Tag Archives: mortgage-backed securities

Would You Stop Paying Your Mortgage?

Post Author: Bill Pratt

I was listening to the “This American Life” podcast today and heard something that intrigued me.  The podcast recounted the story of a few NPR reporters who bought a mortgage-backed security (MBS) earlier this year.  This particular MBS is a kind of bond that bundles some 2,000 mortgages together and pays the investor (the NPR reporters) interest from the proceeds of the mortgage payments made by the 2,000 mortgage holders.

Sounds like a good deal, right?  The only catch is that this MBS was actually a “toxic asset.”  That means that a large percentage of the 2,000 mortgage holders have stopped paying their mortgage payments, and therefore the investment is highly risky.  The NPR reporters paid $1,000 for the MBS, which was originally priced at $100,000 (a 99% discount due to the risk).  These are the kind of securities that helped cause the recent world financial collapse.

The NPR reporters knew this going in.  Their goal was to buy one of these MBS’s, do some detective work to figure out who some of the mortgage holders were, and then find out why they weren’t paying.

After some initial investigation, they were able to locate an 81-year old man in Florida who had stopped paying his mortgage and agreed to talk about it.  What happened?  Well, he bought a brand new condominium in Sarasota so that he could downsize from his current home.  He took out a $300,000 mortgage on this condo only to see it quickly drop in value.  It dropped in value so much that his $300,000 mortgage was more than the value of the condo.

What did he do?  He decided to stop paying his mortgage, thus defaulting on his loan and stiffing the bank who loaned him the money and the investors who bought the MBS which included his mortgage.  The NPR reporters asked him why he stopped paying.

He answered that it was a very painful decision for him, that it went against everything he was taught growing up.  But, he claimed, he had no choice.  One of the NPR reporters challenged him, telling him that he did have a choice, that he could have kept paying.  He didn’t have much of a response, only saying that it “didn’t make sense” to keep paying.  It’s important to note that he had enough money to keep paying, but that he chose not to.  The only consequence for him is a bad credit rating, but since he is 81 years old he probably won’t need to borrow money again, so this didn’t seem so bad.

What do you think of this elderly gentleman’s decision?  Was he wrong to stop paying?  It seems that millions of other people did the same thing in the last several years as housing prices fell, thus precipitating the financial crisis.  Please vote in the poll below and then leave some comments telling us what you think.