House Of Cards: The Mortgage Mess

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

(CBS)  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.

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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.

[kldupont]

How appropriate this was aired the same night as the Milennials story. Both of these stories wreak of how irresponsible the majority of Americans are to work and living. The majority of fault for this mortgage crisis is people want more house they can afford. Mortgage companies and banks have always told people they can afford more than they can. People need to wake up and think for themselves. It is no one''s fault when you sign mortgage documents except yourself. People always want to blame someone else for their ignorance and not have any consequences. I am glad when you showed the Fontenot family they were questioned about how they could afford the home. And also didn''t they realize what they were doing. The answer just thinking of my family isn''t good enough. That is not a mature responsible statement. Each person needs to assess what they have and live within their means. Now with this recession building hopefully some people will wake up to that fact. Until we take personal responsibility for our own actions this country will continue to crumble around us. Too many people want too much for nothing. And it is getting burdensome to all the hard working people who do live within their means.

[tootall10142]

Ahh the american dream two car a new house four credit cards 2.3 children we got it all honey!living beyond our means is great.i love my new hemi!that bass boat will really fly!daddy what is wal-mart?look to yourleft the jones,s are in line beside you.the smiths well ,they are home building on thier new jim walter home.that is paid forand the roof repels water.

[mortgageexp]

Even after nearly 18 months of reporting on the mortgage crisis you ( CBS News / 60 Minutes ) still haven%u2019t gotten this story right. You haven%u2019t provided an accurate reported on the reason that nearly half to two-thirds of homeowners have gone into foreclosure. I feel your report did an injustice to an entire industry. The truth of the matter is, the mortgage brokering industry and sub-prime loans have been around for nearly 30 years without any major problems until the end of 2006. The mortgage brokerage industry was a direct result of the U.S. Savings and Loan crisis of the 1980s.

Sub-prime loans are not the real culprit in the mortgage meltdown. By the way a sub-prime loan was any loan which was not a conforming (Fannie Mae/ Freddie Mac ) or a government loans ( FHA / VA ) Therefore for example, a doctor with a complex tax return and who may not want to disclose his income may elect to utilize a %u201Csub-prime%u201D mortgage.

In my opinion, your reporting on this crisis can be likened to an oncologist who is more concerned with and focusing on a cancer patient%u2019s hair loss instead of their chemotherapy treatment.

I%u2019ve been helping homeowners, like the folks Mr. Kroft was reporting on keep their homes for the past six months.

[ohboy1929]

400 billion dollars. Big deal! If you listen closely you can hear the thundering foot steps of the "Mother of all financial disasters" coming the 600 TRILLION dollar OTC derivative market meltdown.

[gtfarrell3]

The Credit Crunch
The True Cause

In my best selling book, "the Angry Black Man''s Guide to Success," in chapter eleven, I take a hard look at the credit rating agengies and how a system without transparency really caused the sub-prime mortgage crises that is destroying the financial markets around the world. While the Ferderal Reserve attempts to stop the inevitable, a market crash, they still are treating the symptoms but not the desease.

Many analyst are blaming easy credit but are missing the obvious. The credit rating system, or credit scores as they are more commonly known, are defective, faulty and wrong. The scoring system devised by Fair Issacs in 1961 initial purpose was to serve to speed up the process of approving or denying small consumer credit and store cards. Thus a system devised to approve purchases up to $500.00 is now being used to approve real estate purchases into the millions.

The credt scoring system eliminated the core basics of the three C''s of credit, which include Collateral, Character and Capacity, Collateral or assets did not apply which is why investors could buy multiple homes with no money down as long as thier score was above 700. Character took a flying leap out the window and Capacity to repay was never analyzed. No documentation was required or requested because the credit scoring system was considered infalable.



George Farrell
www.abmgts.blogspot.com

[mysticsilks]

Steve Kroft, you explained in layman''s terms what the heck is really going on with the housing, and banking industry. Seems like 60 Minutes is the only true news broadcast,that is informing the people. The rest of the news simply skims what is , but not the real whys?

I simply remember back in the 1940''s, and 1950''s, a bank or loan company wouldn''t give you a loan for a home unless you could prove financially that you could afford the payments. Period!
Why, did they change a system that worked very well?

