DESPERATE HOUSEHOLDS TRANSCRIPT
Last week, George Negus found himself way above the Arctic Circle in a tiny Norwegian town financially battered by the cowboys of the US-based shonky loan world. So what is the situation in the US itself, where the now global train wreck first surfaced? If the credit crisis continues at its present rate, the estimate is that more than 2 million American homes will be reposessed by the end of this year. Here's Mark Maley deep in US surburbia.
REPORTER: Mark Maley
DAVE HARMON, REAL ESTATE AGENT: In this particular cul-de-sac I've personally had one of the listings on this home that after being it on the market for a year we couldn't sell it, we couldn't find a price at which someone would buy the home.
Real estate agent Dave Harmon works in the Californian city of Stockton. It has the dubious distinction of having the highest rate of home repossession in America.
DAVE HARMON: And since that time the home next to it is in foreclosure, it is for sale now, two others behind me, another across the street and two more on the end. So half the homes on this cul-de-sac have been hit with a foreclosure situation. Now the bad news is that the half that haven't been hit yet will be in the near future.
California's Central Valley is the epicentre of the subprime crisis. In some Stockton suburbs, one in four houses has already been repossessed by the banks and the foreclosure rate is still accelerating. It's not expected to peak until October. I've travelled to Stockton to see the scale of the bust in America's housing boom - a crisis which has badly shaken the US financial system.
DAVE HARMON: And now we are regenerating a period of major correction and the prices now have slipped 30% and 40% from where they were three years ago.
In these well-tended new neighbourhoods, long grass is the tell-tale sign of foreclosed homes. But there are also foreclosures lurking behind some of the neat facades.
REPORTER: What are you doing here?
GARDENER: We're coming here, maid service, cutting the lawns and working for the banks, we're just keeping up the places for them and everything. We just come once a month, twice a month, weekly, depends on whatever the schedule is.
REPORTER: Are there many of these places around?
GARDENER: Yeah, there is, there's plenty of them all over the place. Lots of foreclosures, all foreclosures.
Some houses in these areas have dropped 60% of their value. It's devastating for people like Giselle Mireles and her family. They've already had to move out. This visit is a chance for the kids to catch up with their friends.
GISELLE MIRELES: If you wanna go say hi to Crystal you can and then later when I come back you can play with Tonia.
At the peak of the boom, their house was worth about $450,000. It's now on the market for $230,000.
JOSE MIRELES: What choice they leave you? You got to get out of the house, give back to the bank or put it short sale or walk away.
Giselle and Jose have spent $50,000, their entire life savings, in a fruitless bid to save their home.
JOSE MIRELES: The main problem come when the payment come adjustable, so when we got the fees we can't afford it.
The Mireles' path to this predicament is not unusual. Three years ago they took out a $360,000 mortgage, the kind of loan now known around the world as subprime.
REPORTER: At that time did you feel that was a mortgage you could afford to pay?
GISELLE MIRELES: At the time, yes, because the economy was well and my husband was working more than his regular 40 hours a week. At the time we did have the money to make the payments.
REPORTER: How much did you borrow?
GISELLE MIRELES: We got the house 100% financed.
The Mireles' loan started out at a low fixed rate but two years later they were hit by a double-whammy. Jose's work in the construction industry dried up just as their repayments changed to the variable rate and went up nearly 50%.
GISELLE MIRELES: We looked at refinancing with - first of all with the bank that had our loan. Then we looked with other banks. And at the time the real estate was going down and we got turned down by three or four different banks. After we tried, there was no way we pay US$5,000 a month for the house.
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Cheap loans and even cheaper introductory rates are now hard to find. At the peak of the boom America was awash with them. Mortgage brokers could find loans for anyone, whether they had an income or not.
WOMAN: OK, well, the next property we'll be showcasing today is on 5467 Rockwood Circle.
Cesar Dias is a mortgage broker as well as running a real estate business. He did very well selling loans during the boom. Now he's trying to profit from the bust. He's known as 'Repo Man' because he runs bus tours for the buyers that are now stalking Stockton's repossessed homes.
CESAR DIAS, MORTAGE AND REAL ESTATE BROKER: Move in quickly. We have a lot of good properties to look at today.
REPORTER: You think it's a good time to buy now?
MAN: Yes, and I think we should hurry up and buy before the market turns around.
