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SCOTT SIMON, host:

The subprime lending market is the part of the mortgage industry that lends to people with less than perfect credit. Now in recent weeks, it's becoming increasingly apparent how overextended many subprime lenders have become. Delinquencies and foreclosures are on the rise. One of the biggest subprime lenders, New Century Financial Corporation, has stopped making new loans.

Here to help us understand what's happened, whether it will affect the overall economy is our man from the world of business, New York Times columnist Joe Nocera. Joe, thanks for being with us.

Mr. JOE NOCERA (Columnist, New York Times): Thanks very much, Scott.

SIMON: Remind us how does a mortgage work from one of these subprime lenders?

NOCERA: Well it's not that different from a prime lender, except that the borrower has a lot less money than somebody who buys a normal mortgage. In fact, sometimes, they don't have that much money at all. The way this - I shouldn't call it a scam - but the way it works is you buy a house for $100,000 with no money down. It goes up in value, say, to $115,000 at the point, which you're supposed to pay a higher interest rate because, you know, these are all low-rate beginnings and they jump up.

And so what happens is they use the extra equity in the house to refinance. So the rates are still low. So, you know, it's like you're on a treadmill and suddenly, the treadmill stops. So once housing prices stop going up, all these people who had these loans suddenly couldn't afford the higher rate and they begin defaulting.

And the truth of the matter is, as this was going on, the lending standards became lower and lower and lower, and there were people who really shouldn't be getting these things in the first place who were getting them and defaulted almost immediately.

SIMON: What's the effect on the overall economy when this begins to happen?

Mr. NOCERA: Well so far it's been limited. I mean, you know, Wall Street holds a lot of these mortgages. I mean, one of the ways this works now is you securitize with mortgages. You sell them to Wall Street. You know, they've been hurt a little bit. The other credit markets haven't been hurt that much.

But the real effect, the thing that you worry about, is that if this spreads into the prime market and, you know, housing prices are not going up and, you know, people who have regular mortgages - not subprime mortgages - are going to face the same problem, which is, you know, they're going to have to pay higher interest rates and higher debt service on their loans. And there's a real worry that if this leaches into the rest of the mortgage market, it will really slow down the mortgage market, the housing market, and housing is really what's driven the economy the last three or four years.

SIMON: What can or should or might be done about problems now with subprime lenders?

Mr. NOCERA: Well the amazing thing about this, Scott, is we went through this in 1998, a slightly less severe version of this. Companies went out of business. I mean, the ad - remember the ads for the Money Stores?

SIMON: Yes, of course.

Mr. NOCERA: The Money Store doesn't exist anymore. They were subprime lender. And what's amazing to me is that here we are, eight years later, just eight years later, and the same thing has happened, only worse. And you sort of wonder are institutional memories that short that we can't even remember this just happened? And so when you think about what just happened in subprime, you just think to yourself, why do people lose their heads, and I'm not just talking about the people who buy the homes, I'm talking about the companies themselves. Which, you know, they lower their lending standards and pretty soon, they're giving what are called liar loans.

That's a great one where...You know, liar loan is where there is no income verification whatsoever. There's not only there's no money down, but there's no income verification. And that's where we've been in the last year and a half or so. We've been in the land of the liar loan.

SIMON: Does government, state or federal government, have an incentive to get involved with greater regulation of subprime lenders or anything like that to prevent this from happening again?

Mr. NOCERA: Sure they do. They do for two reasons. First of all, it is the American dream to own a house. And a government has an incentive to want people who are, you know, middle class or even lower than middle class to be able to own their own house. That's just part of who we are as a culture.

Now, you know, the problem is that they will fix yesterday's problem and that will be good but they won't anticipate tomorrow's problem. So, you know, when you think to yourself, you know, how avoidable was this? The answer is it's incredibly avoidable. But on the other hand, it bumps up against the sort of classic, human behavior when it comes to all things having to do with money -which is that eventually greed overtakes fear and people lose their heads.

SIMON: Joe Nocera, our friend from the world of business, writes a column for The New York Times. Thanks very much.

Mr. NOCERA: I...thanks for having me, Scott.

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