Subprime Mortgages Worry Investors

A selloff of shares in subprime mortgage lending companies was partly to blame for the slump in the stock market Tuesday. Michael Mandel, chief economist with Business Week, talks with Madeleine Brand.

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MADELEINE BRAND, host:

From the studios of NPR West, this is DAY TO DAY. I'm Madeleine Brand.

LUKE BURBANK, host:

And I'm Luke Burbank.

Coming up, we'll talk to a guy who's looking for the economic silver lining in global warming.

BRAND: But first, to the big picture economic story that might have some personal consequences. Stock markets around the world today took a hit after yesterday's sell off in New York. That sell off was triggered in part by increased foreclosures in the housing market, especially for so-called sub-prime mortgages.

The sub-prime market was developed to give loans to borrowers who wouldn't qualify for a regular loan. Now, some of those borrowers are having trouble paying back their loans.

Michael Mandel is chief economist for Business Week magazine, and he joins me now. Welcome, to DAY TO DAY.

Mr. MICHAEL MANDEL (Economist, Business Week): Oh, very glad to be here.

BRAND: Well, what are we seeing right now in the sub-prime mortgage market?

Mr. MANDEL: What's happening is that the sub-prime borrowers had been the people who are worst hit by the said interest rate increases. For the rest of us, you know, the rates went up and we were able to set up refinance into low-rate, fix-rate loans. If you're a corporation, you could take out low-rate bonds. But if you are a poor, sub-prime borrower, you've been stuck with mortgage rates that just keep going up and up, and they can't pay it. And that's hitting the sub-prime lenders, and there's going to be a lot of turmoil in that part of the economy.

BRAND: And, how is that going to affect the larger economy, if it's going to assess the larger economy?

Mr. MANDEL: Well, they may not affect it that much, because the sub-prime market, while, you know, sort of large in absolute size - actually very small compared to the overall mortgage market, and even smaller compared to the size of the whole economy. So we're going to see some of the sub-prime lenders go down. We're going to see a lot of pain among sub-prime borrowers, you know, people are going to lose their homes.

But if you're a person who has a decent job and a decent income, what's happening is that your mortgage rate is actually going down. And so we have this odd situation where there's pain intensely concentrated in one sector of the economy, and everybody else is kind of doing okay. And unless something gets really screwy, that's what's going to happen.

BRAND: Well, here are the fears as I've heard them, that there will be a general tightening because of the sub-prime market having some problems. There will be less money available for all types of loans, and a general tightening in terms of credit worthiness. So it'll be harder to just to get loan. And so that will mean, in general, there will be fewer borrowers available. And sellers will have to lower the prices on their houses and maybe take a hit.

Mr. MANDEL: Well, that's certainly could happen, but at least so far the 30-year mortgage rate that applies to most people has been falling. The 15-year mortgage rate has been falling. And the reason why is all the investors who formerly put their money into sub-prime loans are now moving it to the safer primes.

We have a low unemployment rate. We have a growing economy. And as long as the economy keeps growing, people are going to be able to pay back their mortgages.

BRAND: So, in general, this is affecting poor people. The people…

Mr. MANDEL: This is affecting poor - the way to think about the Fed's rate increases is that they turned out to be a regressive tax on poor borrowers. And people with decent incomes have been able to get decent rate mortgages, and if they had arms, they were able to move into cheap fixed rates. The only people who couldn't move out of the way of the Fed's interest rate hammer were the poor and the people who lent to the poor.

And I think what's going to happen is you're going to have a massive blowback on that. And the political fallout will be very large, but the economic fallout won't be.

BRAND: Michael Mandel is chief economist for Business Week magazine. Thanks, Michael.

Mr. MANDEL: Glad to be here.

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