Australian Broadcasting Corporation
"Mortgage Meltdown"
TRANSCRIPT
Program Transcript
Read the program transcript of Paul Barry's report "Mortgage Meltdown".
Reporter: Paul Barry
PAUL BARRY: Welcome to real estate auctions California style.
It has all the fervour and frenzy of an evangelist meeting and what's happening here should put the fear of god into homeowners around the world.
Houses are being knocked down today for 30 or 40 per cent less than their owners paid just a few months ago.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: Well, the last time that we saw a home price fall as big as the one we have just seen, is 1941. And ah, you're right, that was the year the US entered World War II.
PAUL BARRY: This year and next, more than two million American families will lose their homes.
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA: We're in a house now that's worth a lot less than what we paid for it.
PAUL BARRY (to Jim Adams): Have you lost the money that you made?
JIM ADAMS (to Paul Barry): Yes Sir.
PAUL BARRY: So why should Australians care if the housing market in America is crashing? Well tonight you'll find out.
The so-called subprime mortgage crisis has sent world stock markets into a spin, caused panic in credit markets so banks are afraid to lend to each other, and forced central banks to pump hundreds of billions of dollars into the system to stop it from seizing up. It now threatens to push America and possibly the rest of the world into recession.
PAUL BARRY: Tonight, the biggest mortgage meltdown since the crash of 1929.
SUPER REQUIRED "MORTGAGE MELTDOWN", "Reporter: PAUL BARRY")
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA (speaking at a table with Paul Barry and two family members): The earthquake fault is another thing that is an issue for us because -
FRANKIE (to Paul Barry): If we have a major earthquake you can't get out of Southern California.
PAUL BARRY (to Frankie): You can't get out?
FRANKIE (to Paul Barry): There's no way to get out.
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA: These freeways are up to 10 storeys high, the over-passes. This freeway interchange right here (referring to map) has collapsed once already ...
PAUL BARRY: Jim Adams is one of the nicest guys you'll ever meet, even if at times he might seem a little paranoid.
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA (to Paul Barry): Frankie buys a lot of dry goods.
FRANKIE (to Paul Barry): We have enough just canned goods under the stairs. We could probably go 30 days, maybe, yeah ...
PAUL BARRY: Jim and his family fear earthquakes, terrorism, civil disorder and a rising crime rate, which is why they've stocked the house with emergency rations and have five guns close to hand.
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA (to Paul Barry): There's one, just about one hidden in every room in the house.
PAUL BARRY: But what hit Jim Adams between the eyes was something he never imagined - his own desire to make a killing.
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA: It's a lazy man's way of making money, it's a gamble, but at that time we didn't look at it as being a gamble. We really saw it as a sure thing. We really thought that we could move into this house, keep it for a year and then turn around and sell it and have our retirement money and our retirement house paid for.
I keep relating it to like buying a car. You go into a car lot and the sales people come swarming all around you and it's the smell of the new car, the sound of that engine, the total excitement of being able to get into something new. It's the same way with the house. It's the smell, the looks, the excitement, it's ‘oh it's new, we can do this.' And when you start looking at the paperwork and they tell you ...
PAUL BARRY (to Jim Adams): And you thought, "Wow, we're going to make some money."
JIM ADAMS, RIVERSIDE HOMEOWNER, CALIFORNIA: Yeah, we're going to make some money, yeah.
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA (speaking to Paul Barry, driving car): This area out here ...
PAUL BARRY (to Jimmy Adams): Yeah?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: This is what this area always used to look like, on both sides of the car. It used to be nothing but rolling hills and granite stones.
PAUL BARRY: Jim's son Jimmy was also making money out of the boom - as a Riverside real estate agent.
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA (speaking to Paul Barry, driving car): So where we are right now is we're in kind of the middle of the city of Moreno Valley, so the major home builders came in and bought up large plots of land and they started grading ...
PAUL BARRY: Here on the eastern fringe of Los Angeles, in what's known as the Inland Empire, there's been a huge building boom over the last few years.
In three years from 2003, prices more than doubled and anyone on the bandwagon made a fortune.
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: The boom was phenomenal. You couldn't make any more money as a real estate person or a professional involved in this type of industry, you could make a ton of money and people were coming to you out of the woodwork and they were wanting to buy homes, they were wanting to sell homes and there was a lot of, it was a perfect storm because you had lots and lots of people selling and money was being made from all different sides.