CESAR DIAS: Aaaaall aboard! Let's go!
These days Cesar's company offers mostly straightforward fixed-rate loans to qualified buyers.
MAN 2: We want to make sure that we package that loan so it has the best chance of getting it approved before your final financing.
But three or four years ago, lenders were virtually throwing money at customers. People could borrow the full value of houses with very low introductory rates and with no proof of income.
CESAR DIAS: The guideline, the qualifications definitely were different. They were aggressive. It was, to my opinion, chasing the market at that point. It was a hot market and everybody wanted in and did it become over-exuberance? At this point it probably did.
REPORTER: Do you think it was unethical to lend to those people?
CESAR DIAS: In hindsight the programs were there. At this point where do you lay the blame or where was the fault? I think it was just the market.
Cesar believes the flood of subprime lending extended the boom by at least two years.
CESAR DIAS: There was just a lot of money from international money to Wall Street money that created a new demand for products and the consumer took it and ran with it. And it became the subprime as we know it now.
This is where the subprime boom was born. I've come to New York to find out why Wall Street risked billions of dollars of its own money and how it convinced investors to risk billions more.
NOMI PRINS, FORMER BANKER: But it didn't really take up steam until after the late '90s dotcom and stock market bubble kind of burst. Our fed chairman at the time, Alan Greenspan, said, "OK, we've got to stimulate the economy, so we'll cut and cut and cut interest rates and make money easier and cheaper to get," So that's what happened - rates went down from 6.5% to 1.5% in the period of 2.5 years.
Nomi Prins was a banker at financial heavyweights Bear Stearns and Goldman Sachs, but is now a writer campaigning for tighter scrutiny of Wall Street.
NOMI PRINS: When rates are so, so low, conventionally giving out mortgages without any sorts of bells or whistles or weird possibilities to increase over time is just not profitable.
CHARLES MORRIS: And the banks went out and looked for yield.
Charles Morris is also a former banker and now an author. He too believes that very low interest rates pushed the banks into taking greater risks.
CHARLES MORRIS: They actually went out and looked for extremely risky mortgages that would pay the 8% or 9%, and there's lots of reports on record where the banks were paying extra to mortgage brokers to bring in risky deals.
By 2006 Wall Street was pumping $600 billion a year into risky subprime loans, sowing the seeds of a massive financial disaster.
REPORTER: So that whole boom in subprime lending was really driven from Wall Street rather than the other way around?
CHARLES MORRIS: Yes, yes.
REPORTER: And you believe they did it in full knowledge of how risky it was?
CHARLES MORRIS: Yes.
REPORTER: Why did they do it then?
CHARLES MORRIS: Because otherwise they would have lost this huge fee structure.
And Morris says there was no law or ethical code to stop them.
CHARLES MORRIS: There isn't a legal issue. Ethics never entered into it. It's about money.
To attract investors, including conservative super funds, schools boards and local councils, the banks achieved the equivalent of financial alchemy – turning subprime loans into supposedly super-safe AAA-rated investments. For an explanation of how they did it I visited one of America's most respected finance experts, Professor Charles Calomiris of the Columbia Business School.
Thousands of subprime loans were pooled together into specially created companies. The debt was then sliced and diced into an alphabet soup of obscure bonds, collecting fees all the way. What started as a legitimate way to raise money for home loans completely lost its way.
PROFESSOR CHARLES CALOMIRIS, COLUMBIA BUSINESS SCHOOL: And you might say, what is the point of this? And I teach securitisation and I can tell you, I don't know what the point of this stuff was.
At the heart of this financial wizardry was a fatal miscalculation - that house prices would never fall. And Charles Calomiris also believes that the ratings on the bonds were deliberately inflated.
PROFESSOR CHARLES CALOMIRIS: It's absolutely clear that BBB didn't mean for these products, at the time they were rated, what BBB really means. And it was also clear to me that the investors buying these knew that.
REPORTER: And presumably you believe the ratings agencies knew that?
PROFESSOR CHARLES CALOMIRIS: Of course, they were the ones publishing the data showing it.
REPORTER: Do you believe the investment banks that marketed these things knew that?
PROFESSOR CHARLES CALOMIRIS: Of course.
REPORTER: Those huge upfront fees, those fees and ultimately the bonuses and salaries that Wall Street bankers get, does that blind them to the risk?
