Comment by timv | Hacker News Reader

Comment by timv | Hacker News Reader

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The problem is that it will ultimately lead to the market value for debt to drop even further.

- Lender "A" is owed $20,000 by each of 2 people.

- Debt buyer "B" offers to buy them for $1,000 each.

- Debtor "C" realises that getting out of her own debt for 5c in the $ is a good outcome, and take up the opportunity to buy the debt herself. "A" gets their $1000

- Debtor "D" realises the same thing, but he has no way to pay even $1000 for the debt, so passes up the opportunity to buy the debt.

- "B" ends up buying D's debt for $1000, even though it's now obvious that D has little change of ever paying it back.

B ends up with debt that they can never recover - not even the purchase cost. This leads to B offering less money for this style of debt next time.

The only reason B was willing to pay 5c in the $ on the original debt is because that aligns with their odds of getting the debt repayed.

Once you create a system which filters out the debts of anyone who has the ability to pay back a chunk of their debt, the debts that end up selling to the agencies are the real rubbish loans that will never get paid back.

Well, it seems the primary harm would come to debt collectors who wouldn't be able to buy enough "good" bad debt.

On the other end, no one wants to deal with debt collectors, so it seems that they do provide a disincentive to defaulting. Still, the primary stick they have is the threat of a credit ding, which is there even without the debt collectors. And, with enough such dings, the borrower would no longer be able to obtain credit and perpetually abuse the system/drive debt prices down.

So, in this scenario, the market value for debt would seem more a function of the quality of the borrower in the first place. I generally don't think most people want to default and get dinged for it.

So, it seems that the biggest consequence is debt buyers going out of business. I don't know. I'm starting to have trouble seeing the real downside here!

The market for purchasing debt securities on the cheap is factored into the cost of the debt. So if debt purchasers go out of debt, the interest rates for borrowers, both good and bad, go up.

It's a one way market where the purchasers are replaced (from the debt collectors to the actual owners)

Before: I owe $20k, the bank sells my loan to a debt collector for $1k. He expects to collect 10%, ends up extracting $2k from you. $1k for the bank, $1k for the loan collector, -$2k for you.

After: I owe $20k, the bank wants to get rid of my loan for $1k. I buy it (because my grandma just died and I had the cash) . Bank and I are better off, loan collector gets nothing.

OR bank tries to get rid of the loan, trues to sell it to me for $1k, if that doesn't work they go to the loan collectors. Loan collector buys it, and works out a more fluid payment scheme to try and get back $2k very slowly from me.

If the loan collector can't offer a better service, I don't see their value to society anyways. Apart from subsidizing loans for people by being willing to be the guy who psychologically tortures people in bad situations (who most likely don't know about debt collection laws in place to stop this). In the end we kill off a disgusting system.

Alternatively lenders could just be more responsible by not lending to those who can't afford to pay it back.

Easier said than done.

Also, this thread was originally prompted by the idea that it would be good for borrowers if they could get a right of first refusal on any resale of their debt. There's a question of whether more selective lending is in the best interests of such borrowers.

As much as being in debt sucks, many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place. Moreover, this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.

>There's a question of whether more selective lending is in the best interests of such borrowers.

It's kind of odd to question whether it's in the best interest of borrowers. I mean, we're talking about the people who clearly cannot pay their debt and thus need it reduced. So, more selective lending would disqualify them and prevent them from getting in over their heads again.

>many of these borrowers would prefer to be in debt than not have had access to borrowed money in the first place.

Again, that's odd. We're not just talking about being OK with debt. We're talking about being so far in debt that they cannot pay. Why should they continue to have easy access to borrowed money? Their preferences aside, that doesn't really work for anyone under any system (including the current).

>this would make life harder certain borrowers who would pay back their debt but can't get a loan because they fall within whatever statistical grouping or heuristic lenders are using to minimize their losses.

That's purely hypothetical.

The only case that this makes sense for is the case of people borrowing money to access medical services (as per the original article). Though people shouldn't have to get into debt that they have no hope of repaying to access medical services. That's a problem with the health system, not something that fall under the debt market. Ultimately it seems that if you don't pay for health services through taxes, then you pay for it through other means (e.g. paying higher interest rates to the banks when you take out a loan to buy your house)

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