PAUL BARRY (to Jimmy Adams): And prices going up and up and up and up?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: It was just unbelievable to watch houses go on the market for one day and be sold the next day and sold for more than what they wanted.
PAUL BARRY: Four thousand kilometres away from Los Angeles at Yale University, Professor Bob Shiller has been tracking this crazy surge in American house prices.
Shiller is the expert in the field but he's never seen anything like this before.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY (referring to graph): The blue line here shows the price of a home corrected for inflation, CPI inflation. And the red line is rent ...
PB: That is some increase, isn't it? It just goes straight up in the air.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: Oh yeah, that's right.
PB: What, that's Miami, is it? Have you got Los Angeles?
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: There's Los Angeles.
PB: Mmm, same.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: It's much the same.
There's a lot of volatility ...
PAUL BARRY: Seven years ago Bob Shiller's best-selling book, "Irrational Exuberance", predicted the dot-com crash on Wall Street, just weeks before it occurred.
For the last two years he has been warning that exactly the same was bound to happen with American house prices.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: Both the housing boom and the dot-com boom occurred close in time, it was the same people, it was driven by the same sense of economic possibility and it was like a gold rush. You know when they discover gold, people go out staking their claim. That was the dot-com boom and now people, it's remarkable, think they've found gold in their own backyard, all they've got to do is buy a house and so, it's a remarkable delusion I think that has developed. Just buy a house and you'll be rich, amazing, I don't know how we got here, but we're here.
PAUL BARRY: The short answer to how we got here is September the 11th.
When the World Trade Centre collapsed there were fears that world stock markets would follow, so hundreds of billions of dollars were pumped into the banking system by the US Federal Reserve.
ALAN GREENSPAN, CHAIRMAN, US FEDERAL RESERVE AUGUST 1987 - JANUARY 2006 (speaking at press conference): Much economic activity ground to a halt last week ...
PAUL BARRY: Fed Chairman Alan Greenspan then cut interest rates over the next two years to 1 per cent to lift the economy out of recession.
(Brief excerpt from TV advertisement)
And with all this cheap money to be had, America's banks were desperate for customers.
(Brief excerpt from TV advertisement)
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: Everybody, everybody and anybody. Anybody who had a, what we call a FICO score of say 500, 525 to, all the way up to the top. Everybody was able to borrow money, it was really unbelievable who could borrow money.
PAUL BARRY (to Jimmy Adams): And what do you have to do to get a FICO score of 500?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: Nothing (laugh). Breathe, you know, fog a mirror. FICO scores of 500 usually are indicative of people who have not paid their bills on time, or they have little to no credit, no credit history, no credit lines, maybe they've had a bankruptcy, a foreclosure or a repossession. That's what puts people into a 500 FICO score range.
(Excerpt from TV advertisement):
VOICEOVER: This is Pete. He recently got a letter offering him a new credit card with a $3000 limit and an interest rate of 18 per cent, which is odd, because Pete is a dog.
(End of excerpt)
PAUL BARRY: It was the biggest binge in lending America has ever seen.
(Excerpt from TV advertisement):
VOICEOVER: ... Even if your credit is less than perfect, Ameriquest can help. Call 1866 Ameriquest today ...
(End of excerpt)
PAUL BARRY: Everyone was encouraged to refinance their houses, unlock the equity in their home, spend big on that holiday or new TV, or take a ride on the real estate boom. House builders also offered cheap finance to buyers of their properties.
And so a new product took over the market - subprime loans.
A subprime loan is one that isn't quite top quality, because it's being given to people who wouldn't normally get credit or wouldn't get that much, and as a result it carries an extremely high interest rate, often up to 16 per cent, and the banks love it because it's so profitable.
There's a NINJA loan, which is "No Income, No Job, No Assets," but you still get the money. And there's a Piggy Back loan where two sit on top of each other so you can get 100 per cent finance, and colloquially they are often known as LIAR loans because someone somewhere isn't telling the truth.
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: In a way the bankers deserve to get screwed. If you're that damn stupid to make loans without requiring proof of income, proof of the asset by chance, you know, it's shame on you. You deserve to get screwed, and that's exactly what we have here.
Mark Seiffert is a housing activist in Cleveland, the foreclosure capital of the USA.
(Excerpt from discussion around table at ESOP):
FACILITATOR (to man): Your name, your lender.
MAN: Anthony Bird (phonetic). My lender is (inaudible).
FACILITATOR: Okay, ma'am.
WOMAN: I'm Ronald Clemens (phonetic), lender Countrywide Home Loans.
