The loan at the heart of a new foreclosure crisis

Planet Money

This Planet Money episode investigates a surge in DSCR loans—commercial mortgages that don't require income verification—spurring a wave of

Key takeaways

• DSCR loans allow real estate investors to borrow without proving income, employment, or assets—raising red flags about financial oversight.

Main topics

• DSCR loans
• Real estate investment in distressed neighborhoods

Notable quotes

"It does not care how much money you make. It requires no employment, no income verification. Zero."

Conclusion

While DSCR loans have enabled rapid investment in blighted neighborhoods like Baltimore, their

Transcript preview

Speaker 7 (0:00) This message comes from Bloomberg. Odd Lots is a podcast that explores the most interesting and relevant topics in finance, markets, and economics. Join the conversation with Joe Weisenthal and Tracy Allaway every Monday and Thursday. Listen to Odd Lots wherever you get your podcasts. Speaker 8 (0:17) This is Planet Money from NPR. Speaker 1 (0:23) 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 U.S. housing market. Speaker 4 (0:38) I got a text that said, interested in a story about two big investor foreclosures, question mark. Speaker 1 (0:44) 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. A couple years ago, he came to Baltimore. Speaker 4 (0:54) 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? What is development? Well, that's a great question. If I have to answer that, it might define my B2 mind. Basically, Speaker 5 (1:09) Jack's job is to write about how companies and jobs and investment dollars flow in and Speaker 1 (1:15) 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 pro homes. And now a lot of those homes were going into foreclosure, ending up on the auction block. Speaker 4 (1:34) 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, you know, doing the math in your head and you're like, oh, this is going to have big ripple effects. Speaker 1 (1:47) 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. Speaker 2 (1:53) Jack is the kind of colleague who gets really excited about things right away. And so he hung up the phone, looked at me and said, hey, I think I have a huge story here. Speaker 1 (2:05) 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? Speaker 2 (2:32) No, no one had ever heard of them. Speaker 1 (2:34) So they were like nobodies. Speaker 2 (2:35) They were kind of nobodies. Speaker 5 (2:36) Yet, yet, as Jack and Hallie start to piece together the public records, they soon realize 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. Speaker 2 (3:13) We ran the number of, OK, 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. Speaker 5 (3:23) Somehow. In just the span of a couple years, these two investors managed to borrow about $100 million. That is when Jack and Hallie realize something really weird is going on. I was Speaker 4 (3:36) like, what the heck, you know? Speaker 5 (3:37) Yeah, where did all that money come from? And now, where did it all end up? Speaker 5 (3:46) Hello and welcome to Planet Money. I'm Jeff Guo. As Jack and Hallie started to follow the trail of those hundred million dollars, they would soon realize that they Speaker 1 (3:55) 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? Speaker 2 (4:30) Hey, what's your problem? No, seriously. Are your grocery bills too high? Are you spending too much time on your phone? Maybe you're searching for a new job or you're trying to figure out how to set boundaries with your family. Whatever's on your mind, Life Kit has you covered with three episodes every week on health, money, mental health, and so much more. Listen to the Life Kit podcast in the NPR app or wherever you get your podcasts. Speaker 3 (4:57) Hey, it's me, Peter Sagal, host of Wait, Wait, Don't Tell Me. It's leaf peeping season, so why not peep our weekly news quiz while you're at it? We got comedians, celebrities, and games to help laugh about the week's news, and you can listen while you're spicing your pumpkins, whatever people do. Listen every week to Wait, Wait, Don't Tell Me on the NPR app or wherever you get your podcasts. Speaker 1 (5:20) The city of Baltimore is famous for its row homes. They're these two- or three-story, boxy-looking townhouses that go on for block after block. Row homes make up about half the city's housing. But a lot of those row homes are not in good shape. The brick is crumbling. The windows are boarded up. But just in the past couple of years, that picture has been changing. Hallie says suddenly there was a lot more money available to the people who wanted to buy and rehab these homes. Her sources told her a major reason for all this money was this amazing new type of loan coming from Wall Street. Speaker 2 (5:55) It was basically a new way for people to get financing that had previously been unable to get it from traditional banks. Speaker 1 (6:02) Hallie had actually been looking into this story that day when Jack told her about these two investors that came out of nowhere and suddenly built this huge portfolio of homes. Those $100 million they had borrowed and now apparently couldn't pay back? They had gotten that money through this new kind of loan. It's called a Debt Service Coverage Ratio Loan, a DSCR loan. Speaker 4 (6:24) When I learned about that, I was like, what the heck is a DSCR loan? What is debt service coverage what, you know? And then I looked it up and I was like, what the what? Speaker 5 (6:33) A DSCR loan is a type Speaker 1 (6:35) of mortgage, but it's not your traditional kind of mortgage. It's a commercial loan. It's designed for people who want to be landlords, who want to buy a home specifically to rent it out. And unlike a traditional Speaker 5 (6:47) mortgage, A DSCR loan has this very unusual feature. In fact, when Jack first Googled it, he came across tons and tons of people talking about it. Speaker 7 (6:56) It's called a DSCR loan. It's called the DSCR loan. You can buy an investment property without showing any W-2s, tax returns, or any income at all. It does not care how much money you make. It Speaker 3 (7:07) requires Speaker 7 (7:07) no Speaker 3 (7:07) employment, Speaker 5 (7:07) no income verification. Zero. Speaker 7 (7:10) And it's not a scam. Speaker 5 (7:11) To get a DSCR loan, you don't need a job. You don't need to prove any income at all. And when Jack and Hallie first heard about these no income loans that were sweeping through Baltimore, they were like, how is this even possible? And yeah, here at Planet Money, we all had the same reaction. Because remember the global financial crisis? In the run up to that, banks had been giving out all these