House Of Cards: The Mortgage Mess

60 Minutes Reports On How The Subprime Loan Crisis Is Shaking Markets Worldwide

This story was originally broadcast on Jan. 27, 2008. It was updated on May 23, 2008.

Since last summer, Americans have seen their investments shrink and their property values plummet. At the heart of the problem is something called the subprime mortgage crisis, which began back then and continues to ricochet through the economy.

It sounds complicated, but it's really fairly simple: banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. If it sounds like a shell game or Ponzi scheme, in some ways it was a house of cards rife with corruption, greed, and negligence.

And as correspondent Steve Kroft first reported in January, it started in places like Stockton, Calif.



Real estate agent Kevin Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.

"If you see a 'for sale' sign in this neighborhood that probably is a sign of distress, right?" Kroft asks.

"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.

The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O'Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities.

"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."

As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.

"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.

"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.

Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.

Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.

"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.

"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.

"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.

Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.

  • CBSNews

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