WOMAN2: We're from East Cleveland and we heard about your program going through a neighbourhood housing service.
FACILITATOR: Okay.
(End of excerpt)
PAUL BARRY: Mark Seiffert is a housing activist in Cleveland Ohio, the foreclosure capital of the United States. The hundreds of people who file into his offices every week are not rich and are not speculators, but they've been persuaded to take out expensive subprime loans they can't pay back and should never have got into.
WOMAN (speaking to counsellor): ... Mortgage started in September at an adjustable rate, which is almost $300 more than I was paying. When my husband lost his job ...
PAUL BARRY: Now their city is now seeing a tidal wave of evictions and foreclosures.
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: It's devastating. I mean, you know we've had, in Cleveland there's supposedly about 80,000 property units, buildings. Ten thousand of those are vacant as of today. And we're seeing foreclosures increasing by more than 300 per cent over the last couple of years.
And it's no longer an inner city, minority, poor person type issue, it's, you know, we see men, women, black, white, it's married, single, wealthy, middle income, lower income, fixed income. There is no, you know, status quo. I mean fire fighters, architects, TV reporters. It's everybody. And it's, you know, the crisis is just beginning.
(Excerpt from TV advertisement):
HOSPITAL PATIENT: Ouch. My arm is killing me!
NURSE (dressed in saucy outfit): The doctor's MGM will see you now.
VOICEOVER: Is your arm killing you too? Call the mortgage doctors at MGM International Mortgage Corporation. They'll help you get a low fixed rate with lower monthly ...
(End of excerpt)
PAUL BARRY: The ticking time bomb at subprime is the ARM, the automatically resetting mortgage, or "exploding ARMS" as some people call them. They start off a nice low rate to suck people in and then after two or three years reset with a dramatic increase in payments. They've been all the rage over the last two years and some two million of them are about to blow up, wreaking havoc on the people who took them out - like Henry Mitchell.
PAUL BARRY (to Henry Mitchell, referring to photographs): Is that him there too?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: That's him. This the last picture, you know, never gave me any trouble ...
PAUL BARRY (to Henry Mitchell): How old was he?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: He was 27 years old. Never had a record, never been in trouble with the police ...
PAUL BARRY: Henry Mitchell has had one hell of a year. In April his youngest son Germaine was shot dead in the centre of Cleveland after a basketball game.
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: While he was out, on his way back, he went to the street that he was still with his fiancé at that time, someone robbed him and shot him twice in his lower back. He told them he didn't have any money but they murdered him anyway.
PAUL BARRY: Henry and his wife will now have to bring up their 10-month-old grandson.
PAUL BARRY (to Henry Mitchell): Is that your grandson?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: That's him there.
PAUL BARRY: But it looks they won't have a house to do it in.
Henry Mitchell worked 35 years at General Motors and saved all his life to buy this beautiful home on two acres.
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND (showing Paul Barry around his property): Well this is the home that we purchased five years ago ...
PAUL BARRY: He put his kids through college and paid his parents' medical bills when they got sick. But two weeks before his son was killed, his mortgage reset.
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: ... had plans to retire here. They sent a letter to me about a week prior to that payment due in April that it would escalate, you know, from like 8.4 to almost 13 per cent and that would be almost $1000 more.
PAUL BARRY (to Henry Mitchell): Thirteen per cent?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: Thirteen yes.
PAUL BARRY (to Henry Mitchell): Eight to 13 per cent?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: Yes. I just didn't have the money in my budget then on my pension, retired and then on, getting social security I just didn't have any extra money.
PAUL BARRY: Henry Mitchell should have known he'd be paying more but he could have had no idea it would be so much. And his broker certainly never told him.
He now has a court order for possession of the house and he'll be evicted any day unless his lawyer can save him.
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: I'm just praying that a miracle will happen for us because pretty much now that's what we need you know.
PAUL BARRY (to Henry Mitchell): What's it going to mean to you if you lose it?
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND: Well we're going to be devastated, we're going to be homeless and we don't know like I say where we're going to go or how we're going to find another dwelling place because people are reluctant and banks and institutions are reluctant to give you a chance when you're in this situation.
PAUL BARRY: Back in the sunbelt the foreclosure rate is also breaking all records, with more and more people losing their homes or walking away. This new estate in Moreno Valley where Los Angeles meets the desert was finished just six months ago but the exodus has already begun.
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA (to Paul Barry, driving): What do we look for is generally a dead lawn, a lawn that hasn't been taken care of, weeds that are coming up, people stop paying their water bill for taking care of their lawns.
