RENEE MONTAGNE, host:
This is MORNING EDITION from NPR News. I'm Renee Montagne.
STEVE INSKEEP, host:
And I'm Steve Inskeep.
You can see some of the complexities of fixing the mortgage market when you look at one piece of the problem. It's a change in lending that got many Americans into homes in recent years. It's also a change in lending that's causing many Americans trouble today. And it's a change that caught some attention in the presidential campaign this week.
Senator John McCain raised it among many issues in a speech on the economy. He says too many Americans were able to buy houses with little or no down payment.
Senator JOHN MCCAIN (Republican, Arizona): Policy should move towards insuring that homeowners provide a responsible down payment of equity. So many homeowners have found themselves owing more than their home is worth because many never had much equity in the house to begin with.
INSKEEP: So this morning we will talk about that one problem identified by Senator McCain. NPR's Chris Arnold is covering the credit crisis. And Chris, explain why it would be a problem if a homeowner paid no money down to get into a house?
CHRIS ARNOLD: Well, Steve, what happens is, you know, if prices fall soon after you bought the house, then you're quickly upside down. And what that means is, you know, you owe more than the house is worth. In the past there haven't been a whole lot of people in that situation, but according to some economists' estimates, we're in a situation now where one in ten homeowners around the country could be upside down.
INSKEEP: I suppose that makes people nervous because if you had put, say, 20 percent down on the house and home values went down 10 or 15 percent, as they have in much of the country, you'd still have a little bit of equity in the house, you'd still have a mortgage that was worth a little bit less than the house is.
ARNOLD: Right. You'd have a cushion, you know, so that if something went wrong, you know, you're between jobs for a few months or your rate resets up and your payments rise - if you have that 20 percent equity cushion, there's all sorts of things you can do. If you don't, you know, you have to sell the house for a big loss or get foreclosed on. And that's what's happening to a lot of people.
INSKEEP: So how did it happen that so many Americans got into homes with very small down payments or no down payments?
ARNOLD: Initially it wasn't a terrible thing. You know, it actually was promoted by non-profits and pushed by the government. And the idea was, look, you know, there's a lot of people out there who really could be homeowners, they have a solid job but they don't make that much money. They haven't been able to save much. So you know, there were kind of smaller targeted programs to find people like that and get them a home.
INSKEEP: Okay. What changed then?
ARNOLD: It used to be that when banks loaned you money they were very careful because it was their money they were loaning you and they wanted you to pay it back. And what's changed is loans now get sold off to Wall Street and to investors all over the world. So giving somebody a loan or selling them a loan became more about the commission for a lot of lenders. And there are lenders who aren't regulated very well, they aren't major banks.
And what they were doing - this was kind of like buying a car, you know, or a used car - and it became more about making that loan sale, getting that 10, 20 thousand dollar commission, and then it was somebody else's problem. And so that sort of inherent control came off the system and now it became a commission game.
INSKEEP: Well, before we get too carried away here, let me just check. Has this one practice among many really had that big an effect on the housing boom and the resulting bust?
ARNOLD: It's not just there were zero-down loans being written out there. A lot of these loans were written and given to people who, yeah, they put zero down but they also didn't have a good job, and you know, their credit was terrible and their interest rate was set to go through the roof to a level that they could never afford to pay, and that's the bigger problem, that all kinds of controls came off the system here.
INSKEEP: And then you had all these questionable kinds of loans being packaged and sold on Wall Street.
ARNOLD: Right. And you know, there were other loans too. Some called low-doc or no-doc loans, and these were initially for, say, a carpenter who made $150,000 a year but he tells the government he makes 50,000. You know, those loans though started to go to people who didn't make $150,000. They didn't have any job at all. You know, they just, people would make up incomes and write them in and, you know, again, the system was broken.
INSKEEP: So granting this is just one factor, I suppose we could say it's a real factor that did get a lot of Americans into homes. How much pressure is it to dial back on that now and increase the requirements for down payments on homes in the future?
ARNOLD: Well, there is a lot of pressure for greater regulation. Both Republicans and Democrats are calling for greater regulation. In terms of banning any one particular type of loan, I don't think either side has a whole lot of stomach for that. But everybody's talking about having better controls in the system to guarantee that lenders are giving people loans that they can pay back.
INSKEEP: NPR's Chris Arnold, thanks very much.
ARNOLD: Thanks, Steve.
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