TOPICS > Economy

Making Sense of the Foreclosure Crisis

October 15, 2009 at 12:00 AM EST
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In the latest in a series of reports making sense of the economy, NewsHour economics correspondent Paul Solman examines the ongoing foreclosure crisis.
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ANTOINETTE COFFI-AHIBO, homeowner: OK. They told me the mortgage going to cost me $4,000 every — every month, that I’m going to pay that only for one year. After a year, I can refinance, so I can get a lower mortgage.

PAUL SOLMAN: Antoinette Coffi-Ahibo, a typical victim of the housing crash. Born in the Ivory Coast, now a LensCrafters optician, she lives in a Queens, New York, house she bought new two years ago for $679,000, next to houses valued at far less.

ANTOINETTE COFFI-AHIBO: Afterwards, I find out that I have two mortgage. One was 6 percent and the other one was 11 percent.

PAUL SOLMAN: And — but you didn’t know that at the time?

ANTOINETTE COFFI-AHIBO: No, I didn’t know that at the time, no.

PAUL SOLMAN: But did you read the paperwork? Did you get some…

ANTOINETTE COFFI-AHIBO: It was so many paperwork. I don’t know, but is was a bunch of paper that we have to go through that says, just sign. Everybody here was like that. Everybody has two mortgage, like me.

PAUL SOLMAN: Two subprime mortgages that put her and her fellow immigrant homeowners at risk of foreclosure.

Bobby Darkwah is from Ghana.

BOBBY DARKWAH, Homeowner: To have a house in America is a dream come true. The time I came here, 20 years ago, my dream was to have American dream. And that’s a house, not a car. It’s a house.

PAUL SOLMAN: It’s the story of neighborhoods like this that journalist Alyssa Katz puts into context in “Our Lot,” her sweeping new book on housing in America, that this story can only give a hint of.

ALYSSA KATZ, author, “Our Lot: How Real Estate Came to Own Us”: Yes, Jamaica, Queens, is over there by Kennedy Airport.

PAUL SOLMAN: Katz met us at the Queens Museum’s recent show about the housing crisis — above this New York City panorama from the 1964 World’s Fair, each pink symbol showing a city block with three or more foreclosures, blocks clustered in areas like Jamaica.

ALYSSA KATZ: It’s a bastion of middle-class black homeownership, and a real sign, in a lot of ways, of the success of homeownership in helping families build wealth.

PAUL SOLMAN: The significance of Jamaica is that it symbolizes the larger story Katz tells, good intentions run amok, because, 100 years ago, homeownership wasn’t all that common, until Republican President Herbert Hoover began promoting it in the great boom of the so-called Roaring ’20s.

Targeting minorities

Alyssa Katz
Author, 'Our Lot'
What you essentially had was, you know, companies, lenders looking for growth had to look to black and Latino buyers and refinancers for that growth.

ALYSSA KATZ: Financing was pretty freely available, with the problem that mortgages only ran for roughly five years, and then the payment in full for everything would come due. And when banks were solvent, that wasn't a problem. A borrower could just go back and get a refinance.

But when the Depression hit, not only did banks not have the funds, but the property values had plummeted and were worth less than the amount owed on them, just like now, with underwater mortgages today.

And, so, people went into foreclosure en masse, just millions really just unable to make their payments and losing their homes. So, the Roosevelt administration stepped in with something called the Home Owners Loan Corporation that refinanced the homes, provided longer-term mortgages that the borrowers could pay, and based those mortgages on the actual property values, not the inflated 1920s values.

PAUL SOLMAN: You mean, all the proposals were hearing about today, renegotiating mortgages, modifying loans, lengthening the terms, that was all stuff that Roosevelt originally put in?

ALYSSA KATZ: More or less. The one -- that's exactly what they did. The one difference between then and now is, because the banks had already gone under, because the borrowers already had no more options, it was possible to just wipe the slate clean, do the refinancing, and move on.

PAUL SOLMAN: As the museum show made clear, however, part of government strategy was not to make loans to what are now New York's foreclosure pink zones in fact, in fact, red-zoned for decades.

ALYSSA KATZ: People who lived in cities, and particularly minorities whose neighborhoods were what was called red-lined by the banks, didn't have the option of buying.

PAUL SOLMAN: FDR's new Federal Housing Administration literally drew red lines around declining neighborhoods to which it seemed unwise to lend. The effect was to shut minorities out of the FHA's then cutting-edge product, the 30-year mortgage. Banks honored the red lines as well into the late '70s. Then came the housing boom.

ALYSSA KATZ: At that point, 75 percent of white American households, white-headed American households, owned their homes. And the rate for black-headed households and Latino-headed households was under 50 percent.

So, what you essentially had was, you know, companies, lenders looking for growth had to look to black and Latino buyers and refinancers for that growth.

PAUL SOLMAN: Another innovation also fueled the growth, bundling mortgages into batches and securitizing them into loans, which were then sold to eager investors who had been saving their money the world over, thus often bypassing banks entirely, all arguably positive trends that spawned a new breed of developer, appraiser and mortgage broker, sometimes, as on this block in Jamaica, all rolled into one.

A company called United Homes was more than willing to set up shop here in a previously un-bankable neighborhood with very inexperienced homebuyers.

ANTOINETTE COFFI-AHIBO: The only people that want to talk to us when we want to buy the house is those people, because they're -- they are in -- they are in that -- in the community everywhere. You turn right, you see them. You turn left, you see them.

'Too good to be true'

Antoinette Coffi-Ahibo
I was scammed.

JAMES LEWIS, community organizer: Shoddy housing, construction, overpriced, these adjustable-rate mortgages, two mortgages on each home.

