Why don't banks just issue 2 year bonds to borrow home equity at a decent interest rate?
Thursday, 29. December 2011
If a bank is having trouble with their asset column, why doesn’t a bank just issue 2 year bonds to borrow home equity from property owners at a decent interest rate? In other words, if a property owner has bad credit and does not qualify for a loan, why doesn’t a bank just give the property owner a 2 year bond (similar to a cd) at a 2 year cd interest rate and temporarily transfer the property owners equity into the asset column of the bank? The bank would then have additional assets in the asset column (to balance) and the property owner would get an interest rate on their home equity? (The amount borrowed by the bank would be only a fraction of the property owners home equity which would be insured only to 100,000, in agreement during the 2 year period that the homeowner would agree not to sale the property, pay taxes, etc. There could possibly even be an option to have the interest rate on return set to slowly cancel out some of the property owners personal debt. Foreign banks could do this to slow the rate of loss by shifting the time, similar to operation twist, but instead of using treasuries you would create a new bond and "twist" home equity.)
I am very new to banking concepts, does this form of bond already exist?
Thanks JoeyV, I need to make some mistakes now, I’m still new to this.
1) Yes, that’s where the "twist" would come in, in terms of the bond. The bank would issue a special kind of bond that the property owner can basically sell back to the bank (its in reverse, of course the interest rate will be that of a cd based upon the amount of equity agreed upon in the transaction).
2) This new type of bond could also be a special kind of deed that is made that shows temporary joint ownership during that period, with certain limitations in the contract. The bank can only use the equity of the property as a security. This could be made into a piece of paper with a notary seal of some sort and a few signatures on it.
3) The bank would actually temporarily be joint owner of the property (in terms of equity). It would be preferably best due to this if the property owner was preferably sub-prime, as the property owner would be unable to make a loan from that particular bank for the duration of the
…duration of the bond (due to a conflict of interest). I don’t know if this would work, but during the transaction, the money would actually be rotated from nothing in the asset column to a deposit in the liability column, insured, and back into the asset column to loan… all in terms of numbers, from nothing. (of course the real value being in the property and other loans made, not to mention other investments, r/mbs etc).
4) Well the "twist" in operation twist seems to me to be a twisting of the actual structure of the previous QE. In QE 1, 2 American banks were unable to make loans due to the credit crisis, it seemed they couldn’t make money off of federal bonds made from nothing unless they made sub-prime loans. So in terms of actual assets the banks had to hold properties (usually acquired through subprime lending) in the asset column in order to balance it, which lead to the mortgage crisis. In QE 1, 2 it seemed they simply took the money made out of nothing that American bank
…that American banks weren’t using, called the it a stimulus, then dropped this package of money made out of nothing on foreign banks for assistance. (I don’t know how it all exactly works yet, but I think after it was all over the properties from failed banks were just rebundled up and sold through investment banks.)
4) So it seems to me, in QE 3, the "twist" is that instead of unloading money made out of nothing on foreign banks, they shuffle the treasuries and simply twist the yield curve in terms of interest rates, in terms of time.
5) It seems if there is real value in home equity in failing countries, and the banks and property owners are not making money off it, it would kind of make sense to twist time and utilize it. In terms of failing countries though, it kind of sounds more like something the World Bank might do, that in providing interest on owned equity to those countries they provide base money for the people to buy basic supplies, meanwhile reloaning the money in the
…the money in the countries equity back to them in order to give property value, build and mobilize infrastructure.
I really appreciate your reply, have to do more research on it, the idea just came to me off the top of my head, so its nice to have some imput on it.