NOMI PRINS: There's this perception on Wall Street that you need to make this year's bonus and there's almost no perception of what happens after this year's bonus. There's no perception of the guy in some tiny little house in Detroit or in Philadelphia or in Stockton who basically might be losing their home if they can't pay the rising interest rate which they potentially didn't have disclosed to them. There's absolutely no connection in Wall Street to that person whatsoever.
The first signs of impending disaster appeared in 2006 - as interest rates rose and house prices fell, mortgage defaults started climbing. But still the lenders were shovelling out money.
Rob Marshall is a traffic controller. Along with his wife, Amber, they borrowed even more than the $257,000 needed to buy this house. Now just eight months later the economic downturn has caught up with them.
REPORTER: Why are you selling your house?
ROB MARSHALL: Loss of job and relocation.
REPORTER: So you've had to sell your house in a hurry?
ROB MARSHALL: Yep, big hurry. Talk about issues of abandonment. It's like leaving your children – I'm walking away from something that's meant so much to me.
REAL ESTATE AGENT: The bank-owned properties are really our competition right now, so..
Today they're getting the bad news from the real estate agents. The house's value has fallen significantly since they bought it.
MAN: Your last option is potentially to give the house back to the bank.
AMBER MARSHALL: This is not helping, 'cause we're packing tonight and moving in five days.
Their best option is to convince the bank to accept a quick sale and forgive the loss. But there's a catch.
AMBER MARSHALL: You know, who knows, we could go three months, 'cause sometimes what scares me is that some banks won't do anything until you've defaulted on your payment.
ROB MARSHALL: 90 days.
AMBER MARSHALL: Yeah, and that will destroy our credit, that's what we're trying to avoid.
REPORTER: So the risk is that the bank won't do a deal unless you're behind in your payments?
AMBER MARSHALL: Right.
REPORTER: So in effect you get punished for trying to do the right thing.
AMBER MARSHALL: Right, exactly, exactly.
For the Marshalls it's a crisis that has engulfed the whole family. Both of Amber's brothers and her parents have already lost their homes.
AMBER MARSHALL: As bad as your situation is there's always someone around the corner who's just as bad. You've just got to be thankful for the good and pray for the bad and hope it all pans out in the end.
From his study overlooking the devastated World Trade Centre, Charles Morris saw the crisis coming. A year ago the former banker predicted that losses would top US$1 trillion.
CHARLES MORRIS: And that's if everything goes well. Because if everything starts to crash and run and people take fright, which could easily happen, you'd easily have an instant loss of US$2 trillion, US$3 trillion, US$4 trillion.
Many of the biggest losses have been in high-risk investment funds, known as hedge funds. They were gobbling up subprime loans as fast as they could.
NOMI PRINS: If they're looking at a subprime package of subprime loans, they won't buy just one, they might borrow 10, 20, 30 times to buy basically 30 of them.
REPORTER: And they borrowed that money from the big banks, basically?
NOMI PRINS: They borrow the money from the big banks and they borrow the money from certain investment banks like Bear Stearns.
In March, the complex chain of bonds, loans and guarantees finally broke and Bear Stearns was the weakest link.
CHARLES MORRIS: To get a size of the scale of the chain it could have triggered, the length of the chain, there are $62 trillion of guarantees out there. That's more money than the country has. So once these things started to come undone, the Fed was looking at a black hole, you know, where would it end?
JACK HEALD: You know what? Your tax money is going to bail out the debts of a private organisation and your congressman didn't even get to vote on it.
America's central bank, the Federal Reserve, bailed out Bear Stearns - its first ever rescue of an investment bank. It guaranteed $39 billion of Bear Stearns' loans so that another Wall Street giant, JP Morgan, could buy it out. Today, a small group of investors has gathered outside the New York Stock Exchange to protest against using public money to rescue a private bank.
JACK HEALD: Now, if BS debt was actually worth anything, would JP Morgan have asked for guarantees from the Federal Reserve? Of course not. So we know the debt was worthless.
Jack Heald was so outraged by the bail-out, he's travelled here from Phoenix, Arizona, for the protest.
JACK HEALD: Aside from being unethical, immoral and unconstitutional it's as illegal as it can be.
Like many others, he believes that investment banks like Bear Stearns should be allowed to fail, that bail-outs will only ensure they'll continue to take excessive risks.
