Lessons from the mortgage-default wave
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Lessons from the mortgage-default wave
KAI RYSSDAL: Steve Tripoli’s been following the subprime meltdown for us as well. And we’ve got him on the line.
Steve, you heard Jane’s report on Frances Geary. What is there to take away from her story about what’s happening to people who hold those subprime mortgages?
STEVE TRIPOLI: Well you know, Kai, her story is not typical in the sense that she was a speculator — you know, the vast majority of folks burned by subprime mortgages were just trying to buy or refinance their own homes. But that story does show how subprime lending actually helped pump up the housing bubble, in the hot markets especially like Southern California, or in Florida or Las Vegas. These lenders were throwing money at anybody who would take it, and that by itself drove prices high and left a lot of people in trouble when interest rates went up and prices dropped.
RYSSDAL: Obviously nobody got into subprimes. They didn’t come up with this mechanism on the theory that millions of people were gonna lose their homes. I mean it . . . I would guess it started out as a thing that got more people into homes.
TRIPOLI: Right. And it all began with a conceptually good innovation, and that was when, in the 1980s, financial institutions started buying these pools of mortgages from banks and lenders that made the loans, and the pools were then sold to investors at securities. Now in theory, that’s good. A bank, for instance, doesn’t have to limit its mortgage lending to the amount of money it holds, and it could write a mortgage, sell it to a pool, get fresh money for investors and then even more people got these opportunities.
RYSSDAL: There is a caveat and part of this story . Why did all these people, millions of them, take loans that in essence they wouldn’t be able to afford if conditions changed?
TRIPOLI: Well, this is where the shenanigans come in. You know the risk of issuing a bad loan became detached from the profits of the people who were issuing the loans. The brokers were getting their fees upfront. The people who package these as securities were getting their fees upfront. And that led to sort of this frenzy of marketing anyone to any loan to anyone with crazy standards, even deceptive practices. And some people got into this loans with their eyes open, but a lot of folks had the brokers downplay risk or lie about them. Sarah Ludwig, who works with a consumer group called NEDAP
in New York City, told me what her people have been hearing from subprime borrowers.
SARAH LUDWIG: Many of the homeowners that we work with in New York tell us, “Oh, the broker said don’t worry about it, you’ll be able to afford it because you can refinance later. Don’t worry about it, we’ll falsify your income, everybody does it.” You know, the fact of the matter is that they wouldn’t be able to gouge people and make people loans they can’t afford to repay if people understood the nature of the transaction.
RYSSDAL: The pain spreads, too. Obviously investors aren’t hurting as bad as people who’ve lost their houses. But people who have invested in what appeared to be a booming section of the mortgage industry have lost a whole lot of money.
TRIPOLI: Yeah. You know, a cynic would say this only became a headline when the subprime crisis left Main Street for Wall Street. But you know some of these investors may have their own gripe, which is that Wall Street analysts, who are rating these mortgage-bond packages . . . a lot of these investments were rated as reasonable risks until things actually started falling apart just two or three weeks ago. And that reminds us all of how analysts botched their jobs as dot com stocks went from boom to bust a few years back.
RYSSDAL: Right. And you have that combined with the near certainty of congressional oversight hearings. What are we going to learn, though, in the next number of months that might stop something like this from happening again?
TRIPOLI: Well, we’re gonna learn two things. First of all that, when you hear that this crisis is just 1 or 2 percent of mortgages nationwide — which is true and bad enough — people haven’t realized that it’s many times worse in loads of communities around the country that have really been badly hit by this. And second, we ought to ask how it got so big before we all caught on, including many of us in the news media, because those warnings really were out there.
RYSSDAL: Marketplace’s Steve Tripoli on the subprime story for us. Thank you, Steve.
TRIPOLI: You’re welcome, Kai.
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