PAUL BARRY (to Jimmy Adams): One there?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: There's one there, you'll see two here, most of these houses are already vacant. You can tell if they're vacant just by the way they're sitting.
PAUL BARRY (to Jimmy Adams): So this is a house that someone has been in for six months and is already walking away from it?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: Correct.
PAUL BARRY (to Jimmy Adams): What about this one here?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: This one here is already abandoned and let go, this one's already abandoned and let go, you'll notice a lot of cards and things on the doors.
So, you know, on a street where there's probably nine different properties you can see five of them are for sale or appear to be abandoned.
PAUL BARRY: Foreclosure auctions like this one are now commonplace in California, as they are in Florida, Arizona and Nevada, where the speculative boom was biggest.
And it's no surprise if the cheer squad look happy. Today's sale of 112 houses will gross at least $30 million. Another in LA tomorrow will do even better.
MICHAEL SCHACK, SENIOR VP, REDC: Business is good, it's strong we're busy, we're getting busier.
PAUL BARRY (to Michael Schack): When did you get back into these foreclosure auctions? When did they start again?
MICHAEL SCHACK, SENIOR VP, REDC: Real Estate Disposition Corporation was around in the 1990s and then we were dormant for a period of time while the market was good and this year at the beginning of the year we started to ramp up again and we have come out of hibernation. We're back at it.
PAUL BARRY (to Michael Schack): Is it going to get even busier do you think?
MICHAEL SCHACK, SENIOR VP, REDC: I would say absolutely it will get even busier. We are getting lenders every day calling us and saying we want to do this, we have builders and developers contacting us, they want to sell through the auction. So we have plenty of customers coming to us, many lenders coming to us, they want to sell their properties, they've got the inventory and they see us as a fantastic way to sell their inventory.
PAUL BARRY: But bad as the problems clearly are for California and for Cleveland, how on earth have they spread so far as to shake the world?
The answer lies here on Wall St, because it was the big banks and brokers here who put up the massive amounts of money that fuelled the huge lending surge and the dodgy loans then came back here to be parcelled up into mortgage backed securities and collateralised debt obligations and sold to investors all around the world, with everyone picking up fat fees along the way.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": A German banker recently said to me with a very Germanic accent, "Why is somebody not paying their mortgage in Luneville, West Virginia," and this is a real town by the way, "going to affect me?"
And the reason is very simple. Because of the web of transactions in global finance now and capital flows, people from all round the world have invested in the US.
PAUL BARRY: Satyajit Das is a world expert on hedge funds and credit markets and an adviser to banks around the world.
He has long been warning how easily a crisis like this could develop.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": To give you an idea of global capital flows, 85 per cent of capital flows from Europe, the Middle East, and the Far East is in to the US. And a good chunk of that has gone into the subprime mortgage area, or the mortgage area in general.
PAUL BARRY (to Satyajit Das): So the money comes from overseas and it then gets lent out to people in Cleveland, Ohio?
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": That's absolutely correct.
PAUL BARRY (to Satyajit Das): Right.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": That's absolutely correct.
PAUL BARRY (to Satyajit Das): So when the people in Cleveland, Ohio, stop paying, the wave comes back again outwards?
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": It's like the old saying about chaos theory: the flapping of the wings of a butterfly in the Amazon causes a Caribbean hurricane. And that's what we're seeing now.
PAUL BARRY: In August, these storm force winds battered the world's stock markets. Prices on Wall St dived by 10 per cent, while Australia, Europe and Asia took an even bigger beating. And while some of those losses have now been clawed back the nerves remain.
But the barrage of bad news has also hit credit markets where banks are suddenly afraid to lend to anyone, even to each other.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": What we now have is a very, very serious dislocation in the lubricant of the financial system, which is credit. Now the analogy I always use is like a car engine: credit is the actual oil in the engine. Now there's a big crack and the oil's all flowing out of the engine, so the whole engine is ceasing up. So we're getting effects everywhere and I don't think we've seen the worst of the effects because it's going to be a rolling contagion where things happen in one market, then another, and they keep feeding back on themselves.
And the other thing we haven't seen as yet, which is the really, really long term effect, is on the real economy, because so far it's been a financial market crisis. Eventually it will affect things like GDP growth, employment, investment and how people spend money. Once that occurs what we're going to see is a new order of this particular contagion. That's what makes it much worse.
PAUL BARRY: So how did it all unfold? Well, it pretty much began with a couple of hedge funds run by Bear Stearns, a huge Wall St investment bank, which took big bets on subprime loans.
