
I Can Be the Bank: Individual Investors Buy Busted Mortgages - iaskquestions
https://www.wsj.com/articles/a-decade-after-the-housing-crisis-small-investors-try-to-bring-busted-mortgages-back-to-life-1542734455
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agency
[https://outline.com/B3wHYJ](https://outline.com/B3wHYJ)

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ticmasta
My family has been in commercial property rental for a long time, but never
residential.

Residential is seen as an easier path to being a landlord because the capital
requirements are lower, but I caution everyone considering buying a rental
property to ask a very simple question: "Are you willing to kick someone out
of their home?" Would you be prepared to evict a human being not that
different from yourself, who may have lost their job, have kids, medical
problems, etc?

In addition most jurisdictions stack the laws against residential landlords
(I'm in Canada) for both legitimate and populist reasons. It's not quite as
blatant with commercial.

Buying delinquent mortgages that are so underwater that lenders will sell them
to collection requires a whole new level of commitment. You will need to
become one of those people who call at dinner every single day, call
employers, stalk online, harrass, even threaten - you're literally trying to
squeeze money out of the people who have the least to spare. I'm not going to
judge the collectors, debtors or the business model, but it's definitely not
for me.

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jldugger
The one exception to this rule is a pretty astounding scam: buying your own
delinquent debt. I can't find the citations for a story I read about a guy who
did this at the million dollar condo level, but the idea is pretty simple. Bad
debt trades at a fraction of the nominal price, so it might be easier to buy
the rights to collect on your own debt than pay off the current debt owner.

The hard part, of course, is getting someone to sell it to you without their
knowledge.

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delecti
How could someone with delinquent debt (presumably someone unable to pay their
obligations) be able to afford buying their own delinquent debt?

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ghshephard
Depending on how delinquent it is, Debt can sell for pennies on the dollar.
The irony, of course, is the more delinquent you are, the less your debt is
worth. Therefore, those who show the least attention to repaying their debt,
are the ones who get the best deal on settling.

You just have to deal with Debt Collector harassing you for 2-3 years, and
take a pretty big hit to your credit, and you can often settle debt for
nothing more than the original principal loaned.

Of course, good luck trying to borrow money for the next 7-8 years...

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dmurray
"Nothing more than the original principal loaned" is a much less attractive
deal than "pennies on the dollar"!

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ghshephard
Most people are not willing/able to get their debt delinquent enough (ability
to pay is a big barrier for most) to get there. But almost _everyone_ , if
they are willing to put up with the hassle of a debt collector and a credit-
history black mark, can negotiate for the original principal.

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pavel_lishin
> _Gail Greenberg of suburban Philadelphia embraced the nonperforming-loan
> trade to build up her retirement savings, which took a hit in 2008. She
> started in 2016 with a loan in Flint, Mich., she bought for $15,000._

> _“I only owned it for nine weeks and the house burned down,” Ms. Greenberg
> said. Thanks to an insurance payout, though, she said she made a profit of
> $27,000._

> _Ms. Greenberg took that as a sign she should make loan investing her day
> job. She now owns 58 mortgage notes, as they’re often called, totaling more
> than $2.4 million in unpaid principal._

I wonder how she's doing now.

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refurb
Holy crap. I wonder how big this market is? If it’s enough to matter, I’d say
this is a sign that people should get the hell out.

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test6554
Can you imagine what this market looks like when the next recession hits?
Banks unload all this bad debt to these non-performing debt buyers and wipe
their hands, meanwhile the economy crashes and there's no money getting
collected and nobody wants to buy the debt off them.

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maxxxxx
Aren't they basically running collection agencies? I thought there is a whole
industry that buys defaulting loans and then tries to get the borrowers to
pay.

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tacon
Yes. Collection agencies normally are used for unsecured debt. Mortgages are
secured by real estate.

There has always been a brisk market for real estate paper ("notes"). This
might be someone that lent on a second mortgage and now needs his cash back,
so he enters the note market and takes a hefty discount to turn his stream of
income into a lump sum. Or someone that just sold their house with owner
financing, and wants to be free of the hassle of servicing the loan for the
next fifteen years, so they sell on the open market. Supply and demand
determine the prices, and the discounts are easily 40% off the net present
value of that mortgage note's stream of income.

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alwaysreading
The thing I'm most confused about the whole article is how did some homeowners
go years (a decade?) living in their home without paying a mortgage and not
get evicted? The article implies this is happening but I didn't realize any
lender allowed that amount of time to pass.

