So, what happens to loans owned by mortgage lenders when they go broke?
Labour intensive, though. Packaging up many loans and selling it as a complete unit is far easier.
You could find financing for 50 to 100k, especially if you have a 300k house as collateral as part of it.
Only the other bank gets the sweetheart deal.
Same kind of problem with foreclosure auctions too btw. They require cash up front for those, you cant put a mortgage on a foreclosed house. (without it first being bought outright by the bank, who isnt gonna mortgage it to you for the foreclosed price)
Further, in most times MBSes are usually worth more than the debt - otherwise, modern banking wouldn't make any sense.
Mortgages issued in the last 2 years at ~2.75% are probably worth less than the debt now. So it might actually be the case for a lot of these loans.
That being said, the discount is not going to be anywhere close to 50%.
The difference in the discount would be evened out by the difference in the interest rate you'd have to refinance at almost exactly.
Considering the cost of refinancing, if you bought your own debt with some new debt from some new mortgage company - this would be a losing proposition for 99%+ of mortgages.
First, it seems they're selling at something like 85%, so they're selling a $300k mortgage for something like $250k.
Second, the main reason they're selling because these collaterals have fallen in value and so it now would be much less than $300k.
Third, any $300k mortgages it would be possible for you to get financing for the $250k simply would not be sold as part of such a discount package (because those are likely worth the full $300k or close to that), the discounted sale gets those loans for which they (knowing all the data) know that an equivalent financing won't be granted in this market - because anyone who'll grant you a $250k financing will rather buy the same thing from a lender for more than $250k as part of a large scale package deal with less overhead; refinancing is a reasonable option only if they can lock in a much better interest rate and thus make it more profitable.
I’d love to see the law change to force owners of debt to give the person that owes right of first refusal whenever debt is sold. (Mostly for medical debt and collections agency situations, but also for mortgages.)
Why would anyone choose to lend under such terms?
One of the big problems that happens a lot with mortgages is that the bank sells it to this other bank and mix ups can cause all kind of problems for the debt holder. Give the debtor right of first refusal at price they are about to sell (simple form letter that they have 30 days to respond to). 9 times out of 10, debtor just lets it happen.
But what WILL happen is a company will come along, offer what are basically refinance loans to service this situation, and the debtor gets helped out.
The whole practice of tranching is toxic to begin with and if this discourages that its a double win.
Mix ups with selling mortgages or servicing rights do occasionally occur but they are rare and impact relatively few borrowers.
That's exactly the point. There is nothing prohibiting them from doing that but they don't do it anyway because it makes life a little more difficult for them while making like substantially more difficult for the debt holder. Parent post is suggesting enforcing an inversion of that dynamic - put more power in the hands of the debt holder and less in the hands of the debt owner. A law is absolutely required to overcome the natural incentives at play, if that is the goal.
Your proposed law wouldn't even make life easier for anyone but the richest debtors, who don't need a law to protect them. The vast majority of people live paycheck to paycheck and have de minims savings. If you offered them a 30% discount to pay off their mortgage (or even a 50% discount), they have no way to come up with that payment without going out and obtaining another loan.
B) It's not really necessary to consider how the lender will fund the infrastructure necessary to comply with the law. That's sort of how laws work. If you want to operate in that space, you have to obey the law or not operate in that space. Either they will stay in that business or they won't. What is necessary to consider is the secondary effects of that decision, which would likely be decreased access to credit for borrowers with marginal credit. Might be OK, might not.
C) RE: whether it's a viable business model, see above.
D) RE: benefiting richer debtors proportionally more than poorer ones, that's relatively easy to handle - we have all kinds of policies that are targeted to benefit one economic class over another. Most of them are tuned to help the richest, but there are plenty tuned to help the poorest or the middlest. It's not a problem so long as we build in the correct dials to tune those parameters.
E) RE: unavailability of credit to low-income debtors to take advantage of this scheme - I have no doubt that new enterprises would form to take advantage of this economic niche. It might be higher risk, and come with a somewhat higher rate, but it might be viable to make a marginally risky $40,000 loan where it would not be viable to make that same loan at $100,000, particularly if the loan was secured by the property. That is in effect already happening, it's just the bank buying the loan from another bank that gets the benefit.
This stance hits me as entitlement cloaked within anti-capitalism/pro-consumerism.
The argument you replied to isn't that the law should be changed to allow this to be offered to the debtor.
The argument is that the law should be changed such that this is required to be offered to the debtor, prior to offering an external sale.
Ofc, the original buyer could offer instead offer to refinance.
This whole thing reeks of entitlement to me. If you take out a loan expect to pay it off. Don't expect that if the lender goes belly up that means you got some get out of jail free card.
The current system, to me, has just as much entitlement, just from the other side. Why should it be some unrelated party that benefits from the lender's misfortunes. The lending is between two parties, and it seems reasonable to keep it that way unless both parties agree not to.
They would have to have a discount much lower than 30% to homeowner, and a way steeper discount to the firm buying the remaining bundle of people who didn’t take the offer.
People with decent credit will simply get a new loan for 70% of their principal; kind of like refinancing.
That means rather than having to buy both the good and bad loans in bulk, firms can cherry pick the loans they want to buy.
Any loans left after that cherry picking will have already been turned down by the potential buying firms. They're effectively un-sellable, because everyone has already turned down buying them by refusing to issue a new loan in it's place.
If you first skim off the "best" loans, the ones held by debtors in a position to pay them off at a reduced rate you know have a higher risk/lower value bundle.
So what do you do with the new remaining bundle of loans? Offer those debtors the ability to pay them off at even greater reduced rates?
Eventually you iterate down to the highest risk lowest value bucket that almost nobody would see the value in purchasing.
The remaining business is doomed to fail now but even more painfully.
It lowers the debt total of the borrower, and makes the assets held by the new lender less toxic.
Seriously, stop making up fake numbers and look up price quotes on real mortgage-backed securities. The real world doesn't work anything like what you're describing.
Then the shareholders of the lending company wouldn't be rich-people-broke-where-someone-buys-them-out-and-somehow-they're-all-still-rich they'd be actual-broke-where-they-lost-all-their-money-on-a-stupid-venture.
I'd also note you could flip that argument on its head - more people seeking out unstable lenders would help capitalize them.
IIUC, the lender who sells the debt takes a loss, but the amount of debt owed by the borrower remains the same.
For those who need a primer, check out https://www.compareclosing.com/blog/all-about-mortgage-tranc...
https://www.npr.org/2014/04/01/297686724/on-a-rigged-wall-st...
PFOF and HFT mean that no matter how much you win, the exchanges and HFTs will always win more.
It's extremely hard to win as a small-money day trader, so I won't play that game.
Also, Citadel is buying retail order flow because they’re reasonably certain they can capture the spread and not get run over by an institutional trader with more information than the market maker. They aren’t frontrunning your 20 share order because you aren’t going to move the market by purchasing 20 shares.
Zero commissions and tight bid/ask spreads are better for an individual than no PFOF and $5/trade transaction fees with 25-50 bps bid/ask spreads.
https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
Even the worst of the liar loans didn't sell that low (the whole problem is nobody knew how to price them, but they were sure they were worth something).
If you ignore all the transaction/processing fees. You could borrow some number less than your principal balance at today's rates ~5%, and use that to buy your current mortgage at a discount (it dropped in value). But your monthly payment would end up the same. Higher interest on a lower principal balance.
Roughly.
A 100k loan today that pays back 105% a year from now isn't worth 100k.
Only bad debt is sold for such a discount. A normal mortgage with nothing wrong with it will be sold at full value, i.e. sold to someone who wants to make money on the interest.