Sigh, analyst, you are repeating, but then so am I.
The fact that the person (“lender”) who makes the lending decision is not the person actually and ultimately providing the money and taking the risk doesn’t mean there is no money being loaned. The real lender is the person whose savings have funded the loan. Economically, all the other people are just agents of that principal. (And yes, a good many of those agents are highly culpable and should be prosecuted.) Saying that the entity we commonly refer to as the “lender” isn’t putting any money at risk is a red herring. It doesn’t mean that there’s no person at the other end of a default taking the loss.
As for the borrower “not getting any money”. This fallacy sums up one of the biggest problems that created this bubble, and that we still have. When someone buys a house, the way that it should work is that they agree to pay the price by a certain date, and they then collect the money from their savings, and perhaps some borrowing. If the transaction were viewed this way, people would never allow a bubble to happen. Instead, people started to feel that a bank was buying the house for them. They didn’t really agree to pay $800,000 for that shack. They got the bank to pay $800,000. They only agreed to pay $2500 a month until they “sold” the house “they” bought for $1.2 million.
This mental attitude, that you are not actually agreeing to pay the purchase price, and the money just flies directly from the bank to the seller, is a key reason the bubble inflated, and is still a problem today. People need to be brought back to earth, and reminded that if they agree to pay $800,00 for something, they are supposed to pay it. If they borrow the money, then that’s a loan, and it needs to be repaid on time and with the agreed interest. It is two transactions that we have allowed to become hopelessly muddled.
My own personal suggestion to break this pattern would be to require that interest on home loans in excess of 2 x (65 – Buyer age)% of the home’s value be nondedictible. In other words, make people pay a lot of their own money when they buy. Then instead of feeling that they are an onlooker in some transaction between a bank and a seller, buyer would become real buyers again, and real borrowers, and real repayers of the loans.