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tempestn
I assume the properties were so devalued that it literally wasn't worth the
bank's time to foreclose and try to sell, nor to keep hassling the non-paying
borrower.

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yazaddaruvala
Anyone know the legality of using loan acquisition as a strategy for donation
and tax exemption?

\- `A` loans $100,000 from `B`.

\- `A` cannot pay the loan, and therefore `B` sells to loan to `C` for
$10,000.

\- `C` then donates money to a charity set up by `C`.

\- The charity then offers to pay off `A`s loan, and the money comes back to
`C`.

At this point, `C` "donates" (i.e. cycles the money) enough to make their
taxes $0 per year. `A` has their mortgage slowly but surely forgiven. Win-Win,
but the IRS losses.

While morally grey, what might the legality be?

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ThrustVectoring
IIRC under current tax code this results in $100k of taxable income for the
original debtor. For C, well, getting paid from the charity counts as taxable
income, so things net out. Donate $100k, receive $100k in debt repayments, net
change to AGI is $0.

The best scheme I can come up with is this:

Make the note performing again by giving the creditor a small amount of money.
Claim that it is now worth significantly more than $10k due to being a
performing loan. Donate the _loan_ to a controlled charity, pocket the tax
deduction for the "fair market value" of it, and then stop paying to make it
be "performing" and have the charity take the losses on it. The IRS will still
fault it, probably, but it lets you actually get ahead on your taxes.

NB: this system can be a price support for rare artwork getting sold in
distress. If you think you can claim to the IRS that a piece of art is worth
$100M later, and you pay a 30% marginal tax rate, then the post-donation
after-tax price is essentially $30M less.

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sandGorgon
How is this possible in the US ? I run a lending startup in India, but you
can't own paper until you have a regulatory license from the central bank. Our
license took 18 months - including extensive background checks,
interviews,etc.

Can any individual buy mortgages and become a lender in the US ?

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clintonb
There is a difference in the U.S. between lending, loan servicing, and simply
holding onto debt. All three have different regulations, in decreasing order
of regulatory burden. The people in the article are not lenders. They are
buying loans and acting as mortgage services (e.g. making sure people pay
their debt every month).

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sytelus
TLDR; Apparently there are laws in some states that makes it very hard to
foreclose. So these loans linger over for years and now being purchased by
some folks trying to restart the payments hoping to take advantage of better
economy. It's very high risk business.

The most surprising part of entire article is that it is very hard to enforce
foreclosure for missed payments in many states. The delinquent borrowers can
stay in homes for months and often years! As mortgages are essentially
sponsored by US government, this whole market runs on twisted economy.

The basic question is why more people aren't taking advantages of these laws
and twisted economics? For example, you can live in Hawaii, buy a house, just
don't pay any mortgages, declare bankruptcy and stay in the house for next 4
years for free. Or even better: buy many houses, put them on AirBnB, collect
income and never pay any mortgages!

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pavel_lishin
Everything about this sounds so fucking gross.

> _A scrappy breed of independent investor_

> _During the boom before the bust, lenders made mortgage loans to countless
> buyers who couldn’t afford them. Lenders later wrote off many of the loans,
> but borrowers’ obligation to pay remained. Today, in an improved economy, a
> rag-tag group of individual investors, plus some Wall Street giants, is
> buying these old loans and trying to tease value out of them._

It's a feel good story of the year! A group of scrappy rag-tag enterpreneurs,
with a can-do attitude, hustling by ... going after people who were already
fucked at least once.

> _Others use loan servicers to try to get mortgage payments restarted so they
> can feed the loans back into the Wall Street mortgage securitization
> machine._

Yes, feeding things to a machine definitely sounds like a morally neutral
proposition.

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seibelj
> going after people who were already fucked at least once.