MAN: Those banks that are solvent and are strong can acquire the weaker ones, and the weaker ones that aren't - unfortunately the shareholders may lose, but that's the risk you take.
But the central bank sees it differently. So far the Federal Reserve has taken $200 billion worth of mortgage securities off the hands of American banks. And even so, the so-called securitisation industry is in tatters.
PROFESSOR CHARLES CALOMIRIS: The securitisation structure lost its reputation, not just in subprime but much more broadly.
REPORTER: So that means there's less money to lend to a whole range of players in the economy?
PROFESSOR CHARLES CALOMIRIS: Exactly.
This squeeze on lending is affecting much more than housing. Here at the Southern New Hampshire University, few are aware of the crisis heading their way. Student loan programs across the country have been suspended because their providers cannot raise the money.
Rene Drouin runs the New Hampshire Higher Education Assistance Network. It's a not-for-profit company that borrow money to provide loans to local university students.
RENE DROUIN: There's nothing in the market place. We're not able to issue any bonds whatsoever.
Rene is desperately trying to refinance $1.5 billion of loans, and until he can there's no money for the next crop of university students.
RENE DROUIN: Right now, we are basically dead in the water. There's no way to refinance this $1.5 billion right now.
REPORTER: Is the impact of this going to be that there are students who might otherwise have gone to university who won't?
RENE DROUIN: I believe so, I believe there will be.
The Bush Government's response to this crisis has been to put more money into the pockets of consumers. It's hoping rock-bottom interest rates, assisting the banks and tax rebates totalling $50 billion will avert a major recession. But opinions are sharply divided over whether the rescue package will work.
CHARLES MORRIS: This is the dumbest, most hopeless strategy. It makes sense only if you think that the Federal Reserve is a cabinet office of the presidency and they just want to get through till November of 2008 and find they'll hand it over to some, somebody else. But as a policy stance it makes no sense at all.
PROFESSOR CHARLES CALOMIRIS: In my view, it's not going to be as bad as many critics thought it would be. And I said so in September and so far I've been right and they've been wrong.
CATHLEEN GAGLIANI, CALIFORNIA ASSEMBLY MEMBER: While this crisis hits all Californians, the Central Valley has been particularly hard hit.
Nationally, the US may avoid a deep recession, but parts of California are already there. And here in Sacramento, the politicians are worried.
CATHLEEN GAGLIANI: It's clear to see how the foreclosure crisis has hurt families, but it is also translating to hurting California Government and local governments.
Cathleen Galgiani represents Stockton in the California Congress. She's proposing a bill that she hopes will discourage lenders from foreclosing on homes.
WOMAN: Reluctantly, I support the concept, but I don't think I can support the bill today.
MAN: We hope to protect the homeowners, that's all part of the American dream, so I commend the officer on the bill and look forward to it as it moves through the legislative process.
Cathleen Galgiani's bill passed through this committee. But it probably won't make it into law, because cash-strapped California's Governor, Arnold Schwarzenegger, is unlikely to fund the program.
CATHLEEN GAGLIANI: We're faced with a loss in revenue due to the decline in property taxes that the state is receiving. As a result we're having to make cuts at the state level. So this is hurting everyone. Everyone is feeling the pain from this.
REPORTER: Is it affecting the economy?
CATHLEEN GAGLIANI: Yes, it's had a drastic effect on the economy.
At the current rate the banks could repossess more than 2 million homes by the end of the year. For the Mireles the quick sale they'd hoped for has fallen through.
GISELLE MIRELES: I'm still carrying the key in the key chain like this was my house.
They've stopped making repayments and the bank will soon repossess the house.
GISELLE MIRELES: I wish we had never had to leave this house in the first place, but it just feels like when you walk in like the first time we walked in, and of course worse, because it's empty now and we know we can't come back to it.
The US economy will recover, but for Giselle and millions of other Americans there will be years of pain ahead rebuilding what they've lost.
GISELLE MIRELES: It's a sad experience. I think that, you know, it's just having something for years and then all of a sudden not having it anymore and coming to it. It's a sad feeling. It's sad.
Credits
Reporter/Camera
MARK MALEY
Editor
NICK O’BRIEN
Producer
AARON THOMAS
Local Producer
TARA LIBERT
Researcher
VICTORIA STROBL
Original Music composed by
VICKI HANSEN