The other subprime
KAI RYSSDAL: If analysts are to be believed, we’re a step closer to the first bankruptcy to come out of the subprime mortgage meltdown. New Century Financial cut its ties with the mortgage giant Freddie Mac today. That takes it out of a huge chunk of the market and could be a prelude to Chapter 11.
Mortgages are getting all the bad press. But other kinds of subprime borrowing are just as common. In everything from credit cards to fast-cash, more Americans are paying more for their loans, as Marketplace’s Steve Tripoli reports.
MUSIC: Under pressure.
STEVE TRIPOLI: The applause was subdued and even stunned during the closing credits at last week’s Boston premiere of a new documentary. “Maxed Out” takes a bleak look at the personal debt explosion that’s leaving many Americans “under pressure.”
After the screening, viewers stop to discuss what they’ve seen in their lives. Jill Richard of nearby Medford was first.
JILL RICHARD: I went to get a mortgage originally for my house, and they said it was gonna be a certain percentage. And then it seemed like by the time the mortgage came out, it was like 2 percent more.
A therapist who counsels college students says many struggle with debts they incurred without their parents’ sign-off. She asked not to be named.
COLLEGE THERAPIST: I mean they’re depressed, and they’re working many, many hours in addition to going to school full-time.
Kathleen Kolar of Boston tells of a friend who got into trouble charging her anti-depression drugs.
KATHLEEN KOLAR: She came to me one day and said “People are calling me day and night about the money that I’ve spent on paying for these medications.”
It’s easier than ever to borrow these days, but not nearly as easy to get low-cost credit.
Longtime legal services lawyer Diane Thompson serves the counties around East St. Louis, Illinois. Urban or rural, Thompson says all kinds of subprime lending flourish in those communities.
DIANE THOMPSON: One very prevalent form are subprime credit cards. Another very common kind is subprime car financing. Title loans, people borrowing money on their car titles. A lot of payday lending.
The common denominator is high fees and interest rates, often between 100 and 600 percent a year. Thompson says a single small loan can trigger a cycle that has people paying many times the amount borrowed.
Could East St. Louis be some kind of rare, subprime hotbed? Not by a longshot, says Kathleen Keest at the Center for Responsible Lending.
KATHLEEN KEEST: We can find it everywhere.
Her center tracks subprime lending nationwide, and its researchers often testify before Congress.
Keest says mortgage and non-mortgage subprime lending has mushroomed. She says there’s been a radical change in American lending practices in a single generation.
KEEST: Twenty years ago, if anyone said that people would be arguing that 360 percent small loans were defensible . . . or 10 years ago if you said that there’d be an entire, billion-dollar industry, which is what the payday loan industry is, I think people would think you were nuts.
The explosion in payday lenders — who advance loans against the borrower’s next paycheck — shows just how quickly the subprime sector has grown. A University of California study says these lenders have added 22,000 U.S. stores since 1990. By comparison, Starbucks has opened just 8,500 outlets since then.
So, why has so much lending — credit cards, car loans, fast cash — gone subprime? Alan White researches the industry’s underpinnings at Community Legal Services in Philadelphia.
ALAN WHITE: What’s happened, because of deregulation and the free flow of lending capital through the securities markets, is that there’s all this capital chasing American consumers. And the result of that has been riskier, higher-priced credit chasing out more prudent credit.
White says high-priced credit displaces regular lending for several reasons. First, it’s lucrative. And it’s fed by worldwide investor demand for lenders’ securities. That demand floods markets with cash to lend.
With loads of new cash, lenders loosen standards and aggressively market credit. Like the six billion pre-approved credit card solicitations mailed out in 2005.
Looser lending standards add risk. Alan White says the subprime push then starts feeding on itself, stoking ever-higher rates on a given individual’s loan.
WHITE: And it becomes subprime, not because the individual has changed, but because the amount they’re borrowing has pushed their debt ratios to the point they can’t qualify for conventional credit.
If the high-priced loan becomes a problem or if payments are late, which happens more these days, the borrower’s credit rating suffers. That makes their next loan more likely to be subprime. And on it goes.
In an upcoming story, we’ll hear from those who say subprime lending has helped lots of people. And we’ll examine the impact on those it hurts.
I’m Steve Tripoli for Marketplace.
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