On today's Planet Money:
We revisit the show that fathered our podcast — The Giant Pool of Money.
In that collaboration between NPR and This American Life, Adam and Alex set out to explain a simple question: "Why would the financial services industry rush to make lots of loans to people who couldn't pay them back?" They traced the mortgage chain from the people who took out the loans to those who re-packaged them and sold them off.
That show aired in May of 2008, several months before we knew the extent of the giant financial collapse we were headed for. Today we visit two of the people featured in that piece — Richard, a Marine who was facing foreclosure, and Jim Finkel, a CDO manager, to see they've fared in the downturn.
Bonus: Strategic defaults, then and now.
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Here's a New York Times story about strategic or "ruthless" defaults from May 10, 2008. Mortgage Holders Find It Hard to Walk Away From Their Homes:
The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet "jingle mail," the term for those tinkling packages of keys, appears to be far rarer than many seem to think.
Freddie Mac, the big government-sponsored mortgage company, estimates that just 0.14 percent of the defaulted mortgages in its portfolio involved properties that were abandoned by borrowers. Fannie Mae, another mortgage company, puts the figure in the single digits. Both companies deal in relatively conservative loans, so the total rate may be somewhat higher. Industry officials say they have no way of knowing for sure.
The low numbers from Freddie Mac and Fannie Mae are consistent with past housing busts, like the ones that occurred in Texas in the 1980s and in the Northeast and California in the early 1990s. Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage, usually because of job loss, a death in the family, divorce or a big jump in their monthly payments.
Here's some recent figures from the Los Angeles Times:
The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.
Two-thirds of strategic defaulters have only one mortgage — the one they're walking away from on their primary homes.
Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
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