In May, Bear Stearns admitted that one of these funds had lost six per cent in value. Then, three weeks later, it was 23 per cent and from there, according to Matt Goldstein who writes on hedge funds for the American magazine "Business Week", it rapidly vaporised.
MATTHEW GOLDSTEIN, ASSOCIATE EDITOR, "BUSINESSWEEK": The value of the bonds they had bought lost their value so quickly, and that's what happens in a falling market, what had once been worth maybe say 100 cents on the dollar quickly became worth 50 cents on the dollar, even 25 cents on the dollar. And essentially, the hedge funds essentially vaporised and disappeared.
PAUL BARRY (to Matthew Goldstein): Vaporised?
MATTHEW GOLDSTEIN, ASSOCIATE EDITOR, "BUSINESSWEEK": Vaporised, there's nothing, there's nothing left. The hedge funds have, there's literally, they finally said when Bear finally gave a total accounting in July, they said, basically you can expect to get nothing back from these hedge funds. Hedge funds that had raised almost $1.7 billion from investors and at one point had borrowed up to $20 billion are now worth nothing.
PAUL BARRY: The two Bear Stearns hedge funds finally went bust at the end of July, but we still don't know how much money has been lost.
The last rites are being read at this bankruptcy court in Manhattan. And the body count does not end there.
MATTHEW GOLDSTEIN, ASSOCIATE EDITOR, "BUSINESSWEEK": Once the Bear Stearns Funds collapsed, it became known that essentially a lot of these bonds had very little value and then that forced everyone else to start to mark down their own bonds and in the process that started a cascading effect where basically hedge fund after hedge fund that own these bonds found, well we thought these were worth $100, now they're only worth $50.
PAUL BARRY (to Matthew Goldstein): So give me a quick roll call of who's taken a hit on this.
MATTHEW GOLDSTEIN, ASSOCIATE EDITOR, "BUSINESSWEEK": Who's taken a hit? Well, I mean you can just about name everyone, because in the sell-off we had in August which basically spanned the entire globe, all hedge funds were hit even if they didn't own subprime and that's because basically when selling gets going, it forces selling in different markets because people have to raise money.
I mean we had here in the US, we had Goldman Sachs has a very big hedge fund that in one week lost almost 40 per cent of its value.
PAUL BARRY: Goldman Sachs pumped $3 billion into its ailing hedge fund to keep it going. The UK based Cheyne Finance went into receivership owing $9 billion. The German Landesbank Sachsen needed a $20 billion bail out. French bank BNP Paribas froze redemptions on three funds worth $2 billion. And Australia's Macquarie Bank admitted its Fortress funds had lost 30 per cent of their value.
Other multi-million dollar losses or rescues have been coming thick and fast and it's not likely that we've seen the end.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": In the old days, to use an analogy, when you actually had a lending and a borrowing transaction people put money with a bank, the bank lends to the client. You know where the problem is.
In the modern capital markets risk is diffused, it's everywhere. Different investors hold different pieces of the risk and we don't often understand the linkages fully. So the first thing is we don't actually understand the linkages of how this will transmit to where.
The other thing is most risk is moved from banks which are regulated and relatively transparent, to people like hedge funds. Hedge funds are a), not regulated, they don't have to report anything, and they're certainly not transparent. So we don't under those circumstances know who's holding what. And obviously they're under no pressure to tell anybody, except their investors, and this information comes out with a lag.
But even at the core of the problem, which is the subprime, we really don't know how bad the losses are.
PAUL BARRY: If anywhere is ground zero in this terrible mortgage meltdown it's America's Midwest.
Cleveland Ohio is one of the cities that made America the greatest industrial power this world has ever seen. Its steel mills and machine tool factories once worked round the clock to help Ford and General Motors knock out cars by the million.
Now it's known as the rust belt. Its factories are closing, its jobs are going, its inner city is emptying as whites flee to the suburbs.
In Cleveland one in 20 homes is now in foreclosure.
BARBARA ANDERSON, HOMEOWNER, CLEVELAND, OHIO (showing Paul Barry around the neighbourhood): What we have here is at the very end of this street is you have three houses - one, two, three - that are vacant and been vandalised over the course of the last 12 years actually ...
PAUL BARRY: It's no longer just black Americans like Barbara Anderson who are suffering.
