Wall St. Finds Profits by Reducing Mortgages - NY Times

The New York Times now reports on something we have previously written about, the profits being made by traders buying mortgages at steep discounts, reducing their principal balance and then refinancing the loan. The difference between the discount and the payoff is substantial, and great profits are being made.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

What's different about these loans is that the new loans are made through government programs.

Here's how it works,

For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.

But there's a risk, again for the taxpayer as there is no assurance the new loan--this time government guaranteed--will be paid.

So, the taxpayer funded bailed out lender who dumps a mortgage takes a hit, and a speculator makes a mint. Can someone explain why the original lender cannot make the same deal for the homeowner, i.e., reduce the balance, and assist the borrower in getting new financing that takes the loan off the books?

Read the full article.

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