PAUL SOLMAN: James Lewis, a community organizer, says the deals were just too good to be true.

JAMES LEWIS: They -- they conned people into thinking that they're going to be able to refinance in a year, so this was definitely a con job. There's nothing else you can say about that.

PAUL SOLMAN: We tried to contact United Homes, but their phone was disconnected...

COMPUTER VOICE: We're sorry. Your call cannot be completed as dialed.

PAUL SOLMAN: ... their Web site on the fritz.

Meanwhile, the company is a defendant in at least six lawsuits charging it with being at the center of a conspiracy to defraud low-income homebuyers, like Robustiano and Teresa Reyes.

ROBUSTIANO REYES, homeowner: They screwed everybody around here, everybody.

TERESA REYES, homeowner: Yes, because we have two loans. One of the loans is 12.9 percent interest with a balloon that we didn't even know that. And then the other one is 5.9 percent, and, after three -- five years, it's going to raise.

ANTOINETTE COFFI-AHIBO: If they know that $4,000 out, it was a little hard for me to pay, why they are thinking that, if it double in five years, why make them think I am going to be able to pay the mortgage in the first place? So, I was scammed. That was a scam.

PAUL SOLMAN: But it was a scam with honorable roots in a long and bipartisan past, and not just Herbert Hoover and FDR.

GEORGE H.W. BUSH, former president, United States: We must empower the poor with the pride that comes from owning a home

PAUL SOLMAN: Homeownership for the poor was a goal of the first George Bush, a goal of the Clinton administration, of course.

BILL CLINTON, former president, United States: We have the highest home ownership in history.

PAUL SOLMAN: And then there was Congress and the government- sponsored enterprises it encouraged.

ALYSSA KATZ: In the 1990s, Fannie Mae and Freddie Mac played really central roles in changing how mortgages were underwritten, figuring out, well, how can we get people who wouldn't have qualified for mortgages before into homeownership? And, you know, this will be good for our market growth and in -- in the promotion of homeownership.

PAUL SOLMAN: But that's the problem, isn't it?

ALYSSA KATZ: Well, it is, except that those mortgages generally performed very, very well, and even through the most recent crisis, have continued to perform much, much better than other mortgages.

PAUL SOLMAN: Fannie and Freddie's critics would counter that they did wind up backing risky subprime mortgages as well, and that, when the housing market collapsed, those mortgages contributed to the loss of investor confidence, which forced a government rescue.

MAN: Ladies and gentlemen, the president of the United States.

PAUL SOLMAN: But the bigger story is a housing bubble encouraged by presidents from Reagan to Clinton to George W. Bush, all presumably with the best of intentions, pushing homeownership.

GEORGE W. BUSH, former president, United States: The difference between Anglo-America and African-American and Hispanic homeownership is too big. And, so, by the year 2010, we must increase minority homeowners by at least 5.5 million.

In order to close the homeownership gap, we have got to set a big goal for America and focus our attention and resources on that goal.

Chasing the American dream

Alyssa Katz
Author, 'Our Lot'
There's a fundamental contradiction between the sort of social policy objective of getting every American for whom it's remotely possible to own their own home and making mortgage-lending a profitable business.

PAUL SOLMAN: To Katz, it was yet another unrealistic American dream.

ALYSSA KATZ: There's a fundamental contradiction between the sort of social policy objective of getting every American for whom it's remotely possible to own their own home and making mortgage-lending a profitable business for investors through the mortgage-backed securities market.

That -- those two missions seem to be fundamentally at odds with one another.

BOBBY DARKWAH: The guys lied to me that I can get this house. They check all my income. I was qualified. They give me the house. Now I see that a ripoff. I can't get no refinance. I can't get no loan modification. Right now, I don't know what to do. My dream is just slipping little by little.

ROBUSTIANO REYES: They just took the money and ran.

PAUL SOLMAN: Why did you trust them?

ROBUSTIANO REYES: The guys -- I don't know. I don't know why I trust them because the guys sounded like -- just like you.

ALYSSA KATZ: You have to remember how important it is for someone going in to take out a mortgage, buy a home. These are very intimidating and difficult things, particularly if you're the first person in your family ever to do it, which is the case for many people in this situation.

You want to know that somebody is going to look you in the eye, give you what you need and say, yes, we will help you. And that's exactly what this company and so many others did.

PAUL SOLMAN: So, money was loose, regulation looser, everyone pushing homeownership, and the scamsters ran wild. But shouldn't the borrowers also shoulder some of the blame?

People like yourself have been stigmatized to some extent here now as, you ought to have known better.

ANTOINETTE COFFI-AHIBO: OK, I'm going to answer that one second. To all the people who say that, think about Madock. How many people...

PAUL SOLMAN: Madoff.

ANTOINETTE COFFI-AHIBO: Madoff.

How many conned from their money? The people were stupid, OK? When you have a con artist, people who know what they want and they know that they're coming to get you, they will come and do whatever they want to, to get you. It's not because you're stupid. You are the victim.

We are the victims, OK? It's not because were stupid. It's not because we didn't do our homework. We are the victims. And we need help.

PAUL SOLMAN: James Lewis is trying to give it to them, trying to get lenders to modify their loans.

Do you see us pulling out of the housing crisis, slowly perhaps? But, I mean, after all, prices are going up in most major cities.

JAMES LEWIS: This is America- it's going to happen. When -- the question is, is how many of these homeowners are going to still have their homes when that happens?

PAUL SOLMAN: As of today, 1.2 million homes are in foreclosure in the United States. Another $2.5 trillion in adjustable-rate mortgages are due to reset beginning in April of next year.

JIM LEHRER: Alyssa Katz will answer your questions about the foreclosure crisis on our Web site, NewsHour.PBS.org.