I'm not sure it's so clear cut. The last anecdote in the article was a civil
engineer with savings and a good salary, who thought his entire mortgage was
forgiven by PNC and he got a free house. At least in that case, he should be
obligated to pay his mortgage.

~~~
diggernet
Here is another example of people I don't feel too sorry for...

When I was house-hunting after the crash, I noticed that the loan history of
most of the short sales (underwater mortgages) I looked at followed the same
pattern:

\- Buy house with minimal down payment. \- Over 5-10 years or so as the market
climbed, refinance with ever-larger cash-out mortgages. \- After the crash,
apply for short sale, forcing the bank to take a loss.

So, for example, I might see a house with $750k loan on short sale for $350k.
But on closer inspection of the history, find that they put $15k down on a
$250k house, then pocketed $500k in cash-outs. Sure, they "lost their home",
but at the end of the day it feels more like bank robbery to me.

Now they probably didn't have all that cash sitting in a bank somewhere. It
was probably all spent on one thing or another. But they still got the
advantage of spending that $500k. (Not necessarily wisely. The one I remember
details of lost both his house and his wife because he blew it all on racing
toys.)

Yes, there were certainly plenty of people who were legitimately burned in
that whole mess. I'm just mentioning that from what I saw, more often than not
there were huge cash-outs involved.

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fierro
wait, can you explain this to me? How does refinancing the home in this
example give them a 500k windfall? eli5 plz

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shanedog
Assume his home was worth 1mm at the peak. He got a new loan for $750 k, paid
off his old loan of ~$250k, and pocketed the difference.

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fierro
right, but now he has much bigger monthly payments, and still owes that 500k
back... so it seems all he did here was get a big loan....

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diggernet
That is true. But then he stops making the payments. The bank either
forecloses and takes the house to settle the loan, or he sells it in a short
sale for $350K and the bank writes off the difference. Worst case, he has to
file bankruptcy and maybe pay income tax on the amount forgiven. Either way,
he still got to spend the $500K on...whatever.

Now that I think about it (and these are pure anecdotes), at the time I heard
tales of people using the money from refinancing to buy a smaller home with
cash. Then they'd move into that and let the first house get foreclosed on
(because their paid-in-full primary residence is protected in bankruptcy).

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choot
It seems most people think that you buy these busted mortgages to make some
ROI.

It's far from truth.

I know some guys purchase them to negotiate frequent sex with the Tennant and
other favours. You'll be surprized how many people are completely unware of
the law and make it seem like they are providing a fair deal.

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SmellyGeekBoy
If you know these people you should report them. Sexual exploitation is no
laughing matter.

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getcrunk
There’s news documentaries on this. Increasingly popular practice

~~~
ryanwaggoner
Yeah, I call bullshit. Link to some of these sources.

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true_tuna
This might be interesting if I could read it. Who here wants a closed
internet?

~~~
dang
Paywalls are annoying, but such comments like this only add noise, so please
refrain from injecting that into the thread. This is in the FAQ at
[https://news.ycombinator.com/newsfaq.html](https://news.ycombinator.com/newsfaq.html)
and there's more explanation here:

[https://news.ycombinator.com/item?id=10178989](https://news.ycombinator.com/item?id=10178989)

[https://hn.algolia.com/?query=by:dang%20paywall&sort=byDate&...](https://hn.algolia.com/?query=by:dang%20paywall&sort=byDate&dateRange=all&type=comment&storyText=false&prefix&page=0)

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paulcole
Are there other forms of copyright infringement HN encourages or is this the
only one?

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bwb
man I hate paywalls, I really want to read this one.

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wnissen
I'm loving the ability to buy articles a la carte on Blendle. No relationship
with the company.

[https://blendle.com/i/wsj-com/a-decade-after-the-housing-
cri...](https://blendle.com/i/wsj-com/a-decade-after-the-housing-crisis-small-
investors-try-to-bring-busted-mortgages-back-to-life/bnl-
wsj-20181120-SB11730339679307604739004584554273660297070?sharer=eyJ2ZXJzaW9uIjoiMSIsInVpZCI6InRtcDYzNzkzMjIwNDkxNjI0YjllIiwiaXRlbV9pZCI6ImJubC13c2otMjAxODExMjAtU0IxMTczMDMzOTY3OTMwNzYwNDczOTAwNDU4NDU1NDI3MzY2MDI5NzA3MCJ9)

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et2o
How does this businesses model work... have they gotten the WSJ as well as all
of the other publishers to agree to sell individual articles?

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specialp
Yes they have. I have had it for over a year. People don't want to subscribe
for $10 a month or something but surely they can pay 20 cents for an article.
Otherwise we are going to have junk news forever with auto playing videos and
ads.

Edit: Also once you pay you can decide to rescind your payment if it is click
bait or not good. Also no relationship with them I just want to see a paid web
content model succeed.

~~~
ajdlinux
I'm a Blendle user as well, and I really love the concept - the main thing I
would like is integration between Blendle and the original publication site,
because people post links to the original newspaper, not to Blendle...

