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If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless as

If mortgage paper was trading for much less than face value why not allow people to buy their debt back? Thereby creating increased demand for the "worthless assets"; at the very least it would have created a pretty solid floor for the value of these types of investments. It also would've helped the freefalling house values because it would have given underwater homeowners a chance to be part of the solution rather than part of the problem. We all ended up buying the debt back anyway, we just used the federal government to do it.

aspiringsensei 16y ago
This is a great question: I am working on getting you an answer from a derivatives expert. I suspect the reason has to do with difficulty inherent to unbundling existing derivatives contracts in order to isolate "your" mortgage, but I'll circle back when I get an expert opinion.
- johngalt 16y ago
  Why would you have to isolate "your" mortgage? Couldn't you just buy the equivalent number of shares in the correct CDO then present them as payment to your bank? Rather than try to follow the mortgage all the way through the system, just focus on each end. I'm sure this isn't allowed contractually, but there was a lot of paper torn up by the federal government during the bailout. I would argue that this change would have been less damaging to all parties invovled. Consider that everyone that owned a home would be scraping every dime they have together to put money into this system. There would still be loss, but this would stop the panic and add a floor to the housing/debt markets.
AlexMuir 16y ago
Buy it back with what? Nearly everyone would need to get another mortgage to buy back their debt.
- wdewind 16y ago
  What if we had taken the bailout money and simply paid the debt directly back, instead of lending it to the lenders, and leaving the original debt still in tact. Wouldn't the companies have been saved as well as the debtors if we had simply paid back the mortages with the bailout money?
- johngalt 16y ago
  I know many people that are buying another small house then walking away from the underwater home. This gives them a different option.
fanboy123 16y ago
The debt was put into structured securities which means the banks/investors did not own individual loans. Letting people prepay for less than par would have caused infighting between the investors and was not legal for the servicers (administrators for these structures) to do.
- johngalt 16y ago
  I understand that, but if I'm in risk group X and buy shares of the equivalent risk group. Why can't I trade those for my debt? On one side we have underwater homeowners that have no option but to walk away. On the other side we have cash strapped banks that are holding on to debt obligations that are worthless because homeowners are all walking away. It seems to me that giving homeowners a way to buy into this system rather than walk away from it would benefit everyone. I understand there is no legal/contractual method for this currently. I was suggesting adding one.

aspiringsensei 16y ago

This is a great question: I am working on getting you an answer from a derivatives expert. I suspect the reason has to do with difficulty inherent to unbundling existing derivatives contracts in order to isolate "your" mortgage, but I'll circle back when I get an expert opinion.

johngalt 16y ago
Why would you have to isolate "your" mortgage? Couldn't you just buy the equivalent number of shares in the correct CDO then present them as payment to your bank? Rather than try to follow the mortgage all the way through the system, just focus on each end. I'm sure this isn't allowed contractually, but there was a lot of paper torn up by the federal government during the bailout. I would argue that this change would have been less damaging to all parties invovled. Consider that everyone that owned a home would be scraping every dime they have together to put money into this system. There would still be loss, but this would stop the panic and add a floor to the housing/debt markets.

AlexMuir 16y ago

Buy it back with what? Nearly everyone would need to get another mortgage to buy back their debt.

wdewind 16y ago
What if we had taken the bailout money and simply paid the debt directly back, instead of lending it to the lenders, and leaving the original debt still in tact. Wouldn't the companies have been saved as well as the debtors if we had simply paid back the mortages with the bailout money?
johngalt 16y ago
I know many people that are buying another small house then walking away from the underwater home. This gives them a different option.

fanboy123 16y ago

The debt was put into structured securities which means the banks/investors did not own individual loans. Letting people prepay for less than par would have caused infighting between the investors and was not legal for the servicers (administrators for these structures) to do.

johngalt 16y ago
I understand that, but if I'm in risk group X and buy shares of the equivalent risk group. Why can't I trade those for my debt? On one side we have underwater homeowners that have no option but to walk away. On the other side we have cash strapped banks that are holding on to debt obligations that are worthless because homeowners are all walking away. It seems to me that giving homeowners a way to buy into this system rather than walk away from it would benefit everyone. I understand there is no legal/contractual method for this currently. I was suggesting adding one.