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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 p
by brk 4y ago
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.
- psychphysic 4y agoExactly, 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.
- sophacles 4y agoSeems 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.
- nradov 4y agoHuh? 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.
- Spivak 4y agoIt’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.
- nradov 4y agoYou 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.
- conductr 4y agoIf 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.