BARBARA ANDERSON, HOMEOWNER, CLEVELAND, OHIO: This devastation has crept from Cleveland, from the inner city all the way out into our suburbs, both the inner and outer ring suburbs and now people are paying a little more attention simply because of now who it's hurting.
PAUL BARRY: Barbara Anderson has lived on Cleveland's East Side for the last 27 years and she's seen the neighbourhood fall apart around her, with a great deal of help recently from what is known as predatory lending.
BARBARA ANDERSON, HOMEOWNER, CLEVELAND, OHIO: What has happened is that our street has gone from a street that once was full of children laughing and talking and playing, to a street where half of it has been wiped out. The houses are boarded up, they're empty, vacant, vandalised and they offer a real threat to our community.
PB: And why has that happened?
BARBARA ANDERSON, HOMEOWNER, CLEVELAND, OHIO: That has happened primarily because of predatory lending. Mortgage services and brokers all got together and somehow conspired, cheated, scammed and lied people to people which resulted in them perhaps taking out mortgages that were more than they could afford
PB: And is that still happening?
BARBARA ANDERSON, HOMEOWNER, CLEVELAND, OHIO: That is still happening so we are not yet at the end of this storm. We're pretty much, I would say maybe we're at the middle but we have a long ways to go and we will see a lot more properties being damaged and a lot of neighbourhoods devastated by predatory lending.
(Excerpt from TV advertisement):
BROKER (white man speaking to elderly black woman at her kitchen table): Mrs Johnson, good to see you again. This is Mike, you can trust him, he looks just like you.
MIKE (young black man speaking to elderly woman): I'll be sucking up to you in order to make you sign the loan.
BROKER: So, here are your low monthly payments and interest rate as we promised. Here's where they triple. The rest of this is really just here so that we get your house ...
(End of excerpt)
PAUL BARRY: The brokers who sold subprime loans were unregulated and often unscrupulous. African Americans were five times more likely to fall victim, and roughly half the people who were steered into these expensive traps could have got cheaper deals.
PAUL BARRY (to Mark Seiffert): What's the advantage of a subprime loan to a broker?
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: Oh more money. As a broker you're going to make a hell of a lot more money off a subprime loan than you are a prime because you're able to charge higher interest. As a broker, if I can bring you, Mr Banker, a 12 per cent loan you're going to reward me with more money because I brought you a more expensive loan. The fact that it's going to go bad doesn't matter because see, here we play hot potato.
PAUL BARRY (to Mark Seiffert): So you take a fee and you pass it on as quickly as possible.
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: And as quickly as possible, yes.
PAUL BARRY (to Mark Seiffert): That means the risk of it going bad doesn't rest with you.
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: Right.
PAUL BARRY: Cleveland's East Side is famous for its crime, but what we saw here was the triumph of the human spirit.
Pastor Andrew Clark's congregation are some of the most disadvantaged in America. They battle to pay their bills, pray they don't get sick and are now fighting hard to keep their homes.
But spend two hours at worship here and your faith in human nature will be restored, because for these people, praise the lord, money isn't everything.
PASTOR ANDREW CLARK, TRINITY OUTREACH MINISTRIES, CLEVELAND (speaking at church meeting): Bless souls that live down the street from me! We claim victory over sin, we claim victory over death, we claim victory over division, we claim victory over predatory lenders. We claimed a victory today because God we know that you're able, we know you're able to make everything all right. Come one give the Lord a hand, friends. Now turn around and tell your neighbour that everything is going to be all right. I feel a song coming ...
CONGREGATION SINGS: ... I've got a vision, everything is going to be all right ...
I've got a vision, everything is going to be all right ...
PAUL BARRY: It's a confident song that everything will be all right. But the pastor and his flock know there's plenty more pain to come.
PAUL BARRY (to Andrew Clark): Why do mortgage lenders lend to people if they can't afford to pay the loans back?
PASTOR ANDREW CLARK, TRINITY OUTREACH MINISTRIES, CLEVELAND: Well it's robbery. You know robbery has been a part of, it's been a part of world societies since the beginning of time. People have selected robbery as a source of income and a source of living and they're designed to take advantage of the disenfranchised. They're designed to take advantage of people when they're not looking. They're designed to take advantage of people that are not as educated.
PAUL BARRY (to Andrew Clark): And the system has allowed it.
PASTOR ANDREW CLARK, TRINITY OUTREACH MINISTRIES, CLEVELAND: Yeah, and the system has in fact tolerated it because there is somebody up top that is getting fed by the robberies that take place amongst those that are disenfranchised.
