MELISSA BLOCK, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.
MICHELE NORRIS, host:
And I'm Michele Norris.
In this half hour, an update on the subprime lending crisis and its fallout for other parts of the real estate industry. Subprime loans are the ones made to people with less than perfect credit, and the subprime industry grew enormously in recent years, from $35 billion in the mid-'90s to $625 billion in 2005. Often these loans don't require a down payment. Some lenders didn't even do background checks to verify income. So if interest rates started to rise, as they have for the last couple of years, many homeowners found they couldn't keep up with their mortgage payments. Some two-dozen lenders shut down operations. One of the largest, the New Century Financial Corporation, filed for bankruptcy this month.
In a few minutes we'll check in on Minneapolis, one of many areas that seen a recent spike in foreclosures. First, to get the sense of the scale of the problem, we turn to Cathy Lesser Mansfield from Drake University Law School in Des Moines. Professor Mansfield has been studying the subprime industry, and she says experts knew the crisis was coming for the last few years.
Professor CATHY LESSER MANSFIELD (Law, Drake University): As the practices got worse and worse, the risk of the crisis got larger and larger. I think that given the types of loans that have been made in the last year or two, and the propensity for these loans to fail, you know, within their first several years, were just seeing the tip of the iceberg right now.
NORRIS: It's not unusual to pick up a regional paper and see on the front page a story about a spike in foreclosures in a local area. Give us a sense of the scale of this problem across the country.
Prof. MANSFIELD: Well, I think that, you know, it's clearly getting worse and worse, and it's having, you know, an echo effect or a domino effect in communities. I know there have been stories about neighborhoods that have high concentrations of foreclosures and that there's the individual cost, you know, the family that loses their home. And then there's the sort of neighborhood-wide cost like abandoned properties after a foreclosure before a resale and that sort of thing. There are predictions of how much worse the foreclosure situation is going to get. People are predicting a one-in-five failure rate for subprime mortgages; that came out of a study at the Center for Responsible Lending in North Carolina. And foreclosure rates are up there now in the - almost to 20 percent. So I think it's still going to go higher before we see the end of this.
NORRIS: Now, we've been talking about foreclosure rates. There's also sort of another way to measure this, the number of default notices that have been sent out to families, to homeowners. What does that tell us?
Prof. MANSFIELD: Well, it clearly tells us who's sort of getting in line for foreclosures. And for the families, it has all kinds of other consequences that we need to think about. Many families that have an affordable teaser rate -that's what we like to call it where it's two years at a particularly low rate and then it jumps up. Once the rate resets, they can't afford their mortgage payment anymore. And most people are willing to pour as much of their resources as they can into their mortgage. And that means that other needs like food and other costs get sort of put by the wayside. So it's both a predictor of upcoming foreclosures and it's - to me, it's an indication of families who are at risk of failing on all sorts of other ways.
NORRIS: So if we're going to start seeing these default notices arriving in mailboxes all across the country, more for sale signs, more homes placed at auction because of these foreclosures, what does that mean for the rest of the people who live in those communities?
Prof. MANSFIELD: Clearly it's a community-wide issue, and we need to be concerned about this because our entire fabric as a society is based on home ownership. Our schools are tax bases. You know, the home value of your own house depends on what's happening around you. And it's also an issue that I think we have to have some empathy about. You know, being able to raise your family in a home where you aren't forced to move or forced to be homeless is something that is, you know, the good old American dream. And when one in five people who think they've arrived at that dream are ending up some place else, it's something we should definitely be concerned about.
NORRIS: That was Cathy Lesser Mansfield of Drake University Law School in Des Moines, Iowa.