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Arbitrage Opportunity! Debt vs. Real Estate Prices

March 02, 2009 – Comments (1)

Which falls faster the value of your debt or the value of your assets?

Well it looks like arbitrage opportunities are popping up everywhere as banks scramble to unload their debt at deeply discounted rates far below the asset values connected to them. This is allowing companies with liquidity to arbitrage the difference! Some companies are finding buyers for their property/debt (on the side), buying their own debt (tax deductable now, thanks to The Stimulus), and selling it. 

This is a good thing and a bad thing. Good thing is that debt is massively undervalued compared to current asset prices, hopefully signaling that the debt market cannot fall much further/faster while housing continues to come down much slower. Bad is that the debt market is so messed up that this opportunity exists. The same is happening with all types of debt, allowing companies to basically refinanace themselves or drastically reduce their debt/recover losses. 

Imagine you have a 200K mortgage. You have buyers willing to pay 180K, but you can buy your mortgage for 140K. So you buy your mortgage and sell your house for a cool 40K arbitrage and come out ahead! Of course this all requires a huge amount of mobility and liquidity, but I thought you might want to know that these opportunities exist.