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Can someone explain why this is bad practice? If I loan someone $100 with 10% interest, and immediately sell the loan to someone else for $102, why should I ca

Can someone explain why this is bad practice? If I loan someone $100 with 10% interest, and immediately sell the loan to someone else for $102, why should I care about anything other than $2 profit?

deleted 5y ago
[deleted]
compiler-guy 5y ago
The seller works out great until the buyers decide they no longer want the product. In the housing crisis this was because the sellers of the security had them rated far higher than they should have been. Will these be rated properly? Very hard to m know. But the seller ends up I trouble if they can’t sell the security because they are relying on the cash flow to finance the rest of the business. It all works fine as long as the pipeline flows.
- beerandt 5y ago
  Regardless of the rating, the risk is entirety different, since vehicles almost always depreciate, and do so faster than the debt is paid off, whereas people expect real estate to appreciate long term. Even a highly rated vehicle note is still based on the fact that the asset will fully depreciate somewhat in line with the outstanding debt.
  - imtringued 5y ago
    Faster than usual depreciation would still ruin some loans.
    - beerandt 5y ago
      We're talking packaging the loans into a bundle, so it'd need to be faster than usual depreciation across the market, for some unforseen (aka not priced-in) reason. Otherwise it'd average out.
Spooky23 5y ago
Your question is the answer. The incentive is to get your $2, and you don’t care about the $100. So the business process has an incentive to just write loans, period. It sounds like in this cases there is a compromised relationship with the lender as well.
adeelk93 5y ago
Skin in the game, forces you to consider the quality of the loan. In theory.
HarryHirsch 5y ago
why should I care about anything other than $2 profit? That's the point, right? Securitization serves individual short-term interest, at the cost of stability of the system. We saw that in 2008, and even then the politically connected players made out like bandits.

Can someone explain why this is bad practice? If I loan someone $100 with 10% interest, and immediately sell the loan to someone else for $102, why should I care about anything other than $2 profit?

deleted 5y ago

[deleted]

compiler-guy 5y ago

The seller works out great until the buyers decide they no longer want the product. In the housing crisis this was because the sellers of the security had them rated far higher than they should have been. Will these be rated properly? Very hard to m know. But the seller ends up I trouble if they can’t sell the security because they are relying on the cash flow to finance the rest of the business. It all works fine as long as the pipeline flows.

beerandt 5y ago
Regardless of the rating, the risk is entirety different, since vehicles almost always depreciate, and do so faster than the debt is paid off, whereas people expect real estate to appreciate long term. Even a highly rated vehicle note is still based on the fact that the asset will fully depreciate somewhat in line with the outstanding debt.
- imtringued 5y ago
  Faster than usual depreciation would still ruin some loans.
  - beerandt 5y ago
    We're talking packaging the loans into a bundle, so it'd need to be faster than usual depreciation across the market, for some unforseen (aka not priced-in) reason. Otherwise it'd average out.

Spooky23 5y ago

Your question is the answer. The incentive is to get your $2, and you don’t care about the $100. So the business process has an incentive to just write loans, period. It sounds like in this cases there is a compromised relationship with the lender as well.

adeelk93 5y ago

Skin in the game, forces you to consider the quality of the loan. In theory.

HarryHirsch 5y ago

why should I care about anything other than $2 profit? That's the point, right? Securitization serves individual short-term interest, at the cost of stability of the system. We saw that in 2008, and even then the politically connected players made out like bandits.