Playlist: Mortgage Meltdown: A Primer on America's Subprime Crisis
This program explains how the U.S. subprime market grew from the post-9/11 rise of easy credit, which was then exploited by predatory lenders; subsequent widespread defaults and foreclosures; the attendant market correction; and the resulting threat of recession. Yale University’s Robert Schiller; BusinessWeek’s Matthew Goldstein; Nouriel Roubini, of the Stern School of Business; JPMorgan’s Bruce Kasman; and Satyajit Das—an expert on hedge funds and credit markets and an adviser to banks around the world—give their views, along with everyday people who, trapped in the mortgage meltdown, have lost their homes. It’s said that when the U.S. sneezes, the rest of the world gets a cold. Will America’s unfolding subprime mortgage crisis prove the truth of that adage? (43 minutes)
America's foreclosed homes show up on auction blocks where speculators snap them up at 30-40% less that people paid for them just months ago. The drop in today's house pricing equals the magnitude of the drop in 1941.
In California, real estate agents were successful during the Inland Empire's huge building boom. Prices more than doubled around 2003. Prices soared along with profits. Financial experts predicted the fall in home prices.
When the Federal Reserve pumped hundreds of billions into banks after 9/11, the banks aggressively marketed cheap money to potential homeowners. Nearly everyone could borrow money. The product? Sub-prime loans.
Automatic re-setting mortgages, or adjustable rate mortgages start off with low rates to entice borrowers. After 2 or 3 years they re-set with a dramatic increase. Nearly two million such loans blew up in 2007.
In the Sun Belt, people lose their homes through foreclosures, or they simply walk away from homes they can no longer afford. Meanwhile, foreclosure auctions attract speculators who "want to make a killing" in real estate.
Satyajit Das—an expert on hedge funds and credit markets and an adviser to banks around the world—explains how global financial markets are invested in American funds. Thus, what happens in America affects the world markets.
The beginnings of the current financial crisis occurred at Bear Stearns whose financial officers would unwittingly sow the seeds of the firm's destruction by betting heavily on the manufacture and the sale of mortgage-backed securities.
In modern capital markets, risk is diffused. Different investors hold different prices of the risk. The American Mid-West, one in 20 homes is now in foreclosure. Many place the blame on predatory lenders.
The brokers who sold sub-prime loans were unregulated and unscrupulous. African Americans were 5 times more likely to get fooled into accepting doomed mortgage loans. Lenders pass off the bad loans immediately to get rid of their risks.
A Cleveland minister asserts that the sub-prime loan bankers simply robbed the people they gave loans to. The disenfranchised of society were the most vulnerable. Banks rewarded brokers who brought them sub-prime loans.
The fallout of sub-prime loans can be seed in Cleveland where whole neighborhoods are laid to waste. Some experts that the city of Cleveland cannot be saved. The worst comes when the ARM loans are reset and serious recession sets in.
America's massive spending spree, fueled by credit, caused many homeowners to refinance with sub-prime loans, thus using their homes like bank tellers. Others were cashed out of their homes. Now, home prices continue to drop.
How pessimistic is America about its economic situation? Long-term trends in real estate indicate that homes increase in value, on average, of 1% per year.