Re:Why Don't People Manage Debt Better?
by imgabe on Saturday February 20, 2016 @08:04AM
(#11139905)
> Why wouldn't they just buy the asset directly, and cut out the middleman?
Let's see, why doesn't Bank of America just buy millions of houses rather than lending out mortgages?
1. They don't need and don't have the manpower to maintain millions of houses.
2. Empty houses owned by the bank are not as valuable as houses with people living in them. If the bank owned every house in a neighborhood, nobody would want to live there and their value would drop.
3. They get to shift some of the risk to the person taking out the loan. If the value of the house drops, the borrower is still on the hook for paying the original amount (up to a point, unless they're willing to go through bankruptcy). So they don't get as much upside, but they have less downside too.
Let's see, why doesn't Bank of America just buy millions of houses rather than lending out mortgages?
1. They don't need and don't have the manpower to maintain millions of houses.
2. Empty houses owned by the bank are not as valuable as houses with people living in them. If the bank owned every house in a neighborhood, nobody would want to live there and their value would drop.
3. They get to shift some of the risk to the person taking out the loan. If the value of the house drops, the borrower is still on the hook for paying the original amount (up to a point, unless they're willing to go through bankruptcy). So they don't get as much upside, but they have less downside too.
I'm sure there's other reasons as well.