The loan at the heart of a new foreclosure crisis

SPEAKER_1 (0:01)

This is Planet Money from NPR.

Jeff Guo (0:06)

Last year, Jack Bologna was sitting at his desk in Baltimore when he got the tip that would turn into the biggest story of his career. A sprawling investigation into the mysterious pools of money pouring into the US housing market.

Jack Bologna (0:21)

I got a text that said, interested in a story about two big investor foreclosures?

Jeff Guo (0:27)

Jack is a local reporter at the Baltimore Banner. He's always written for local newspapers, started out in the Midwest, writing about meth rings and heroin busts. Couple years ago, he came to Baltimore.

Jack Bologna (0:37)

I cover business and development, which is vague enough that you get to cover a lot of stuff, I feel like, because, you know, what is development?

Jeff Guo (0:45)

What is development?

Jack Bologna (0:47)

Well, that's a great question. If I have to answer that, then I might define my butu mind.

Jeff Guo (0:51)

Basically, Jack's job is to write about how companies and jobs and investment dollars flow in and out of Baltimore, which is how he got this tip. It's from an anonymous real estate insider who tells him over the phone, apparently, two people, two investors, had been buying up a bunch of homes in Baltimore, mostly old, bro homes, and now a lot of those homes were going into foreclosure, ending up on the auction block.

Jack Bologna (1:17)

These folks were from out of town. They had bought so many houses so fast.

They had borrowed a huge amount of money. You kind of start doing the math in your head, and you're like, oh, this is going to have big ripple effects.

Jeff Guo (1:30)

So Jack turns around in his chair and starts telling all of this to the housing reporter at the banner. Her name's Hallie Miller.

Hallie Miller (1:36)

Jack is the kind of colleague who gets really excited about things right away. And so he hung up the phone, and looked at me and said, hey, I think I have a huge story here.

Jeff Guo (1:48)

Hallie had been covering the housing beat in Baltimore for years. Recently, more and more investors had been swooping in, buying old homes here and fixing them up, which according to Hallie's sources was great news for the city.

But there was something weird about these particular investors. For one, they kind of came out of nowhere just a couple years ago. The paperwork had the address of some suburb north of New York City. Were these names well-known in the Baltimore community?

Hallie Miller (2:15)

No, no one had ever heard of them.

Jeff Guo (2:17)

So they were like nobodies?

Hallie Miller (2:18)

They were kind of nobodies.

Jeff Guo (2:19)

Yet, yet as Jack and Hallie start to piece together the public records, they soon realized that these two people that nobody had ever heard of, had quickly and quietly amassed what Jack and Hallie believe to be one of the largest private real estate portfolios in Baltimore, over 700 homes.

And, of course, these investors weren't buying the homes with all their own money. They were taking out loans. Lots and lots of loans. So Jack and Hallie start building this ginormous spreadsheet, putting in how much each home cost, how much money these investors had borrowed on each one. They add it all up.

Hallie Miller (2:56)

We ran the number of, okay, so how much are we talking here? I want to say we ran it more than once, just to make sure, you know, because you see it once and you're like, that can't be right.

Jeff Guo (3:06)

Somehow, in just the span of a couple of years, these two investors managed to borrow about $100 million. That is when Jack and Halle realize something really weird is going on.

Jack Bologna (3:19)

I was like, what the heck, you know?

Jeff Guo (3:20)

Yeah, where did all that money come from? And now, where did it all end up?

Hello, and welcome to Planet Money. I'm Jeff Guo. As Jack and Halle started to follow the trail of those $100 million, they would soon realize that they had stumbled across a story that went far beyond just Baltimore. Today on the show, there is a new type of loan that is sweeping through the country right now. It's advertised as a super quick, super easy way to get a mortgage to buy a home. In recent years, Wall Street has been funneling billions of dollars into these loans.

But these loans are also raising questions. Are they a financial innovation that's helping the housing market? Or a sign that Wall Street might be forgetting some of the mistakes of the past?