Debt Buyers Eagerly Eyeing Treasury Department’s Recovery Plan

Market investors may not have welcomed the U.S. Treasury Department’s announcement Tuesday that it will partner with private equity investors to help Wall Street banks cleanse their balance sheets, but consumer debt buyers want to hear more.

“I’m very interested in seeing what form this takes…if there is some way we can end up participating,” said Al Brothers, CEO of Cavalry Portfolio Services, a Phoenix, Ariz.-based firm that buys all forms of non-performing consumer accounts.

Barbara Sinsley, general counsel for DBA International told insideARM that Brothers is not alone. She said the association’s Washington D.C. representatives have reached out to federal lawmakers about participating in the recovery plan and are making good inroads.

“DBA International’s board and members think this is a prime opportunity for our membership to reach out to the government and partner in the debt sales that may occur,” Sinsley said. “Our membership has the expertise and financial backing to get this done. Plus there’s the added advantage our membership has in adding to the employment rolls.”

Debt pricing, however, will determine if Brothers and other debt buyers dip their toe into the banking industry’s troubled waters.  Brothers said he believes there’s enough private capital to buy the mortgage assets without government funding and that Cavalry has approached banks about buying some of their mortgage backed assets. He said the banks, however, want more than the assets are worth.  

“We’re in the business of buying assets from banks every day,” Brothers said. “We see a lot of assets banks are holding that they are not willing to sell at current market prices.”

David John, a senior fellow in financial services at the Heritage Foundation, said the Wall Street banks are worried about becoming insolvent if they have to sell mortgage or other consumer assets for less than they shelled out, forcing them to write off the balance.

John said the banks are hoping that the Treasury forms an aggregate bank or so-called “bad bank” to buy their toxic assets, presumably for more than they are worth, or at least allow the banks a one-time exemption from the mark-to-market accounting rule that requires they value the assets on their balance at the price the market is currently willing to pay.

“They want some forgiveness to recording the mark-to-market or market value of the asset,” Johns said. Johns said that may still occur, but so far there’s no indication in the Treasury Department’s Financial Stability Plan fact sheet that it will happen.



Alex J. Pollock of the American Enterprise Institute for Public Policy Research said he doesn’t believe Treasury will attempt any changes on how an asset’s market value is addressed on the balance sheet.

“It looks to me that if it gets addressed, it will have to be forced by Congress,” said Pollock, who advocates adding a mark-to-market balance sheet to the traditional profit and loss statements. “The accountants are dug in their defensive position.  They’re not going to fix it. If it happens, it will be because of Congressional pressure.”

Still, if traditional debt buyers partner with the Treasury to buy mortgage-backed assets, those assets wouldn’t be liquidated entirely the way collection professionals are used to. Most states have deficiency laws that allow the holder of a house note to pursue a deficiency balance judgment, giving collectors an opportunity to help banks reach a settlement on the balance, said Rozanne Andersen, ACA International’s executive vice president and general counsel.

But many note holders don’t take advantage of deficiency balance laws.

“The (homeowner) will have an ace in the hole of filing bankruptcy if they can’t come to an agreement with the holder of the loan,” said Richard Leibert, past president of USFN, a non-profit organization of mortgage banking attorney’s and trustees throughout the United States.

Leibert pointed out that the portfolio buyer has the advantage of buying the debt at a discount. Brothers said if Cavalry purchased a portfolio of non-performing mortgage loans at a discount, it would try to keep the homebuyer in the home by restructuring loans at the current market value. Foreclosed homes would be resold at current market value, he said.

“That’s the way most debt buyers would look at this thing. We’d be looking to get our money back as quickly as possible,” he said.

Collection professionals, meanwhile, could participate in the new business by helping to qualify homeowners who want to restructure their mortgages, experts say.

“It’s simply the conversation with the debtor that changes, not the role of the collection industry,” Andersen said. “It’s about finding solutions and looking at the whole credit system a bit differently.”  

Sinsley added that if debt buyers do find a way to directly participate in the government’s economic recovery efforts it would help Congress and consumers better understand, and hopefully better appreciate, the debt purchasing industry and the role it brings to making credit available and affordable.  

“The more creditors are able to recoup, the more they’re able to lend, reduce interest rates and make more credit  available,” Sinsley said.