Why can’t borrowers buy back their mortgages at a discount?

By Felix Salmon
April 11, 2009

Thornburg Borrowers Unite is a new blog for people with mortgages from now-bankrupt Thornburg. Those mortgages are for sale, at a discount: why can’t the homeowners themselves buy them back? “If Thornburg can be persuaded to give its borrowers right of first refusal,” goes the argument, “it costs taxpayers nothing, and it prevents third parties from profiting from our losses and the demise of Thornburg.”

This is entirely true, and it seems like a perfectly good idea. But there is one small problem with it — the issue of adverse selection, from the point of view of the investor buying up Thornburg’s mortgages.

If I’m putting in a bid on a large number of Thornburg loans, I know that some will perform well, and be worth more than par, while others will perform very badly, result in foreclosure, and be worth maybe 30 or 40 cents on the dollar to me, all told. Net-net, I might be willing to pay 60 or 70 cents on the dollars for those loans.

The borrowers are saying that if Thornburg is willing to sell their loan to an outside investor for 69 cents, it should be even more willing to sell that loan back to the homeowner for 70 cents. But in fact it’s more complicated than that. The homeowners who are willing and able to buy back their own loans for 70 cents on the dollar are generally the most valuable of Thornburg’s borrowers — they’re overwhelmingly likely to be the ones whose loans are worth par, or more. So if Thornburg allows them to buy their own loans back, the value of the remaining mortgages goes down, and the investors aren’t going to be willing to pay 69 cents on the dollar any more.

And it’s also not strictly true that doing this “costs taxpayers nothing”. If I borrow $500,000 from Thornburg and then buy that debt back for $350,000, I’m basically making a $150,000 profit, which would normally be taxed as income. Recently, the government temporarily suspended the laws forcing me to pay income tax on that $150,000. But the more people who buy back their mortgages at a discount, the more income tax is foregone by the Treasury.

All that said, the idea behind the blog is a fundamentally good one: anything which provides a new bid for legacy mortgage assets should be encouraged. I wish these people well, and hope they get somewhere with their campaign.

Comments
11 comments so far

Felix:

But there’s no reason why we have to preserve the integrity of the package of mortgages as a package. If the banks are forced to do individual credit analysis and decide whether to beat the borrower’s bid on their own mortgage, it would be more costly to do the secondary lending, but perhaps that’s a good thing.

HAL

Posted by HAL | Report as abusive

Felix;

When I got in touch with Thornburg they told me that I could only buy it at the face value. I have a clause in the mortgage that says Thornburg will NEVER sell my mortgage. My next move is to contact an aggressive layer!

JOE

Posted by JOE | Report as abusive

Let the homeowners buy a share of the bundle, while keeping their original loan.

Posted by MattYoung | Report as abusive

The answer is for them to refinance, or would be if they weren’t underwater. All they have to do is pay the loan down to the point they can.

Posted by Lord | Report as abusive

Let the mexicans and saudies and pirates buy up the mortgages as they have the money. Also let the Gitmo detainees live in these houses or let them live in the house on Pennsylvania ave.

I vote for giving the loan to the highest qualified bidder. As long as they have a good credit record and are not deadbeats, why not?

revolution in 20 years, overthrow the whole financial system. just look at Thailand, that kind of protest will come to the U.S., but next 20 years.

So lets split these loans into two categories, afloat and underwater. Who would buy a sinking ship? Nobody. Greedy bankers are deluding themselves when they try to carry non-performing loans on their books at some fictitious face value, whereas the true value is pennies on the dollar. Nothing is worth more than a buyer is willing to pay for it.

Posted by Bill | Report as abusive

These idiots who want to buy back their mortgages at a discount are not fools. No, they are a bunch of greedy a$$holes who want taxpayer money to subsidize the purchase of their homes. To the idiot who is gonna hire a lawyer because his finance company said they would never sell his paper…Great! Keep the lawyers employed. But you’re an idiot too. If the company is bankrupt, they are not selling your paper, the receivers are and they are not party to the contract. Sue the finance company all you want, it’s gone! That’s what happens in a liquidation.

Posted by katz | Report as abusive

A land grab for the powerful, (little “p”), who steal from those they can to ensure their own comfort and survival. No one mentions those who make offers on bank owned properties, why they rarely hear back from the bank, as though the banks really do not want to sell those properties, but still must offer them for sale by law (eb=ven though they can refuse any offer). Hmmmmm

Posted by Yohanan | Report as abusive

The banks are hedging that the property values will be worth more in the future, holding their cards until that time. But, they are never coming back, and this short little breath we have now is a mere last gulp before the final plunge. Look, if one just prices the raw materials to build a complete home, minus the labor, most folks could live in mansions for 100K. Who is going to think the 900% on top of that 100K will ever be absorbed? Truth is, the “easy money” era is over, and the age of individual resourcefulness is here.

Posted by Yohanan | Report as abusive
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