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Wall Street jackals bundling foreclosure debt

House is gone but debt lives on,” says WSJ. Those who walked away from their homes assuming the bank would eat the difference between what the house is now worth and what is owed on it are getting a nasty surprise. Deficiency judgments are becoming more common. That’s when the foreclosed owner is legally told to pay the difference.

Yes, I do have a problem with people walking away from homes sticking someone else with the bill (and that someone is often taxpayers since the government buys or guarantees such debt.)

However, as might be expected, Wall Street sees deficiency judgments an exciting new income opportunity. Buy this toxic slop of debt, grind the previous homeowners into dust trying to collect, then package it all in bundles of securities. What could go wrong with that?

The increase in deficiency judgments has sparked a growing secondary market. Sophisticated investors are “ravenous for this debt and ramping up their purchases,” says Jeffrey Shachat, a managing director at Arca Capital Partners LLC, a Palo Alto, Calif., firm that finances distressed-debt deals. He says deficiency judgments will eventually be bundled into packages that resemble mortgage-backed securities.

Then they can buy and sell credit default swaps on these noxious poo piles, creating ever more fictitious capital and increased risk and instability in the financial system until it inevitably blows up in their faces again, just like in 2008. Some of this debt is selling for 2 cents on the dollar, which seems just a teensy bit risky to me.

None of this helps the economy at large nor does it create jobs in any appreciable way.

  • Sue

    I’d like a tranche of Poo Pile IV, please.

    • Would you like your Poo Pile IV tranche further sliced and diced or as is? We have a festive assortment of options? Perhaps madam would prefer it to be an impenetrably opaque SIV instead?

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