Buying your own debt for a discount?

[David Reo]

I have a pretty interesting concept I’ve been kicking around in my head lately: can you buy your own note at a discount. I’m confident this would be near impossible to do directly (in most market cycles), but what if you set up an entity and got creative with things? I heard on BP podcast #23 that Dave Van Horn buys secondary liens for 3 to 20 cents on the dollar. What if you got a home equity loan and then bought it back for 3 cents on the dollar? That would be crazy arbitrage...but can it be done? Of course, this means the note would be for sale, or you convince the debt holder to sell.

[JD Martin]

Originally posted by @David Reo:

I have a pretty interesting concept I’ve been kicking around in my head lately: can you buy your own note at a discount. I’m confident this would be near impossible to do directly (in most market cycles), but what if you set up an entity and got creative with things? I heard on BP podcast #23 that Dave Van Horn buys secondary liens for 3 to 20 cents on the dollar. What if you got a home equity loan and then bought it back for 3 cents on the dollar? That would be crazy arbitrage...but can it be done? Of course, this means the note would be for sale, or you convince the debt holder to sell.

 Who would sell your note at that kind of markdown unless you were seriously delinquent, in risk of foreclosure where 2nd+positions would be wiped out, etc? I suppose you could purposely have your note underperform by withholding your payments, but although I don't know this for sure it sounds to me like that would be major fraud.