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But that is just fantasy accounting. If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000. They have a $200,000 share i

But that is just fantasy accounting. If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000. They have a $200,000 share in a piece of real estate. The real liquid value of the asset should be discounted by the cost of reclaiming that asset and what it might be expected to fetch on the market (which as we learned in 2007, might as well be zero in some cases). The long-term value of that asset would be marked up by the expected gains in interest from the loan. The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.

JumpCrisscross 3y ago
> If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000 No, but the seller’s bank does.
- robertlagrant 3y ago
  But that's the point - the seller gets real money, that no one disputes should be real - but the buyer's bank should be careful how much it counts assets it would need to liquidate as lendable money.
  - deleted 3y ago
    [deleted]
  - User23 3y ago
    The real asset and the financial asset are accounted for separately. That’s why a bank can sell your mortgage without selling your house.
    - robertlagrant 3y ago
      Understood, but I don't think that changes the statement at all.
      - User23 3y ago
        The only asset the loan originator has as a result of this transaction is the loan itself and it has an equal and opposite offsetting liability for the deposit that was created along with the loan. Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
        robertlagrant 3y ago
        > Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then. True - what I meant was they can't just have a house on the books and loan out 100% of the difference between its value and what's still owed on it, because if the loans start defaulting they need a margin of error in case they can't sell the house for what they thought it was worth at the time of buying.
- sidewndr46 3y ago
  Last time I checked if I just immediately default on my mortgage the bank doesn't just get to go get their money back from the seller's account. Even if the seller was actually using the same bank. Also the seller is now less a real asset. Their liquid asset worth hopefully went up in the sale. But their total net worth should be around the same, minus any fees they paid during the transaction.
  - JumpCrisscross 3y ago
    Okay, I see what you're saying. The terms this discussion craves are liquidity and capital requirements. Mortgages are assesed on risk-based metrics in terms of how much equity a bank must hold against each dollar loaned, and how much liquidity as well. Apologies. The comment you're responding to makes multiple fundamental errors [1], so the discussion is a tad tough to follow. [1] Banks have enough capital to absorb these losses, capital isn't cash, loss reserves aren't cash, there is no chain reaction of defaults in basic lending, bank failures and rescues aren't inflationary
geye1234 3y ago
I'm not sure that the bank owns a share in a piece of real estate. If the house burns down in a fire, the bank is still owed its $200k, assuming it's a full-recourse mortgage. Same if the house's value drops to zero for some other reason. The money owed to the bank is separate from the house (again, in a full-recourse mortgage). Of course, you can't sell the house and keep the mortgage, but that's only because the bank wants to be sure it will get its money; it's not because the bank owns a share of the house. Same story with the bank forcing you to insure the house. So I think it's wrong to say that the bank owns a share of the house. Which raises the question: what, precisely, is the asset that's on its balance sheet?
- sidewndr46 3y ago
  Perhaps a better way to phrase it is "has an interest in". In either condition I think you would agree that the bank has some reasonable non-zero worth claim to the house. But it clearly is not the same as $200,000 cash.
  - geye1234 3y ago
    Yeah, I agree it has an interest in it. It's just I can't name what the bank's asset actually is. What should go on the balance sheet? It gave cash to the borrower (ok, I know it's more complicated than that, but for the sake of argument let's pretend it gave a bundle of Bens), so it credits that asset by $200k. What does it debit? Not a share in a house. A promise to pay, sure, but that's just notional. What is the asset in reality? (Hopefully I'm being clear that I'm not asking what GAAP says. I mean what does the bank have that it didn't have before?) EDIT: this problem doesn't arise with a non-recourse mortgage, where the bank's asset is pretty clearly a share in the house. If the house burns down, the bank loses its money.
    - PaulDavisThe1st 3y ago
      > It's just I can't name what the bank's asset actually is The asset is a debt instrument, with everything implied by the specifics of that instrument.

JumpCrisscross 3y ago

> If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000 No, but the seller’s bank does.

robertlagrant 3y ago
But that's the point - the seller gets real money, that no one disputes should be real - but the buyer's bank should be careful how much it counts assets it would need to liquidate as lendable money.
- deleted 3y ago
  [deleted]
- User23 3y ago
  The real asset and the financial asset are accounted for separately. That’s why a bank can sell your mortgage without selling your house.
  - robertlagrant 3y ago
    Understood, but I don't think that changes the statement at all.
    - User23 3y ago
      The only asset the loan originator has as a result of this transaction is the loan itself and it has an equal and opposite offsetting liability for the deposit that was created along with the loan. Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
      - robertlagrant 3y ago
        > Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then. True - what I meant was they can't just have a house on the books and loan out 100% of the difference between its value and what's still owed on it, because if the loans start defaulting they need a margin of error in case they can't sell the house for what they thought it was worth at the time of buying.
sidewndr46 3y ago
Last time I checked if I just immediately default on my mortgage the bank doesn't just get to go get their money back from the seller's account. Even if the seller was actually using the same bank. Also the seller is now less a real asset. Their liquid asset worth hopefully went up in the sale. But their total net worth should be around the same, minus any fees they paid during the transaction.
- JumpCrisscross 3y ago
  Okay, I see what you're saying. The terms this discussion craves are liquidity and capital requirements. Mortgages are assesed on risk-based metrics in terms of how much equity a bank must hold against each dollar loaned, and how much liquidity as well. Apologies. The comment you're responding to makes multiple fundamental errors [1], so the discussion is a tad tough to follow. [1] Banks have enough capital to absorb these losses, capital isn't cash, loss reserves aren't cash, there is no chain reaction of defaults in basic lending, bank failures and rescues aren't inflationary

geye1234 3y ago

I'm not sure that the bank owns a share in a piece of real estate. If the house burns down in a fire, the bank is still owed its $200k, assuming it's a full-recourse mortgage. Same if the house's value drops to zero for some other reason. The money owed to the bank is separate from the house (again, in a full-recourse mortgage). Of course, you can't sell the house and keep the mortgage, but that's only because the bank wants to be sure it will get its money; it's not because the bank owns a share of the house. Same story with the bank forcing you to insure the house. So I think it's wrong to say that the bank owns a share of the house. Which raises the question: what, precisely, is the asset that's on its balance sheet?

sidewndr46 3y ago
Perhaps a better way to phrase it is "has an interest in". In either condition I think you would agree that the bank has some reasonable non-zero worth claim to the house. But it clearly is not the same as $200,000 cash.
- geye1234 3y ago
  Yeah, I agree it has an interest in it. It's just I can't name what the bank's asset actually is. What should go on the balance sheet? It gave cash to the borrower (ok, I know it's more complicated than that, but for the sake of argument let's pretend it gave a bundle of Bens), so it credits that asset by $200k. What does it debit? Not a share in a house. A promise to pay, sure, but that's just notional. What is the asset in reality? (Hopefully I'm being clear that I'm not asking what GAAP says. I mean what does the bank have that it didn't have before?) EDIT: this problem doesn't arise with a non-recourse mortgage, where the bank's asset is pretty clearly a share in the house. If the house burns down, the bank loses its money.
  - PaulDavisThe1st 3y ago
    > It's just I can't name what the bank's asset actually is The asset is a debt instrument, with everything implied by the specifics of that instrument.