[seehud1]

You left out the most important part of the story. The whole reason that subprime loans were created and who created them.
85% of ALL mortgages made in the US are sold to Fannie Mae. All of these mortgages have to meet Fannie Mae Guidelines. Banks dont make loans without meeting fannie mae guidelines, loan officers dont sell loans that dont meet fannie mae guidelines, WHY? because fannie mae wont buy them. Fannie Mae had to create a product that would yield a higher rate of return on the bond market. When they sold the subprime "paper" on the bond market, they knew exactly what they were selling and insuring because they created the guidelines. When they created the "stated income, no doc" loan, fannie mae knew what kind of borrower they were going to get and yet they continued to buy the loans meeting their own criteria and then bundled and SOLD them as "A" paper. THAT is where the fraud happened and it is appalling that no one in the media seems to get to that part of the story. Please let viewers really understand what happened. The truth is that there is plenty of blame all along the line however the creation of the subprime loan belongs solely to Fannie Mae.
Catherine Reed

[nbrdknkldgr]

Like GW said a couple of years ago, homeownership is at an all time high under his administration. What he didn''t say was that you won''t get to keep it!

[sperrystar]

For many years lenders required 20% down and proof of ability to pay. These basic requirements protected lenders as well as borrowers. You might have asked who is responsible for removing these safe-guards?

The rush to deregulate the financial industry has gone too far. I wonder if the genie be put back in the bottle.

[candacehw-2009]

A LOT OF EMPHASIS HAS BEEN FOCUSED ON THE BORROWERS WHO TOOK OUT SUB-PRIME LOANS RATHER THAN THE "PROFESSIONALS" WHO CREATED THESE PRODUCTS AND ALLOWED THEIR CLIENTS TO TAKE THEM OUT. FIDUCIARY DUTY IS THE PRIMARY ETHICAL DUTY OF SUCH PROFESSIONALS AND IT WAS UNIFORMLY VIOLATED.THEY WELL KNEW THAT THEY WERE INDUCTING CONSUMERS INTO DAMAGING, IMPROPER BEHAVIOR. INSTEAD OF PROTECTING CLIENTS THEY SACRIFICED THEM FOR PERSONAL GAIN. ANALYZING WHAT A CLIENT CAN AFFORD IS VERY EASY. MAKING A LIVING IS MUCH MORE DIFFICULT. THE TEMPTATION WAS, IN THIS CASE, OVERWHELMING.

[shanev137]

Let''s talk about how real estate prices have gone up over 250% during the last 15 years.

Oh, no wait....we can''t talk about that.

[sandycat2]

Wait a minute. I''m an average hard working American. When I bought my house 15 years ago, I paid $72,000 for it. Today my house is worth $100,000. I bought what I thought I could pay for and I put down a down payment. Of course, the bank would have lent me more, but I thought it was to hard for me to pay for a higher priced house. Many of these people knew the interest rate would go up and make it hard for them to make the payments, but they bought the houses they couldn''t afford anyway. I am disgusted by the greed I see not only in this whole foreclosure mess, but in the outsourcing of jobs to China, India, and other places. It all matches the greed in Washington and the capitol of Illinois where I live. These people think the money will just keep rolling in, but look at all the debt we have riding on our backs.

[candacehw-2009]

AS A REAL ESTATE AGENT I BELIEVE YOUR STORY IS NOT AT ALL CRITICAL ENOUGH OF BANKERS, MORTGAGE BROKERS AND REAL ESTATE AGENTS. THESE "PROFESSIONALS" FAILED IN THEIR FIDUCIARY DUTIES AND SHOULD NOT BE ABLE TO WORK IN THIS AREA EVER AGAIN. BANKS WHO ARE CHARGING OVER 7% FOR ANY CURRENT LOANS SHOULD BE FORCED TO REFINANCE BECAUSE THEY FAILED TO MEET FIDUCIARY DUTY TO THEIR CLIENTS. AGENTS WHO ALLOWED THEIR CLIENTS TO TAKE SUCH LOANS SHOULD HAVE THEIR LICENSES REVOKED.

[jrjugs]

Continued...

It was a VERY disrespectful report aimed at us hard working Americans who actually care about what we do, who have tried to hang onto our pride.

I was very disappointed in your opinions and attitudes about this entire report! You need to report on the entire picture, not just little bits and pieces.

You, Mr. Kroft, need to be thrown out of your high paying job so you can see what the real world is like!

[jrjugs]

I was VERY offended by the comment about GREED being the reason why people are defaulting on their mortgages and losing their homes. It has nothing to do with greed!

A few years ago, yes, it was easy to get mortgages with no down payments and low intereste rates. It gave the average working American the opportunity to have the "American Dream" of owning a home they thought would be their''s forever.

It comes down to the multi-million dollar companies having to "line their pockets" with more cash, and moving what used to be good paying jobs, oversees.

