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What If No One Pays Rent?

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UNIDENTIFIED PERSON: This is PLANET MONEY from NPR.

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JACOB GOLDSTEIN, HOST:

The other day, we called up Emily Gordon. She works as a server at a Mexican restaurant called Cafe Ynez in Philadelphia - or at least she used to work there until last month when she got laid off, like so many other people who work at restaurants all around the country.

MARY CHILDS, HOST:

And just like so many other people across the country, she found herself in this position where her income had totally stopped but her bills had not.

GOLDSTEIN: So today - we happen to be talking to you on the first of the month, on April 1. Is your rent due today. Or when is your rent due?

EMILY GORDON: So it is due today.

GOLDSTEIN: And you said you had money saved up. How much money did you have saved up?

GORDON: I had about 1,500 bucks saved.

GOLDSTEIN: OK. And what's your rent?

GORDON: My rent is typically 750 bucks.

GOLDSTEIN: OK. So that's a lot of your savings. I mean, obviously, if you don't have income.

GORDON: Yeah, it would be a half. Yeah.

CHILDS: Emily decided that without any income and without any way to go back to work as a server anytime soon, she shouldn't spend half her savings on just this month's rent. Philadelphia, like a ton of other cities in America, has introduced a moratorium on evictions. So it's not like she's about to get kicked out. But she did want to pay something.

GOLDSTEIN: And so what did you pay this month?

GORDON: $375.

GOLDSTEIN: Three seventy-five - still a big chunk.

GORDON: Yeah.

GOLDSTEIN: Why are you paying rent at all? Why not pay no rent?

GORDON: I did, you know, want to pay something because it's like a domino effect. You know, everyone not paying rent can lead to a serious economic collapse. First, you know, the tenants don't have any income coming in. They're broke. So now the landlords don't have any income, and they're broke. So that's an issue. And I don't really know what happens after that, but I do know at some point the government has to step in. So I don't know if that's relevant, but that's just what I've been wondering.

GOLDSTEIN: I feel like you've explained our whole show. So do you just want to go ahead and say hello and welcome to PLANET MONEY?

GORDON: Oh, my God. I'm so flattered. Holy s***. (Laughter) Thank you. Did you mean that...

GOLDSTEIN: Yes.

GORDON: ...For real, though?

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GORDON: (Laughter).

GOLDSTEIN: Go ahead.

CHILDS: Yeah, do it.

GORDON: Oh, really?

GOLDSTEIN: You know it.

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GORDON: Hello, and welcome to PLANET MONEY.

GOLDSTEIN: I'm Jacob Goldstein.

CHILDS: And I'm Mary Childs. Today on the show, what happens when millions of Americans suddenly can't pay their rent or their mortgage? We follow the chain all the way from Emily to her landlord to the multitrillion-dollar global mortgage market that is sort of falling apart even as we speak.

GORDON: All right. Thank you so much. It's really great talking to you guys.

GOLDSTEIN: OK. Thank you. Good luck.

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CHILDS: The day after we talked to Emily Gordon, we called up her landlord. His name is Ed Edge. He owns four small buildings in Philly. He has some 14 tenants total. And for Ed, being a landlord is actually a side hustle.

ED EDGE: Being a landlord is not my full-time job. I'm a flight medic.

GOLDSTEIN: What does that mean? What do you actually do?

EDGE: I'm a flight medic in the helicopter.

GOLDSTEIN: Wow. Is that job scary right now? I mean, not that that's exactly what we're talking about, but I can't not ask. Like, what was your last shift? Tell us about your last shift.

EDGE: Last shift had two COVID patients...

GOLDSTEIN: Oh, my God.

EDGE: ...One ended up dying on us. The other one was my age and is on a ventilator. So I think the scariest thing about this whole thing is that I'm 33, and most of my COVID patients have been my age with no pre-existing conditions. And it's just the more and more people you see that look like you and are your age, the more you realize that like, oh, this is a huge possibility of what my future's going to look like - the possibility of getting the disease and ending up on a ventilator for weeks on end.

CHILDS: So that is Ed's very intense day job. And now with the economy being shut down, being a landlord has also suddenly gotten more intense.

GOLDSTEIN: So we're talking to you, it just happens to be, today, April 2. Are your tenants' rents in general due on the first of the month? Was rent due yesterday?

EDGE: Yes. Rent was due yesterday. I made a spreadsheet trying to - I'm a huge planner. OK. So one of my favorite things about making lots of spreadsheets is naming them.

GOLDSTEIN: OK.

EDGE: So this spreadsheet is called Pandemic Preparation.

GOLDSTEIN: OK, apt.

EDGE: It was made on the 16 of March, and it was updated today.

