Straight Story: Foreclosure victims . . . or not?

Marketplace Staff Apr 20, 2007
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Straight Story: Foreclosure victims . . . or not?

Marketplace Staff Apr 20, 2007
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TESS VIGELAND:
This time, once again, for our economics editor Chris Farrell to help you sort out what’s smart, what’s stupid, and what is the Straight Story. Chris, you know, earlier in the show, we talked to Monique Parker. And she had lost her home to foreclosure. Of course, millions of homeowners now in similar straights with this whole subprime mortgage mess. It’s absolutely terrible. But, I gather, you have limited sympathy.

CHRIS FARRELL:
That’s right, Tess.

VIGELAND:
No tears?

FARRELL:
None. Now, look. Let’s be very clear. I’m angry for low-income folks, especially minorities that resolved risky, complicated and even fraudulent loans. For them, the American dream of homeownership has turned into nightmare on main street. But, and this is where I don’t have any sympathy, for investors who knew what they were getting into. I don’t wanna hear any sub stories. Same goes for speculators that stressed to get a home so they could flip it for a quick buck. Now, instead of easy money, they’re in foreclosure. And that’s fine with me.

VIGELAND:
Harsh.

FARRELL:
It is harsh. But listen, that’s capitalism. Here’s a straight story. Not everyone in this foreclosure . . . is a victim. You know, some people gambled for a quick riches. And they lost their bet.

VIGELAND:
All right. So you mentioned the word capitalism. That’s what we’re seeing here at work?

FARRELL:
Right. I mean, here’s an example. All right. Test ink your subprime lender.

VIGELAND:
No one wouldn’t do what.

FARRELL:
All right? OK, OK, I’ll do that. Chris Farrell. I’m subprime lender. OK, we’ll put it on me.

VIGELAND:
OK.

FARRELL:
I’m a subprime lender. So I’m gonna be issuing these mortgages to people who don’t have very good credit. But I need money so I can make the loans, right?

VIGELAND:
Mm-hmm.

FARRELL:
So I sell some debt. I sell some notes, some bonds so then I have money and then I could lend out. So these note and bonds, we’re going for about, for a one-year note, 13-month note, about 13 percent. Thirteen percent. Money marker mutual funded that times going around for two percent.

VIGELAND:
Yeah. Why wouldn’t you invest in the subprime?

FARRELL:
Well, here’s the thing. Hello? High risk? That doesn’t mean that you’re gonna get paid.

VIGELAND:
All right. So, do a little hedge shrinking for me here. Why is that the people keep getting suck into this kind of speculation? You mentioned we had the dot-com bust. And then, you know, housing, and everybody said this is a bubble, this is a bubble. There are problems here. And yet people still sink their money into what they think and assume is going to be an incredibly high return with no risk. Why is it that we, as consumers and investors, don’t learn this lesson?

FARRELL:
I think what happens is that you believe that you’re, you know, it’s like the Lake Webegon effect. We can’t all be above average. But you believe you are above average. You’re gonna get out before it collapses. You know, it’s going to collapse. At the back of your mind you know you’re taking a high risk, but you rationalize it. And the reason why you rationalize it is because if you make it, you make some real money.

VIGELAND:
So can you tell us what’s the next bubble’s gonna be?

FARRELL:
Oh, here is my forecast for the next bubble. Oh, this is my forecast for the next bubble. The word is private equity. These are the gunslingers. The gunslingers, they have huge work chest. They buy a company with lots of debt. And let me tell you, there’s too much money and they’re not enough smart people in that business. And by the way, the innovators, the ones who built that business? It’s what they’re doing. They’re selling out.

VIGELAND:
Oh, boy.

FARRELL:
To me that says, the next bubble…

VIGELAND:
Run.

FARRELL:
…private equity, run. Be wary when a private equity firm says, hey, don’t you wanna invest with me?

VIGELAND:
All right. The Straight Story from our men Chris Farrell. Chris, I’m afraid I’m gonna have to run away from you now.

FARRELL:
OK. I’ll talk to you later.

VIGELAND:
Thanks so much.

FARRELL:
Thanks.

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