It also comes down to the MANY weak unions actually working with those companies to lower the average wage by ridiculous amounts. The companies use that as a threat to scare employees into taking those lower wages to ensure their jobs aren''t shipped oversees, along with their product.

When I lost my $22/hr job a couple of years ago, I went from $900/wk down to the ridiculously low unemployment rate of $341/wk. I held onto my house for 8 months. Looking back, I have no idea how I did it, but it was terribly stressful having $1150 in the checkbook and making an $1100 mortgage, just to keep my home.

Deciding to stop making mortage payments was, by far, the HARDEST thing I ever had to do in my life! You made it sound like we just wanted to screw our lenders and acted like irresponsible little kids.

[ConsiderThis1]

Dear Mr. Kroft,
My home is in foreclosure because of the three properties I owned the condo was built over a privy pit and there was hydrogen sulfide inside, which I didn''t know. All I knew was that I began falling a lot, having a lot of trouble breathing, and having a lot of difficulty thinking and remembering.

My condo lender overcharged me at closing, which I wanted to claim in the foreclosure. But my condo was foreclosed and sold behind my back: after papers were served on me in violation of my Chapter 13 automatic stay, Deutsche Bank went ahead and foreclosed and sold my condo behind my back, not even telling me about the sale.

And, I was not allowed to redeem my property. The court clerks refused to allow me to deposit my cashier''s check for $128,250.00, but did allow a Realtor from Sotheby''s where I had my condo listed to deposit and he got my condo for $85,000.

The judgmental Christian Republicans say that due process has nothing to do it, the only thing that is relevant is that I missed payments.

I don''t know which we need more in this country, an adequate justice system or an adequate education system.

[maryprevotea]

Steven Kroft, you have no idea how mean you were to the two couples interviewed! You shamed the homeowner, claiming "greed" from both parties! I went through the same evil market system- as a divorced mother, being harassed by my kids'' father, working hard to get them a home. I worked hard and finally bought a home that I lived in for 5 years. It costs 180,000.00 to raise a child from birth to 17years, according to the USDA. Life happens buddy! I had no help when finances were hard, and everything I had, physically and financially, went to caring for my children. Show respect, you are probably very comfortable and talk from the side of your mouth. You need to read the book, IS THE AMERICAN DREAM KILLING YOU? by Paul Stiles. Two quotes from the book, "The deep nature of our Market Society, a society that is not set up to support an individual''s life, but to prey upon him for financial gain." "The market is purely amoral."

[johannaey]

The other issues here, which is a problem with this story is that by demonizing the American Home Buyer as "greedy" and benefiting from these real estate deals, you are sanitizing when the large mortgage companies did. Real Estate brokers, mortgage brokers and the big banks are the ones who benefited from this crazy mess that you call the House of Cards, the people who are losing their homes are paying the consequences. Why aren''t the mortgage companies, the Realtors and the Mortgage brokers paying any consequences? They aren''t. What consequences will the big mortgage companies pay for this? Who is calling them to task?

[johannaey]

I object to your characterization of the Americans who bought homes with adjustable rate mortgages:
You have characterized mortgage holders as people who have benefited from the mortgage mess. You made broad statements about some of them benefiting or even receiving cash via second mortgages. Please stop characterizing us that way. Your research is usually so good - couldn''t you have given a percentage of those mortgage holders who were paid out - rather than painting everyone with the same brush? I am a mortgage holder, I received no benefit from my mortgage - I did not have a down payment, however, I have invested a ridiculous amount of money into this house. I was forced to immediately replace an aging and defunct air conditioning system - I live in Florida. I am deeply saddened by the loss of my home, a home that I have invested tens of thousands of dollars into. We had a serious plan for re-finance and the world of real estate values de-valued our home. How does that translate into my greed? We lose our home unwillingly and much, much deeper into debt than when we purchased it. Our mortgage company will not work with us and is hurtful and rude. The mortgage brokers and the realtors made tens of thousands of dollars and each of those dollars were earned one at a time by me and my partner - no - we are not the greedy winners. We have not the power to cause this horrendous situation, but we do suffer the consequences. House of cards, indeed. Indeed.

[vote4lou2008]

The resolution is:
Identify a year as the FMV for the home. Interest will be paid on that amount and the rest will be interest free. This option will be available to all home buyers from that year to the present. The interest free amount will remain part of the price of the home no matter the purchaser. This will keep everyone in their homes and not reduce the price of homes on the housing market. This would stabilize the housing market.
Example: purchase price: 400,000
200? FMV: 300,000
Interest Free: 100,000