GOLDSTEIN: So what is - like, in a normal month before the pandemic, how much rent did you collect every month?

EDGE: Ninety-three hundred.

GOLDSTEIN: Ninety-three three hundred. And how much rent did you collect this month?

EDGE: So far, we're at 1,500.

GOLDSTEIN: Basically you collected almost none of the rent so far.

EDGE: (Laughter) I mean, glass half empty, yes - almost none of the rent.

GOLDSTEIN: So - OK. I mean, what does this mean for you, right? Like, do you have mortgages on the buildings you own?

EDGE: So unfortunately, yes. I've got a mortgage on all of my properties.

CHILDS: With the mortgages plus some additional short-term debt he took on to do some renovation work, in all Ed's monthly debt payments on the buildings are about $8,000, which he pays out of that $9,300 in rent that he takes in every month. So basically, he takes almost all of the money from the renters and turns around and uses it to pay the debt on the buildings.

GOLDSTEIN: And we should just say here Ed seems like a thoughtful landlord. Emily Gordon, the laid-off server who we talked to at the beginning of the show told us Ed called her up last month out of the blue and essentially said she didn't have to pay any rent at all this month. Ed told us he did that for all of his tenants who got laid off.

CHILDS: He also called up the company he pays the mortgages to. One is Wells Fargo; another is a company called NewRez - with a Z. And they told him he actually didn't have to pay the mortgage for the next several months. It wouldn't hurt his credit, and they wouldn't charge him late fees.

GOLDSTEIN: But that doesn't mean that the debt for those mortgage payments would just go away. Right? At some point, Ed is going to have to pay it. And he knows that there is no way his tenants are going to come up with a back rent from these months when nobody has a job. So what he's afraid of is that that debt that he's not paying is just going to pile up.

EDGE: I am feeling the feeling of drowning under the possibility of debt accruing.

GOLDSTEIN: Drowning.

EDGE: Or like a quicksand. And that's - the more you struggle, you're still sinking and you're not able to get caught back up. Yeah, that's the way I feel now if these payments are starting to accrue.

GOLDSTEIN: So when are your mortgage payments due?

EDGE: So I've got one - two due - three due on the 5 and one that's due on the 9.

GOLDSTEIN: Oh, just in a few days.

EDGE: Yes. And for the first time in three years, I actually took all of my mortgages off autopay.

GOLDSTEIN: What are you going to do?

EDGE: I don't really know what the answer is at this point.

GOLDSTEIN: Can we call you back next week and ask?

EDGE: Sure. Yeah, that would be wonderful.

CHILDS: After the break, we follow Ed's mortgage payment - or nonpayment - right to the heart of the multitrillion-dollar mortgage market.

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GOLDSTEIN: So Ed Edge, like a lot of landlords and a lot of homeowners in America, is going to have a very hard time paying the mortgage this month and probably next month, too. So what comes after that?

CHILDS: Remember Ed said he has mortgages from a few different places - Wells Fargo, a company called NewRez. And here's the crucial thing - in most cases, Wells Fargo and NewRez don't keep the mortgage payments from homeowners and small-time landlords like Ed. They take a small fee, and then they turn around and pass the mortgage payment on to someone else. That's the way most mortgages work in America.

GOLDSTEIN: When companies do this - when they collect mortgage payments then pass them on to somebody else, they're called mortgage servicers. Just like Ed collects money from his tenants and then passes it on to the next link in the chain, mortgage servicers collect money from landlords and homeowners and then pass the money along again. They're kind of like Ed but just way bigger.

CHILDS: Sometimes mortgage servicers are banks, like Wells Fargo, and sometimes they are specialty companies that a lot of people have never heard of, like NewRez. I had never heard of NewRez with a Z until Ed said the name.

GOLDSTEIN: So - OK. The money goes from the tenant to the landlord to the mortgage servicer, you know, the Wells Fargo or the NewRez. And then the mortgage servicer passes that money on to mortgage investors. These are the people at the end of the line, the people who are really owed that mortgage payment.

And these people - these people at the end of the line, it's a lot of us. It's actually me. I have a retirement account. In my retirement account, I have just, like, a boring target date fund. I have a boring bond index fund. And if you have one of those funds just like boring mutual funds in a 401k, you probably own some of these mortgage bonds, as well.

CHILDS: Now, to be clear, the mortgage market is not just us. It's also, like, hundreds of hedge funds and life insurers from around the world. U.S. mortgages are this giant global market.

GOLDSTEIN: So that is the chain right from the renter to the landlord to the mortgage servicer and then to investors - who may well include you.

