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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-re

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.
    - geye1234 3y ago
      Sure, I know what the accounting says. I just don't know what it means. If I own stock in Microsoft, it means I own a percentage of all its assets (real estate, intangibles, etc), along with a right to a percentage of its revenue streams. Plus I run the risk of my asset being worthless if Microsoft fails. So I know what that means. Similarly, if I own Microsoft bonds, it means I have a right to a fixed revenue stream from it, and further, can claim a proportion of its assets if it stops paying me. So I can be said to 'own' a proportion of its assets, insofar as I have certain rights over them. And again, I run the (smaller) risk of my asset being worthless if Microsoft fails. If I have lent Bob money on a non-recourse basis to buy a house, it's a similar story: I have the right to a fixed revenue stream from Bob, and can claim his asset if he stops paying me. So again, I can be said to own a proportion of the house, less whatever I'd pay him if I seized it. And again, I run the risk of the house burning down, etc etc. In all three of these examples, my balance sheet asset refers to something real. But if I've lent Bob money on a full-recourse basis, what is the asset? Not the house -- we've established that. Not the cash -- the cash is gone. So what is the debt instrument in my balance sheet based on?
      - PaulDavisThe1st 3y ago
        https://www.investopedia.com/ask/answers/08/nonrecourse-loan-vs-recourse-loan.asp https://www.investopedia.com/ask/answers/08/nonrecourse-loan... The full-recourse loan instrument gives you access to any other assets Bob may have (including future assets such as wages).
        geye1234 3y ago
        But these 'assets' are entirely notional. They may not really exist. They may start existing at some point in the future, or they may not. How can I claim ownership over something notional?
        PaulDavisThe1st 3y ago
        How does anyone ever end up with a claim that allows garnishing future wages (that do not exist and are not guaranteed to exist at the time the loan is issued)? The whole point of a loan (of any kind) is that it comes with risks. Different types of loans have different risks, and allow ownership claims of more or less things distributed in time and space). But no loan is risk-free, and so the idea that a loan provides an ownership claim of something that only notionally exists doesn't seem particularly strange.

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.
  - geye1234 3y ago
    Sure, I know what the accounting says. I just don't know what it means. If I own stock in Microsoft, it means I own a percentage of all its assets (real estate, intangibles, etc), along with a right to a percentage of its revenue streams. Plus I run the risk of my asset being worthless if Microsoft fails. So I know what that means. Similarly, if I own Microsoft bonds, it means I have a right to a fixed revenue stream from it, and further, can claim a proportion of its assets if it stops paying me. So I can be said to 'own' a proportion of its assets, insofar as I have certain rights over them. And again, I run the (smaller) risk of my asset being worthless if Microsoft fails. If I have lent Bob money on a non-recourse basis to buy a house, it's a similar story: I have the right to a fixed revenue stream from Bob, and can claim his asset if he stops paying me. So again, I can be said to own a proportion of the house, less whatever I'd pay him if I seized it. And again, I run the risk of the house burning down, etc etc. In all three of these examples, my balance sheet asset refers to something real. But if I've lent Bob money on a full-recourse basis, what is the asset? Not the house -- we've established that. Not the cash -- the cash is gone. So what is the debt instrument in my balance sheet based on?
    - PaulDavisThe1st 3y ago
      https://www.investopedia.com/ask/answers/08/nonrecourse-loan-vs-recourse-loan.asp https://www.investopedia.com/ask/answers/08/nonrecourse-loan... The full-recourse loan instrument gives you access to any other assets Bob may have (including future assets such as wages).
      - geye1234 3y ago
        But these 'assets' are entirely notional. They may not really exist. They may start existing at some point in the future, or they may not. How can I claim ownership over something notional?
        PaulDavisThe1st 3y ago
        How does anyone ever end up with a claim that allows garnishing future wages (that do not exist and are not guaranteed to exist at the time the loan is issued)? The whole point of a loan (of any kind) is that it comes with risks. Different types of loans have different risks, and allow ownership claims of more or less things distributed in time and space). But no loan is risk-free, and so the idea that a loan provides an ownership claim of something that only notionally exists doesn't seem particularly strange.