ED KRAMER, FAIR HOUSING INC, CLEVELAND: The banks actually paid the mortgage brokers to basically defraud their customers and that was legal.
PAUL BARRY (to Ed Kramer): What do you mean they paid the brokers to defraud customers?
ED KRAMER, FAIR HOUSING INC, CLEVELAND: Well, they would pay a bonus, a Yield Premium Spread, it was called. If somebody could have got a conventional loan which would have been fixed at maybe five and three quarters, they put them into subprime at eight or nine per cent, they got a bonus which was called a Yield Premium Spread, for putting the person into a worse loan and that was understood and acceptable. It wasn't illegal to do.
PAUL BARRY (to Ed Kramer): That's pretty scandalous isn't it?
ED KRAMER, FAIR HOUSING INC, CLEVELAND: Absolutely, it's but, it's American capitalism at its worst.
(to Henry Mitchell): The other thing we can do, we'll go to the bank and try to get them to modify your loan. Banks don't really want these houses and since you can pay a reasonable amount there is a chance we can get the banks to agree to modify your loan so you can stay in the house and keep your American dream.
HENRY MITCHELL, HOMEOWNER IN FORECLOSURE, CLEVELAND (to Ed Kramer): I'd certainly appreciate that ...
PAUL BARRY: Ed Kramer is a Cleveland lawyer who's spent the last 30 years trying to help people like Henry Mitchell hang on to their homes.
In a good year he might bring happiness to 50 or 60 clients, but he's now realised there's a better way to fight the fight.
Kramer is suing Argent, one of America's biggest subprime lenders, for unfair lending and together with Ohio's new Attorney-General he's eyeing up an even bigger target.
ED KRAMER, FAIR HOUSING INC, CLEVELAND: The real 800-pound gorillas is Wall St and they're the ones that financed these predators to be able to go out and do the damage, because without them predators would have had their lines of credit exhausted. Without buying these and reloading the predators to go out to give more loans, so they can resell these loans again, we wouldn't have this crisis. So Wall St is ultimately going to be the people that have to come through with the money.
PAUL BARRY (to Ed Kramer): So is there any prospect of them being sued?
ED KRAMER, FAIR HOUSING INC, CLEVELAND: Absolutely, I think they had a fiduciary duty. I mean, they are the ultimate funders of these predators and without their money we wouldn't be in this crisis.
PAUL BARRY: But in the meantime there is a human cost to be counted as areas like inner-city Cleveland are laid to waste.
This house was supposed to be auctioned online last month and you could have snapped it up for just $1000, but no one bothered to bid.
It's in a reasonable neighbourhood but not for much longer. Empty houses here are soon vandalised. The aluminium cladding is stripped off, the plumbing ripped out so the copper can be sold. Next stop is the wrecking ball.
PAUL BARRY (to Mark Seiffert): How do you see this playing out? What's going to happen in the next year?
MARK SEIFFERT, HOUSING ACTIVIST, CLEVELAND OHIO: We have a saying that, you know, the last one out of Cleveland please turn off the lights. I don't think Cleveland can be saved. It has gotten that bad, and keep in mind we've not seen the beginning of it. It is bad and you guys toured, walked around and saw some of the devastation. That's nothing compared to what we're going to have.
PAUL BARRY: The figures suggest that the worst is still to come. This year and next $900 billion dollars of subprime loans are going to reset to higher interest rates. Taking time lags into account, we are essentially here on the graph (graph showing bar highlighted for Sept 07, last bar is July 08, highest bar is at March 08). In California as in Cleveland we're nowhere near the end.
PAUL BARRY (to Jimmy Adams): Do you think we've seen the worst yet?
JIMMY ADAMS, REAL ESTATE AGENT, RIVERSIDE, CALIFORNIA: No I don't. My projection and the way I look at this and have studied it is that we are in the end of the first quarter of a four quarter game.
PAUL BARRY: US employment figures, showing a fall in job numbers, sent world stock markets spinning again. In the last 18 months, 150 US mortgage lenders, including several of the biggest, have gone bust or shut down. So far 60,000 jobs have been lost, with another 50,000 forecast to go. House builders are also in trouble with activity at a 10 year low and more homes than ever that can't be sold.
Some economists like Professor Nouriel Roubini are now convinced that recession is inevitable.