CHILDS: Now, there is one major twist that we haven't mentioned yet, and it's really important right now in this exact crisis. Most of those bundles of mortgages, the ones that are in my retirement account, et cetera, are essentially guaranteed by the U.S. government. So if someone like Ed doesn't pay the mortgage servicer - Wells Fargo or NewRez with a Z - and the mortgage servicer can't pay the investors, the government will step in and essentially make those mortgage payments to those investors.

GOLDSTEIN: It's not quite as sort of simple as that. There's all these different agencies. Like, for example, there's the Federal National Mortgage Association that promises to pay them. That is F-N-M-A, which goes by the name Fannie Mae, which you may have heard of. It's kind of an elegant acronym. There's another similar thing called Freddie Mac, and they have this long, complicated history. They're sort of private; they're sort of public. There's this other thing called Ginnie Mae. A lot of names, a lot of different sort of legal structures, a lot of complicated history - but the essential thing here - the essential thing here is, practically speaking, the U.S. government guarantees trillions of dollars of mortgages - not all of the mortgages in America but most of them.

CHILDS: And the reason the government made those promises to pay the mortgage investors is basically to enable Americans to get cheap mortgages. That's how we get a 30-year fixed rate mortgage that you can refinance whenever you want. And many Americans benefit from that. It's just not really a product of the free market.

GOLDSTEIN: So we talked about all of this stuff, about the government and mortgages and especially mortgage servicers with a law professor named Chris Odinet.

CHRIS ODINET: So I teach and recently wrote a book on mortgage servicing and the financial crisis.

GOLDSTEIN: So this is a big moment for you. Like, this week, this is, like, suddenly everybody cares.

ODINET: Yeah, I'm sorry to say I didn't want it to be a big thing.

CHILDS: Chris was telling us about that $2 trillion rescue package that Congress passed last month, specifically about a part of the bill that covers what happens when people can't pay their mortgages.

ODINET: Section 4022(a)(2) says this is what you will do if you are - if you have a federally backed mortgage. So...

GOLDSTEIN: Oh, do you know that off the top of your head? I'm impressed.

ODINET: I've been, like, reading the bill. Me and bunch of other law professors are doing some projects on the bill. So that I'm, like, really down with right now.

GOLDSTEIN: Give me your favorite sentence in there.

ODINET: Upon a request by a borrower for forbearance under paragraph (1), such forbearance shall be granted for up to 180 days and shall be extended for an additional period of up to 180 days at the request of the borrower by...

CHILDS: And this is Chris' favorite sentence in the bill because it's a huge deal. It's basically saying to people whose mortgages are backed by the government that if you tell your mortgage servicer you're having financial trouble because of the pandemic, your mortgage servicer has to let you stop paying your mortgage for up to 180 days - six months - with the possibility of another six months after that - no late fees, no foreclosures, no black marks on your credit report. And at this moment when millions of people are losing their jobs every week, that seems like a pretty good start - like, the least Congress could do.

GOLDSTEIN: But there are actually a couple of important buts here. The first one is the law doesn't say what happens at the end of this special period. Like, do people with mortgages have to pay all those missed payments back right away? - because, Chris says, if they do, that is going to be a problem.

ODINET: It's almost certain that they're not going to be able to make up those payments. Even if people suddenly go back to work, they're just going to pick up with whatever their wages were before the crisis or perhaps diminished wages. But they're not going to get a big infusion of cash.

CHILDS: So mortgage servicers are going to have to give people more time to pay. In some cases, they'll probably let borrowers just tack the missed payments on to the end of the mortgage years in the future.

GOLDSTEIN: So - OK. That is one of the buts here is what's going to happen, you know, in six months or a year when this forbearance period ends. What do you do about the missed mortgage payments? But there's another but - another problem that is actually more urgent than that and that, frankly, I couldn't believe when I found out about it when we were reporting this story.

CHILDS: So remember the chain goes from the landlord or homeowner who's paying the mortgage to the mortgage servicer to the investors.

GOLDSTEIN: Those are the basic steps - person with the mortgage to the servicer to the investors. This new thing, this new law from Congress says, OK, that first step, the people with the mortgage, they can take a pause on paying the servicers. So far, so good.

CHILDS: But now here's the crazy thing that creates that really urgent problem - in most cases, the mortgage servicers have to keep paying the investors.

GOLDSTEIN: It seems crazy to say, OK, the people who usually pay you, they don't have to pay you now, but you still have to pay the other guy that you always pay. Like, how is that supposed to work?

ODINET: Well, I think that's what everyone's trying to figure out right know, is how that's going to work.

CHILDS: There's actually a really important distinction here, and you can see it in Ed the landlord's mortgages. He has one from Wells Fargo and one from NewRez with a Z.

GOLDSTEIN: Wells Fargo, obviously, is a big bank. There's still lots of big banks servicing mortgages. And the big banks are actually in pretty good shape right now. They have enough money that they can deal with this situation for a while. They're quite a lot stronger than they were, say, in the 2008 financial crisis.

