It can't happen more often because current mortgage holders are not being forced to recognize the true market value of those mortgages. If they did, their balance sheets would instantly crumble. In the meantime, they can hope that the federal government will bail them out, either by buying the mortgage securities at ridiculously inflated prices or by bailing out their insurers (see AIG).

Is it too much to hope DellaCamera used a blunt object to beat recalcitrant mortgage companies into a more amenable frame of mind?

Oh well.

But yes, while I normally have nothing kind to say about HFMs it sounds like he's a businessman who knows what he's doing and isn't excessively greedy.

I just hope Greenberg read the fine print...

"This American Life" touched on this in their "Bad Bank" episode this weekend, talking to two guys in Jersey who are doing the same thing as the investor here. Short answer: The Jersey guys think a big chunk of banks can't afford to sell off their bad debt at market prices w/o going broke themselves. If they sell at 60c on the dollar or whatever level makes what the investor here is doing possible, they go out of business. Plus, in Jersey and presumably above, the transactions were simple --- 1 actual bank, 1 actual homeowner. Not: 5,000 investors across the globe, 20,000 shares of a mortgage backed security, 3 investment banks, 2 mortgage servicers, and 1 house flipper.

So why doesn't this happen more often ?

I think the problem is that most mortgages don't have one owner anymore. The firm which lent Greenberg the money hadn't packaged the money she sent them into a mortgage bond (MBS) and sold it ... yet.

Many homeowners in trouble don't owe more than they can pay to a bank or mortgage company. They owe more than they can pay to investors who don't even know who they are.

To renegotiate such loans DellaCamera would have to buy up all the mortgage bonds. The owners of the MBS aren't organized to bargain with him. The person who owned the last bond with a claim on income from Greenberg would be able to block the whole deal unless DellaCamera paid him, her or it whatever he she or it demanded.

MBS by diversifying risk have created a collective action problem.

My solution is to set up the Big Bad Asset Bank BBAB (aka shitibank) and requisition all the MBS in the world in exchange for shares of the BBAB. At this point all mortgages would be in, at most, 2 pieces, the part the initiator kept and the BBAB. DellaCamera and other people as smart as he would make out like bandits and people would keep their homes. The shares of BBAB would be worth more than the requisitioned MBSs).

The key is the word "requisition" that is take not buy so BBAB gets all of the toxic sludge not just the worst it.

Not gonna happen, but I think it would work.

But but but but but CNBC told me everything was fine!!! Does this mean they were wrong about Bear Stearns? I mean what happened to them? I bought all these shares thanks to Jim Cramer and then suddenly last year I haven't heard one peep out of them!

Larry Krudblow told me in April that this whole Subprime hullabalooo was over and things were great again!

CNBC would NEVER steer me or the rest of the investing world wrong, right? Right? RIGHT?!?

I've just realized who Jim Cramer really is!

It all adds up!

Jim Cramer is Vince for ShamWow returned from the future to save us from ourselves, but he's gotten into an alternative time-line and it's all going horribly, horribly wrong!

(You have to add Futurama to the X-Men and Reid Fleming, World's Toughest Milkman ca. 1986).

So a woman who was making her payments suddenly has 40% of her mortgage disappear. I wonder who ate that ? It's a huge fact you neglected to explore. I suspect the bank used bailout and sold the mortgage, which was not in trouble.

I don't mind using my money to help out people, but there is no mention of this lady having payment issues and the fact that she is going upgrade her home with the difference really ticks me off. Someone covered that 40% of her mortgage and like you said, it wasn't the bank.

And for the record, if anyone wants to cover 40% of my current mortgage, just do it because I am thinking about a pool or a new car. Never been late and who cares how you do it, we'll just say it "it was in their interest to sell them (mortgages), so I assume they profited from the deal." and not worry about the pesky details.

I can hardly believe 1 in 8 mortgages is in trouble, and I agree with you, that is staggering. But this story is exactly what we should not do, help people who do not need help while many others do not get the help they need.

ScottW: From the story, it seems that the company that originally held the mortgage sold it (and a bunch of others) off at a loss. I assume that this was because the mortgages as a whole had lost enough value that they were willing to take 60 cents on the dollar. No one is suggesting that this was an act of charity on their part. They made a bad bet; they lost money.

Mr. DellaCamera, for his part, wrote down the mortgage by 26% (not 40%; the 14% difference is his profit if the mortgage doesn't go into default) to make it more likely that the mortgages will stay current.

Your tax dollars have nothing to do with it. Just business decisions.

" a lot more than he payed."

The past tense of "pay" is, I believe, "paid."

Can't we leave it to the reichwingers to cover the mis-spelling and bad-grammar detail?

Hi Hilzoy, et al,
This was addressed somewhat by the most recent This American Life episode/podcast. There are individual investors that doing this is many areas, but there's just not nearly enough of them to buy up all of the overvalued properties. A caveat: it might be a little too simplistic for some (but not for me!)
Thanks for doing what you do.

I think the problem is that most mortgages don't have one owner anymore. - Robert Waldmann

Even though a specific mortgage is technically owned by many bond investors, there has to be a controlling party. Otherwise, you couldn't even refinance a loan. I suspect the problem is the precedent. If banks regularly wrote down or sold mortgages at market value, bonds would lose their ratings. That would make it more difficult to raise capital or lend more money.

Just an aside to this mortgage mess, but, the soon to fold Seattle P-I has a lead story, this morning, about the number of felons allowed to work for mortgage brokerage firms in the State of Washington, during the run-up to disaster. The same old tale of lobbyists working the Legislature to stop oversight by Washington State. "Oh, we must leave it to the Feds". By the time, the state passed needed legislation to tighten licensing, it was too late. Field day for scam artists doing their "Just win, Baby" thing.

Hilzoy.
But why did they sell it ? Someone had to take the hit and I just don't see a bamk/mortgage company taking the hit when the mortgage was up-to-date.

How do you find these guys who do this?

Why doesn't it happen more often? (And it is happening a lot more actually -- see the story about the former Countrywide CEO going into this business big time).

Because this strategy goes against basic thinking by bankers about managing mortgages. Also, as noted above, the reselling and packaging of mortgages inhibits flexibility in dealing with them (it is true that someone remains a manager or servicer of these things on behalf of the bondholder's/derivative holder's interests, but that manager or servicer typically has far less discretion to renegotiate -- or far less interest in doing so since it is usually only earning a modest servicing fee).

Yeah, some new thinking is needed for new times, but so many people actually running banks just are not used to being that flexible (not a trait taught to bankers).

This situation actually highlights how it is happening. The bank sells off the crappy mortgage and eats its loss rather than trying to foreclose and resell (or renegotiate). Doing the latter requires different management skills that are just not present. Those buying up these bad mortgages for purposes of renegotiation do have that skill set, and are willing to take the risk.

There is something funny about this story -- that the bank was willing to sell the mortgage at a steep discount when it was not already in foreclosure. I suspect that it was fact in that situation when sold, and the renegotiation by the new owner put the loan back on track. Someone has probably left out some details from this story.

Friend of mine just paid a collection agency $50 on a $700 medical bill. Win-win, he gets affordable health care and the agency gets $50. Not that he couldn't have paid the $700 as he has hundreds of thousands stashed overseas, but it's the principle of the thing, teaching greedy doctors a lesson.