdown in the subprime lending industry has become an object lesson in what he was talking about.
Analyst Matthew Howlett says much of the problem was that subprime lenders played too fast and loose.
MATTHEW HOWLETT: I think they just pushed the envelope a little too much in terms of underwriting standards, some of the affordability/exotic mortgage products that were introduced into the subprime space just simply didn’t belong in the space.
By exotic he means high-risk. Consumer groups have been howling about subprime lenders for years. Debbie Goldstein of the Center for Responsible Lending says mortgage companies like New Century were willfully blind to the risk of their loans.
DEBBIE GOLDSTEIN: What New Century was doing was qualifying borrowers for adjustable-rate mortgages, based on an introductory payment that they knew would adjust at the end of two or three years to a much higher payment that the borrower would not be able to afford.
Why would New Century do that? They were counting on those homebuyers being able to refinance. But that gets a lot harder when housing prices flatten or drop. The subprime lenders took their fees and acted like a down market would never happen.
And they had accomplices. Analyst Matt Howlett says global investors awash in cash were chasing any attractive-looking commercial lending deal they could find — what the industry calls “paper.”
HOWLETT: They wanted paper. These deals were well oversubscribed. You couldn’t place enough paper to investors.
Now comes the fallout.
HOWLETT: It could get ugly. Subprime is going to be done for a long time. Underwriting guidelines need to be tightened dramatically, and it remains to be seen how much distressed assets will be out there.
The hard-to-swallow part is that many folks who drove these companies will walk away wealthy. And a lot of folks who just wanted to have their own home will be wrecked.
I’m Steve Tripoli for Marketplace.
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