PROFESSOR NOURIEL ROUBINI, STERN SCHOOL OF BUSINESS, NEW YORK: We had the real estate boom and bust in the late 80s that led to a recession in 1990, we thought we had learned those lessons and instead it has happened again. We had that bubble in tech stocks in the late 90s that led to a bust and the recession in 2001 so the last three US business cycle and recessions have been driven by asset bubble getting out of hand and then having a crash that lead into a credit crunch and then a severe economic downturn, so they happen over and over again.
PNN: And you think this is the third? The next one?
PROFESSOR NOURIEL ROUBINI, STERN SCHOOL OF BUSINESS, NEW YORK: Yes.
PAUL BARRY: The last few years (in the United States) have seen a massive spending spree fuelled by credit. A large chunk of the $1.3 trillion lent in subprime loans got spent in the shopping malls and car yards of America. People were using their houses like automatic teller machines, taking cash out as prices went up.
Now that is all going to go painfully into reverse and the US economy will suffer.
PROFESSOR NOURIEL ROUBINI, STERN SCHOOL OF BUSINESS, NEW YORK: If the US has a hard landing meaning a recession or a near recession, I think that it's still the case that when the US sneezes the rest of the world gets the cold because the US is still one quarter of the global economy.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": I don't think anybody anywhere in the world is going to be immune. It's a question of degree rather than whether they're affected.
PAUL BARRY: Many economists are still optimistic that it will all play out without too much damage. Bruce Kasman is Chief Economist for JP Morgan, one of the world's largest investment banks.
He's not saying don't worry, but he is saying don't panic.
BRUCE KASMAN, HEAD OF GLOBAL ECONOMIC RESEARCH, JP MORGAN: I think the risks are not things we want to ignore but I think the risks of a recession right now are still rather modest.
PAUL BARRY (to Bruce Kasman): What do you say to people like Nouriel Roubini who is very pessimistic about the state of America and I guess the implications for the rest of the world?
BRUCE KASMAN, HEAD OF GLOBAL ECONOMIC RESEARCH, JP MORGAN: Well, I speak to Nouriel Roubini. I'd note that Nouriel Roubini has been pessimistic for as long as I've known him but I think the basic point here is to keep an open mind. I would not want to lose sight of downside risks. The credit events that are playing out here are things which we still don't know how significant and long lasting they're going to be, but to recognise that that's happening in a healthy cyclical backdrop.
So far it's happened in a world in which the tightening in credit conditions haven't extended out broadly in the way that previous global financial crises have hit and to think about this as a world in which we are getting hit but there's no reason I think at that this point to turn extreme and believe that the only outcome here would be a recession or some serious financial crisis taking hold.
BEN BERNANKE, CHAIRMAN, US FEDERAL RESERVE (speaking at US Congress hearing): The recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and in some cases by abuse of lending practices and outright fraud.
PAUL BARRY: The pessimists fear that fear itself has already got the upper hand.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": Once credit markets seize up, fear, and it's the fear of who you lend to, who you transact with defaulting, becomes the paramount concern.
PAUL BARRY (to Satyajit Das): So no-one lends to anybody because they're afraid they won't get their money back. Even the banks.
SATYAJIT DAS, AUTHOR, "TRADERS, GUNS AND MONEY": Absolutely. In fact one of the ironic things about the liquidity that's flooded into the system is it's gone nowhere. It's just sitting there. People have parked it in government securities because they're terrified of lending to anybody in case they won't lend it. And central bankers have been essentially resorting to what I would only call pleas, for people to behave more sensibly.
PAUL BARRY: As to what happens next - well, no one really knows. But if you're convinced a crash could not happen here, just consider this history lesson from Bob Shiller.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY (referring to graph): The blue line here shows real home prices in the Herrengraf region of Amsterdam since 1629; from 1629 to 1973, and you can see that there have been periods for like a half a century when they went up, and periods like a half a century when they went down.
PB: I guess the interesting thing about this graph is that whenever it goes up it comes down again.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: That's right.
PB: I mean it doesn't go up and go along the top. It goes up and it goes whoom.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: You know some people think that home prices go up 10 per cent a year. Do you know what Amsterdam would be worth today if it went up 10 per cent a year for the last 350 years? And if people know about the power of compound interest it would be worth more than the solar system or something. It can't happen.
So if you look about long term trends in real estate maybe one per cent a year, tops, over long, over centuries. Otherwise it's just, it doesn't fit. It's just not going to work.
PB: No one would be able to afford a house.
PROFESSOR ROBERT SHILLER, ECONOMICS, YALE UNIVERSITY: No one could afford it.
PAUL BARRY: Sell, sell.
(sounds of the real estate auction.)
(End of transcript)