Eli5: Why do banks own houses?

35 views

When and why did banks start owning houses and land? When did mortgages start?

In: 3

Banks don’t “own” like I think you’re thinking. They loan someone money yo buy property but hold a lien until paid off. So they only way a bank would own it is if it is foreclosed on and then the bank would just sell it to someone else to get their principle back.

By the time most people could save up enough money to buy/build a house outright, they’d be too old to start a family, etc.

So mortgages are a way to get the house when you need it, when you’re starting a family, etc. The banks pay the seller, and then you pay back the bank with interest over time, so that you have use of the home when you need it even if you won’t fully own it until you’re much older.

Banks don’t own houses as inventory to sell like a store owns pairs or shoes, etc. They just lend you the money when you buy the house from the previous home owner, thus becoming your partner in owning the house. Say you put down 20% down payment and get a mortgage for the remaining 80%, then it’s like the bank owns 4/5 of your house. Over time, as you pay down the loan principal and the house appreciates in value, your stake goes up and their stake goes down.

Banks only own land/homes when they foreclose on a mortgage because the borrower doesn’t pay.

In the US, the first bank to offer mortgage loans started in 1781, but it was mostly for farms.

Banks have pretty much always been in the business of giving people money upfront in exchange for getting more money back slowly over time. In the case of a mortgage, it is a very large loan, so they get to collect intrest for a long time and it’s not like that investment can go anywhere; if the person doesn’t pay, it’s very easy for the bank to come and take the house and sell it to recoup their losses. It’s easy money.

Well one way is for example you buy a house using a loan from your bank. Unfortunate circumstances happen and you lose your job and you can’t pay off loan, so of course this makes the bank mad at you and they do what is called a foreclosure.

Since you can’t afford to live there you have to move out (or force by eviction) and the bank buys the house so they can sell it and make their money back. Well if you want to go deeper, technically they didn’t lose any money but they sure are making more. And banks sure do love making more money any chance they get.

Banks don’t normally own residential real estate as an asset as it’s not very productive use of money. When you take a mortgage, you borrow money from a bank but you own the property. The only time a bank might find itself owning your property is if you default on your mortgage and they re-posses it , and even that for a short time as usually they’ll try to get rid of it quickly to recoup the money.

Banks don’t usually own homes. The owners are usually people who got a loan from the bank to buy a home, called a mortgage. A mortgage is just a loan with the property used as collateral, meaning if the borrower fails to pay the loan, whoever was lending could foreclose on the home and become the owner. Mortgages started in English feudal times, where Lords would mortgage their estates in order to convert their property into money they could spend. In the United States, mortgages happened as early as the 1700s. In the United States, mortgages started to become widespread in the 1930s as a way to allow people to buy homes that they didn’t have the money to buy all at once. The government also guaranteed bank funds and mortgage loans. Before that, only about 40% of people owned the home they lived in (that figure is now 64% but it peaked at 70% in 2004). Widespread mortgages loans actually started with insurance companies, not banks, but later the industry was mostly taken over by banks. Usually banks only own homes when people stop paying their mortgages and the bank forecloses. But banks don’t usually want to own homes, since there are costs and risks associated with that ownership and banks would rather focus on getting interest from their loans. Because of those costs and risks, even if banks want to own homes, they will separate the business of home ownership (or property management) from banking.

In the U.S. banks don’t own houses, home owners own houses. A mortgage is a loan to buy the house, and the loan gives the bank special abilities like being able to take the house (foreclose on it), if the owner doesn’t pay their mortgage. But the bank doesn’t own the house just like the credit card company doesn’t own the TV you buy on it. If you buy a house all the important aspects of ownership; new construction, maintenance, value of appreciation if the home’s value goes up, belong to the home owner. Even if the home owner stops paying their mortgage the bank can only take the home, sell it and take back the money that they’re owed and any expenses from the sale. The left over money, if there is any, goes back to the home owner.

So far none of the answers have been ELI5-enough for me.

**ELI5**.

You want to buy a house. The house costs $100k. But you do not have that kind of money. What do you do?

Harry has the money, but he doesn’t want a house right now.

So Harry says, “Belo, I’ll give you the money to buy a house”.

And you say … “Really? There’s got to be a catch, right? What’s the catch?”

And Harry says: “There’s two catches.”

* “One is that when you pay me back over the next 30 years, you give me $110k. The extra $10k is for me being inconvenienced and not having all that money in my account for 30 years.”

* “The other is that, if you stop paying, then **I own the house**. You forfeit that house if you stop paying me, and then it belongs to me …. because it was my money that bought it!”

Make sense?

It’s the same way with car loans. The bank gives you money, you take the money and buy the car. If you stop paying the bank, they take the car!

In the end though, if you finish paying off your loan/mortgage, you own the property.

Because land is finite, money is infinite. This happened because they dropped the gold standard, which was finite and therefore stable, then introduce fractional reserve banking aka printing money.

Also, the more land they own, because it is finite, the cost of land increases, which means they can sell higher mortgages.