STEVE INSKEEP, host:
It's MORNING EDITION from NPR News. I'm Steve Inskeep.
President Bush will announce the administration's first steps to try to ease the subprime mortgage crisis. That's happening today after more bad housing news. Mortgages are going up and the number of unsold properties is rising.
So we've called up Roger Lowenstein. He's the author of a best-selling biography of Warren Buffett, who doesn't have to worry too much about his home prices, and a book about the Wall Street boom and bust of the '90s called "The Origins of the Crash."
Welcome to the program.
Mr. ROGER LOWENSTEIN (Author, "The Origins of the Crash: The Great Bubble and Its Undoing"): Good morning, Steve.
INSKEEP: What happened to this stable industry? How did it become so unstable?
Mr. LOWENSTEIN: If you go back to the 1950s - what now seems a golden year of stability in home ownership - bankers would pay their depositors 3 percent, they'd lend it out on mortgages at 6 percent, and they'd be back on the golf course at 3 p.m. Three-six-three was the old joke, which connotes the stability of the era. And the whole architecture of American housing was set up to encourage home ownership. The federal government either made or, more commonly, insured loans. There were very tight regulations about what kind of mortgages banks could offer. And the level of foreclosures was very small. Most people who bought their homes paid off their mortgages.
INSKEEP: That was the story then. But how did it get - how did it change?
Mr. LOWENSTEIN: Well, first thing is the extent to which it's changed, pretty dramatic. You know, about two million Americans are said to be facing foreclosure in the next year or two. So how did it change? In the '70s, Wall Street began to get very clever. And what they did was they fashioned a new type of security that was backed by the payments of many, many homeowners pooled together, and a whole new investor market developed. In the old days, the banker made you a loan, he might have kept that loan in his drawer for 30 years. So he was pretty careful about, hey, is Steve going to be able to pay the loan back? If not, I'm going to loan to someone else. Once the investors came in, the equation changed. Then the banker says, look, I'm going to flip this loan in 30 days, or maybe even sooner. So I really don't care if Steve can pay back the money. I'm going to get a fee for originating the loan and I'm going to sell it. They had an effect that weakened lending standards.
INSKEEP: Is there a problem here with what Barack Obama, the presidential candidate, has called deceptive lenders, people who really went out of their way to get people into loans that they could not possibly pay back?
Mr. LOWENSTEIN: You know, deceptive lending is a problem, but I always think that it's always easiest to fool someone who wants to be fooled. And a lot of these borrowers went in trying to stretch the price they could pay, trying to get the best immediate deal on interest rates, even knowing that, you know, the rate was subject to upward revision if the climate changed. The point is that the loans that were made were too dicey. Your home is too important to turn in to a casino.
INSKEEP: And what about the self-policing for money on Wall Street, these bond-rating agencies? Shouldn't they have been looking into this and saying, you know, you're packaging and selling a bunch of these risky mortgages, this is not a good investment?
Mr. LOWENSTEIN: The bond-rating agencies are the most problematic part of the equation, because there's an interim step between when the bank sells the loan to the Wall Street firm and the Wall Street firm sells it to the investor, which is the Wall Street firm runs and gets a rating. And the rating agencies seem to be asleep. You know, it's really not a lot - it doesn't do us a lot of good for them to come in, as they are now, and lower the ratings on stuff after the foreclosures are already mounting.
INSKEEP: So are we in a housing dip or at the beginning of some kind of slow-moving crash?
Mr. LOWENSTEIN: Well, housing dips are always slow moving. Prices have started moving down. And, you know, there's no way to know how far they've move down, but the fact that they went up sharply in the last five or six years suggest that the way down could be prolonged.
INSKEEP: Roger Lowenstein is the author of "The Origins of the Crash." And you can also read his report about the housing market in this Sunday's New York Times magazine.
Thanks for your analysis.
Mr. LOWENSTEIN: Steve, it's a pleasure.
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