Wow, those are some terrible incentives. I've never had a loan, so maybe I misunderstand the experience. But I'd hate to owe money to somebody that is hoping I fail badly enough that they take my stuff and while keeping my money.
It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for.
Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. Once housing prices started going up consistently enough, it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process.
Not the way it works, for two main reasons. First, people who owe less than the house is worth are generally not foreclosed on - in the worst case they just sell and keep whatever equity they get away with. Second, legally the bank can't keep any surplus. If they foreclose on your house, they have to sell it at auction and keep only up to the amount you owed. They would have to give you any excess. At least for houses, banks aren't allowed to profit from foreclosures.
I assume the details depend on whatever the fine print on your mortgage says?
Seems a bit roundabout. If they want to bet on appreciating assets, they can just buy those assets directly?
> Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble.
There was no housing bubble. Only a big housing 'burst'.
See eg https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-... (and if you are really interested, I can give you some better material.)
The bank only loses if you default early in your loan, and the price of the collateral collapses.
Long story short, pay your bill.