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Comment by conductr | Hacker News Reader

A debt holder can typically pay off their debt any time they want. I think what you're proposing is to pass along the discounted price to the debt holder. Eg. if the lender is going bankrupt and selling the debt for 30% of it's value, they should offer that purchase price to the debtor? There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place. It's just not a norm in business because bankruptcies and liquidations are easier/faster to conduct if you can move the assets in a single/few transactions. It also encourages default from the borrowing side.

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Beyond it being easier to sell in bulk to another firm, I think a business would never do this voluntarily because it distills out people who were most likely to pay and makes the remaining debt slightly more toxic on average.

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.

I think it's worse than slightly more toxic, it would be virtually unsellable.

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.

I fail to see how this is a bad thing. Oh no my extremely risky loans are being priced correctly as worthless and I can’t sell them!

I don’t think they are saying it’s a bad thing for the market, they are saying it’s a very bad thing for the seller, so why would they shoot themselves in the foot that way?

>There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place.

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.

It makes life a LOT more difficult for the company. Even setting aside the administrative hassle, imagine how this works in practice. All the debtors who are paying attention and have money pay off their loans at a discount. The loans that remain are the worst of the worst, and they fetch an even lower price in bankruptcy.

Exactly. The same thing already happens at 100% value with refinancing (example: all those with good credit can refinance their student loans with the companies that popped up, those who are likely to default can't).

If a lender is facing bankruptcy, how are they going to fund the infrastructure necessary to negotiate with tens of thousands of borrowers? If a lender is not yet on the brink of bankruptcy, but sees it coming, don't you think if this was a viable business model for a lender to avoid liquidation they would pursue it?

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.

A) Not my proposed law, just being an advocate for parent post's position.

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.

I don't see why the debt holder has any skin in this game at this point. They're not being harmed in any way, they still owe what they owe on the same terms. Why should they benefit? Why should a law require that they benefit?

This stance hits me as entitlement cloaked within anti-capitalism/pro-consumerism.

> Eg. if the lender is going bankrupt and selling the debt for 30% of it's value, they should offer that purchase price to the debtor? There's really nothing prohibiting them from doing that, I don't see why a law needs to be changed for this to start taking place

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.

Even more sensibly. I think it should be after someone has given an offer. As such market price would be set and lender could just buy at that or even have arrangement of getting someone else to pay and move loan to that.

Ofc, the original buyer could offer instead offer to refinance.

What's the price they're required to offer the debtor in that scenario? How does anyone know that's a fair price when there has been no other offers? Why should it be the debtor that benefits from the lender's misfortunes?

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.

To your first two questions, the Right Of First Refusal[0] has a long history of being a financial instrument for just about anything. I see no reason why this would be something different.

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.

[0] https://en.wikipedia.org/wiki/Right_of_first_refusal

The loans are usually sold as a bundle, with an aggregate risk calculation.

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.

Exactly, the same thing can happen in funds. As they go south they sell their liquid assets. Which are typically the best.

The remaining business is doomed to fail now but even more painfully.

Seems to me the lenders already in existence could help de-risk the remaining debt by providing loans to people to cover the fire sale price.

It lowers the debt total of the borrower, and makes the assets held by the new lender less toxic.

Huh? Which lenders are those? Real estate owners are almost always free to refinance loans at any time, regardless of the current lender's financial condition. Those things are entirely unrelated. But other lenders aren't going to issue new loans at below market rates just for the sake of reducing pressure on one of their competitors. That would be crazy. If some lenders go bankrupt that's fine.

It’s not below market rates, it’s at market rates. If the fire sale price of a $300k outstanding loan is $100k and must be offered to the debtor first then any bank should be salivating at the prospect of offering the buyer a $100k loan to cover it and you just turned a risky $300k loan into a way less risky $100k loan.

You have concocted a preposterous, unrealistic scenario. There is no "fire sale" just because the lender is insolvent. Another lender will buy the assets. The lenders who are going broke constitute a small fraction of a huge market. The value of a mortgage only becomes significantly impaired if the borrower is in default and the underlying real estate has lost significant value. A deadbeat borrower who is already in default won't have the cash to buy out the loan at the actual market rate, or the credit rating to refinance with another lender, so the whole concept is just ridiculous.

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.

If the aggregate risk calculation is correct, the gross proceeds from a bunch of unbundled transactions would be exactly the same even with some unsold since the risk calculation would have taken that into account.

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