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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Hawkmoon who wrote (87902)9/2/2007 12:37:09 AM
From: The VetRead Replies (2) of 306849
 
Hmmm... That still doesn't destroy any money.. You say " I would suppose it's the money that the banks now have to declare as a loss on their books."

However that money was generated on the bank's books in the creation process. They don't actually owe it to anyone, and they don't have to repay it. It started as a creative book entry, got converted into a real house and was paid to the builders, his workers and suppliers and became part of the actual money in general circulation. It hasn't been destroyed. The house is still standing, so real value created remains.

In fact the only change is that the bank has make is to reverse the book entry of the $500K loan asset on their books. A few keypresses and its gone just as simply as it was created. But what was "destroyed"?

Actually even if the house has lost half its value they still can show a $250K assets and it can be easily liquified, not like the original loan of $500K. If there was no default there would still be a book entry for $500K but that is more illiquid than the $250K entry after default.

If there was default they could foreclose and sell to recover the $250K. If there was no default then they cannot foreclose and they cannot liquify the $500K principal. It remains as a "good" loan but they, or the owner of the loan still have to wait up to 30 years or so to get paid in full!
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