Financial Troubles Spread Among Mortgage Lenders
LIANE HANSEN, host:
This is Weekend Edition from NPR News. I'm Liane Hansen. Uncertainty in the housing market and the slump in the economy took its toll on the stock market this past week. At one point Friday, the Dow Jones industrial average fell below 11,000 for the first time in two years. Wall Street investors were dumping their shares amidst fears that the nation's biggest mortgage lenders are in major trouble. Late Friday, there was more bad news, the failure of IndyMac Bank, the second largest financial institution to close in U.S. history. NPR's Curt Nickisch joins us from the studios of WBUR in Boston. And Curt, it's been quite a worrisome week.
CURT NICKISCH: Boy, Liane, you know it's been a doozy of a week when you start the next one off with a brand new bank. Tomorrow, IndyMac is going to open as IndyMac Federal Bank. U.S. regulators have taken it over after so many of the home loans it gave out were in default. People got nervous, they made a run on their deposits, and the bank went under. Right now IndyMac is the only bank of that size to fail lately. But it's troubling because many banks are losing money on foreclosed properties.
HANSEN: Of course, IndyMac is a private lender, not related to Freddie Mac or Fannie Mae. Those are two government-sponsored mortgage giants. But you know what? Those two could be in trouble, too. Their stocks went in - it was a depressing ride this past week. Why is everyone so afraid?
NICKISCH: Well, Fannie and Freddie, of course, face the same problem from rising foreclosure, except many more times. So, they write about half the country's mortgages. They've lost about eight billion dollars in as many months. And the more they lose, the less other financial institutions want to lend to them. And they need money to underwrite new home loans.
Now, Federal officials this past week took a bunch of opportunities to try to reassure people that these companies are doing reasonably well. But how bad it gets for them really depends on when and where the housing market hits bottom. No one knows that, and that's making many investors pretty sick to their stomachs.
HANSEN: So, what does this mean then for consumers?
NICKISCH: Well, for one, if the federal government has to give Freddie and Fannie a hand, that's a burden on tax payers. But the immediate danger is that these two companies are such big players in home loans, if they can't raise money cheaply, that means the home loans they back won't be cheap either. You want to buy a house, you might get higher rates and fees. That only discourages people from buying which only makes the housing downturn worse. And Liane, in the end, housing, whether its construction or bank loans or just buying a new couch when you move into a new place, it all adds up to such a big part of the economy.
HANSEN: Give us a preview of what is going to happen this week.
NICKISCH: Tomorrow, there's some new Truth in Lending rules coming out. They're designed to sort of build up more confidence in the mortgage industry. There's also a slew of corporate earnings results coming up on Wall Street. Investors aren't only going to be looking at how companies have been doing, but how they think they are going to do in the months ahead. And Fed chief Ben Bernanke talks to Congress this week. That'll be a good chance to see how willing the Federal Reserve is to help out Freddie Mac and Fannie Mae if they get stuck in quicksand and really start sinking.
HANSEN: But investors will be - will really be watching Fannie and Freddie Mac to see what happens?
NICKISCH: Yeah, they're just such key, you know, indicators. If they go one direction, and that means the housing market goes in one direction, that just brings so much of the economy with it.
HANSEN: NPR's Curt Nickisch. Thank you very much, Curt.
NICKISCH: Sure thing.