Buying your own debt ?

globalds

I just read this article on a philanthropist project.

http://www.bbc.co.uk/news/business-29505582

An activist group in the United States has been carrying out deeds that some might think the stuff of dreams - buying and cancelling other people's student debts.
Rolling Jubilee has purchased and abolished $3.8m (£2.35m) of debt owed by 2,700 students, paying just over $100,000 (£62,000), or as it says, "pennies on the dollar".

It was this part that got me thinking

The group pulled off the deal to illustrate how cheaply the money owed can be sold on the secondary debt market, she says.
"We wanted to question the morality around repayment," she says.
"Your debts are on sale. They are just not on sale to you."

If the market was changed in some way , legislation or some other way of making it really easy to find the value of your debt on the open market and then buy it to pay it off ..would it make things better or worse ?

I think it would make things better ,Mainly because it would make the issuing of loans more risky as a larger portion would not return a patch of the initial investment.

I am not sure you would get many lenders agreeing a loan for some student who said he needed £5,000 ,and would use the cash to clear his £35,000 student debt.

princeofpounds

It would make things better in one theoretical sense. Arguably no-one has better knowledge of your credit situation than yourself, so it would probably lead to more efficient pricing. There might, however, be an incentive to make your own debt artificially distressed before buying it back cheaply and recording a gain (some nefarious companies have been known to do this). So it's practically unworkable.

Don't kid yourself that this debt is on sale in any kind of personal way however. It gets bundled up into tranches of thousands of loans with similar characteristics, which get bought and sold in one go.

Also don't kid yourself that the debt is trading at pennies to the pound. The debt this activist group was buying was basically already non-performing. i.e. they are ripping up the debts of people who had already basically gone under anyway.

It's an interesting publicity stunt, but basically all they did was give their money to some financial institution.

michaels

I disagree, I think whenever your personal debt is traded you should be allowed to purchase it at the agreed price. I can't see how it is morally right that others can purchase your debt but that you can not.

Thanks OP I was going to post the same thing. Isn't there somewhere where either mse martin or the gov are looking for suggestions for what should be in the autumn statement?

reehsetin

michaels wrote: »

I disagree, I think whenever your personal debt is traded you should be allowed to purchase it at the agreed price. I can't see how it is morally right that others can purchase your debt but that you can not.

Good idea - before a company can sell off your debt, they have to offer you first refusal at the price it would have been sold at

N1AK

reehsetin wrote: »

Good idea - before a company can sell off your debt, they have to offer you first refusal at the price it would have been sold at

It's a good idea if you want to vastly decrease the amount of debts being sold, which will make borrowing more expensive or impossible for anyone with the slightest risk.

Why? Because when a company sells a bundle of debts it discounts the bundle because some of the debts will never be repaid, or only partially repaid. Thus when they sell 1,000 debts of £10,000 for £5 mil (half the nominal value) they are saying half the money will never be paid back. If you allowed people to buy their own debt at this point then the people most likely to pay back would buy back at half price, leaving the debt that is left as nearly valueless, effectively giving a return slightly over £2.5 mil on the same debt. The company would then be better off not selling the debts and employing a debt collection firm to collect on their behalf instead.

Thrugelmir

michaels wrote: »

I disagree, I think whenever your personal debt is traded you should be allowed to purchase it at the agreed price.

The debtor is already in default so cannot afford to service the debt. Let alone afford to buy it back.

Generali

reehsetin wrote: »

Good idea - before a company can sell off your debt, they have to offer you first refusal at the price it would have been sold at

michaels wrote: »

I disagree, I think whenever your personal debt is traded you should be allowed to purchase it at the agreed price. I can't see how it is morally right that others can purchase your debt but that you can not.

Thanks OP I was going to post the same thing. Isn't there somewhere where either mse martin or the gov are looking for suggestions for what should be in the autumn statement?

The problem is that it's sold in bundles not as individual debts:

http://www.reuters.com/article/2011/03/29/idUS150054+29-Mar-2011+RNS20110329

This is a pretty typical debt bundle IME. It's an RMBS (Residential Mortgage Backed Security), that is it's a form of debt security that pays investors back as mortgage holders repay their mortgages. If you overpay by a few quid on your mortgage then the holders of the RMBS get paid a little extra. If you refinance then your part of the RMBS is repaid entirely. If you default, one or more of the RMBS classes loses money.

As you can see from page 91 onward, there is plenty of information about the debt in there but nothing that actually identifies you or your house. Quite right too really: if I default, I don't really want that information going round Bloomberg on their pages that they have on underlying collateral.

Even if I could identify my debt, to be able to repay at a discount I'd have to buy up the entire RMBS which is effectively impossible as many people buy to hold to maturity.

princeofpounds

I disagree, I think whenever your personal debt is traded you should be allowed to purchase it at the agreed price. I can't see how it is morally right that others can purchase your debt but that you can not.

You *are* allowed to buy it.

The hard/impossible bit would be tracing it in the sea of debt securities, and then raising the capital to buy out all the thousands of other loans it is bundled with.

antrobus

princeofpounds wrote: »

You *are* allowed to buy it. ...

It's called offering a full and final settlement, I believe.

princeofpounds wrote: »

...The hard/impossible bit would be tracing it in the sea of debt securities, and then raising the capital to buy out all the thousands of other loans it is bundled with.

What Rolling Jubilee have done is quite interesting, but it is very much a random act of philanthropy. Indeed they're quite honest about the fact that it is random. They have no idea who has been liberated from this burden of debt; the cost of actually contacting the 2,700 people concerned would probably exceed the cost of cancelling the debt in the first place.

princeofpounds

I did wonder in fact if the people 'liberated' would ever actually find out or benefit...

antrobus

princeofpounds wrote: »

I did wonder in fact if the people 'liberated' would ever actually find out or benefit...

Well I imagine if your were a student of Everest College, and had defaulted on your student loan, you might well be hoping that you were one of the lucky 350.

Rolling Jubilee seem to be buying debt that is going for 2 or 3 cents on the dollar. At that sort of price I'd guess that your talking about loans in default which have already been through at least one round of the collection process. I think the technical term for this kind of debt is 'carp', or something similar.

It's the kind of debt where the debtor is probably counting down the days until the time the Limitation Act kicks in, and hoping to get as little grief as possible from the creditor in the meantime. The lack of any such grief might simply persuade the debtor to think 'oh good, they've forgotten about me'. (And is unlikely to make much difference to them, as they were not going to pay anyway.)

Of course, it occurs to me that if I had £10,000 going spare and I wanted to donate to some good cause, I'm not so sure that cancelling the debts of some 'over-privileged Americans' would necessarily strike me as the best use of that money. You could probably save the lives of a 1,000 Ethiopians for £10k, or something similar.