Housing Crisis 2007
Tuesday, January 01, 2008SUSIE GHARIB: 2007 will also be remembered as another bad year for the housing market as sales and construction slowed and home prices dropped. Making the situation even worse was a rising default rate on sub-prime loans, mortgages made to people with weak credit. As Stephanie Dhue reports, the resulting sub-prime mess spread far and wide, even hurting the bottom lines of some of the largest financial institutions.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The housing boom peaked two years ago, making 2007 the year when many of the loans taken out at its height went sour.
ANDY LAPERRIERE, ANALYST, ISI: 2007 was the implosion of mortgage lending.
DHUE: When home prices stopped appreciating, the default on sub-prime loans started to go up dramatically. ISI analyst, Andy Laperriere says that was especially the case with loans that required no downpayment or income verification.
LAPERRIERE: It wasn't until home prices stalled and people all of a sudden couldn't do a cash out refinance to just sort of keep the ponzi scheme going, and for a lot of people their mortgage was a ponzi scheme. That's when the music stopped and all of a sudden delinquencies spiked.
DHUE: Sub-prime lenders began to fail. New Century, the second largest sub-prime lender disclosed problems with rising defaults in February. Less than two months later, it filed for bankruptcy. Lenders and mortgage buyers responded by tightening credit standards. Also in February, Freddie Mac put out the word it would no longer buy sub-prime loans that did not verify borrowers' incomes. Freddie Mac CEO Richard Syron said the goal was to reduce home loan defaults.
RICHARD SYRON, CHAIRMAN & CEO, FREDDIE MAC: No one does anyone a favor by making them a loan they can't pay back.
DHUE: The Federal Reserve issued guidelines for stricter underwriting standards for sub-prime loans. At the same time it took a cautious approach to tighter regulations.
RANDALL KROSZNER, GOVERNOR, FEDERAL RESERVE BOARD: We want to make sure responsible lending can get to people who can use it responsibly. Trying to get that balance right is not an easy task.
DHUE: Democratic lawmakers, including New Jersey's Robert Menendez, quickly blasted the Bush Administration and the Federal Reserve for doing too little too late.
SEN. ROBERT MENENDEZ, D-NEW JERSEY: It seems to me we are coming to the table with a plan after a tornado has already ripped through a community.
DHUE: The full blast of the housing storm hit the financial markets in August. That's when it became apparent that many failing loans had been securitized and were sitting in the portfolios of financial institutions worldwide.
LAPERRIERE: All of a sudden nobody wanted those mortgages, and so there was a lot of sellers and not very many buyers.
DHUE: Soon many mortgage backed securities once rated triple-A were downgraded to junk. And major banks and investment houses began writing off billions of dollars in losses. And there was increasing concern the problems would spread to the broader economy. Senate Banking Committee Chairman Chris Dodd called in Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke for an unusually high-profile meeting on the issue.
SEN. CHRIS DODD, BANKING COMMITTEE CHAIRMAN: There are some steps that can be taken right away to minimize this problem from spilling over into other sectors of the economy here.
DHUE: Fears rose that the situation could get even worse with rising foreclosures expected over the next two years as interest rates on adjustable loans reset. To head that off last month, the President announced a plan to freeze sub-prime interest rates at the initial rate for up to 5 years.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATE: We should not bail out lenders, real estate speculators, or those who make the reckless decision to buy a home they knew they could never afford. Yet there are some responsible homeowners who could avoid foreclosure with some assistance.
DHUE: The plan was criticized from both ends of the political spectrum. On one hand, dismissed as setting a bad precedent for government intervention in the free market. And on the other, faulted for not going far enough.
JOHN TAYLOR, NATIONAL COMMUNITY REINVESTMENT COALTION: We need a government finance program that's going to allow these mortgages to get re-written in a way they match the borrowers ability to pay.
DHUE: 2008 is expected to bring increased foreclosures and further drops in home prices. Analysts say that will put pressure on policy makers to do more to help. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