CHILDS: But NewRez is not a bank. And since the financial crisis, nonbanks have been taking a bigger and bigger share of the mortgage servicing business. And those nonbanks have much less money on hand than banks do, and they're not allowed to borrow from the Fed like a bank. And even in the good times of the past few years, there were all these reports coming out saying, you know, if the economy were to ever turn down and people stopped paying their mortgages, these nonbank servicers are going to be in trouble.

ODINET: When you pull the curtain back and you see how this actually works, most people say this doesn't really make any sense. How can we expect these firms, these servicers, who in fact right now are financially weak to make significant payments to investors when they themselves have no money coming in the door? And that is the crazy hidden architecture of homeownership in America. And it is breaking right now.

CHILDS: What these nonbank servicers, the NewRezes (ph) of the world, basically need right now is a loan - or actually lots of loans, like, billions of dollars of loans. And right now there is one institution that is lending thousands of billions of dollars to keep a frightening amount of our economy functioning - the Federal Reserve. So one possibility is the Fed will launch another new lending program very soon for the nonbank mortgage servicers.

GOLDSTEIN: So if that happens and if the crisis really only lasts for a few months - if the economy starts to get back to normal this summer, that could be enough to see the nonbank mortgage servicers through. You know, the economy will start to recover; they'll start to pay back the loans. Everything will be OK. But if another six months pass - if another year passes and the economy is still bad, people still can't pay the rent, can't pay the mortgage, house prices fall, then you might see some of these mortgage servicers start to fail.

In the end, the government might have to make good on all those promises, step in and put, you know, hundreds of billions of dollars into the mortgage market. And like, if you just step back for a sec and think about what's going on in the mortgage market, the magnitude of what the government may have to do, it's one of those things where, if there was not a pandemic right now - if it was just this happening in the mortgage finance market, it would be the biggest story in America. We'd all be talking about it.

But because it is such an insane moment, like, we barely even notice it, right? It's, like, item No. 70 on the list. And yet, it is still a huge deal, hugely important, massive amounts of money. And if it goes bad, it's a problem we're going to be dealing with for years.

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CHILDS: Yesterday, we checked back in with Ed Edge, the landlord - called him on FaceTime. He was in the middle of a 24-hour shift at work.

EDGE: Yes, it's a - just a building where we sleep and cook food and wait for a call.

GOLDSTEIN: I see that there's a sleeping bag on the bed behind you.

EDGE: Yes.

GOLDSTEIN: Sorry. I don't mean to creep. I'm just...

CHILDS: Jacob - so creepy.

EDGE: Here's my crib, and this is my pink sleeping bag and my pink pillow.

CHILDS: Nice.

GOLDSTEIN: So when we talked to you before, you had gotten about $1,500 paid. Have you gotten any more paid since then?

EDGE: Yes. I was lucky enough to get about $4,500 in rent.

GOLDSTEIN: OK. So about half about half.

EDGE: About half.

CHILDS: So Ed hasn't paid the mortgage yet, but he says he's going to pay by next week by the 15. He just can't bear the thought of all that debt piling up. What he really wants is for the mortgage companies to tell him he won't have to write a giant check in a few months to make up for all of those missed payments. Instead, he wants them to tack those missed payments onto the end of the mortgage years in the future. That way, he could stop paying the mortgage without worrying about all that debt. He could call Emily and the other tenants and say, hey, don't worry about it; you don't have to pay for now. We're good. He keeps calling the mortgage companies to ask if they'll do it. But so far, they have not agreed.

EDGE: The game plan is, you know, pay but continually check up with the mortgage companies in the rare event that something else pops up and they change their policies. But it'll probably be a repeat next month just waiting until the 15 and paying, again, out of pocket. And so I've been looking at the numbers to do that until July, and it gets very scary.

GOLDSTEIN: Good luck out there.

EDGE: Thank you. Thank you.

CHILDS: Thank you.

EDGE: Cheers. Take care, mates.

GOLDSTEIN: Take care.

CHILDS: Take care.

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GOLDSTEIN: Are there other giant yet somehow arcane corners of the financial system that demand explanation right now? Please let us know. You can email us at planetmoney@npr.org or find us on the major social media platforms @planetmoney.

CHILDS: Our show today was produced by Alexi Horowitz-Ghazi and Autumn Barnes. Our editor is Bryant Urstadt, and our supervising producer is Alex Goldmark.

GOLDSTEIN: Special thanks to Ted Tozer, Don Layton and Karan Kaul.

I'm Jacob Goldstein.

CHILDS: And I'm Mary Childs. This is NPR. Thanks for listening.

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