NPR: mortgages, like yours or your neighbor's; the housing market. Overall, housing prices continue to fall. And given the recent dire news, you might expect that millions of Americans are losing their homes. But not yet; NPR's Frank Langfitt explains.
FRANK LANGFITT: You see them in the hard-hit parts of the country - Florida, California, Nevada - though in most other states, not nearly as much. They're foreclosure signs, and their relative absence outside those hot spots puzzled me. Everyone knows that foreclosures in risky, subprime mortgages have soared. But they're only a small part of the market. So I called the Mortgage Bankers Association, to get the big picture. I spoke with Jay Brinkmann, the chief economist.
How many mortgages do we have in the United States right now?
JAY BRINKMANN: About 51 million first mortgages.
LANGFITT: And how many of those are either referred foreclosure, or in foreclosure?
BRINKMANN: It's about 1.4 million.
LANGFITT: In other words, less than 3 percent of all American homes are in foreclosure. [POST-BROADCAST CORRECTION: The figures given in the report refer specifically to homes with mortgages. The percentage would be lower if all homes were included.] Historically, that is very high, and many families have been devastated. But given the gravity of the current crisis, you might expect worse numbers. The problem is this: That small percentage of bad loans is doing damage to the financial system. Bad mortgages are mixed with good ones, in securities that are crippling investment banks. No one wants those securities even though, as Max Wolff says, not all the loans are bad. Wolff is aneconomist who teaches at the New School in New York.
MAX WOLFF: Inside these bundles of mortgages are lots of great mortgages - or at least, ones where Joe Smith and wife are going to pay back all the money. They're going to make their payment every month even if it hurts; even if it means they don't go out to eat as much, or go to the movies.
LANGFITT: Wolff says the public forgets that most people didn't take out subprime loans they couldn't afford.
WOLFF: Lost in this story is the heroic struggles of lots of families, and lots of people, to pay those mortgages - which they proudly honor, at great cost.
LANGFITT: Brinkmann says some investment banks were overexposed to subprime, but they also have good loans people continue to pay. Brinkmann thinks that provides underlying value to securities that some investors now view as toxic.
BRINKMANN: Probably more than half of the loans in those securities are performing fine. And of the loans that are not performing, your losses are still going to be limited by what is the value of the house, if it goes into foreclosure; or what, possibly, can be worked out. So, it's not as though you lose every dollar.
LANGFITT: Consequently, Brinkmann thinks some securities are worth much more than they've sold for recently.
BRINKMANN: Merrill Lynch, not too long ago, was forced to liquidate a bunch of their portfolio at 22 cents on the dollar. I think the real value was well north of 22 cents; that ...
LANGFITT: How far north?
BRINKMANN: It'll differ by security - from security to security. But at a minimum, it's double 22 cents.
LANGFITT: The difficulty, of course, is that the mortgages have been sliced up and sold so many times, they are extremely hard to value. And investors are so worried about a continuing fall in housing prices, there's no market. Julia Gordon is policy counsel for the Center for Responsible Lending, a homeowners' advocacy group.
JULIA GORDON: The real problem is, nobody knows which mortgages are good, and which mortgages are bad. I will say that most investment bankers I've talked to, only partially understood what they were doing.
LANGFITT: So now, a problem that began with a small percentage of mortgages threatens the financial world. And the government will have to buy those mortgages, to bring stability back to the system. Frank Langfitt, NPR News.