The explanation is right there in the third paragraph.
Banks are forced to treat a bad loan as though the entire amount of the loan is $0. In actual fact, the loan was backed by a real estate asset. The ACTUAL loss is the difference between what was lended and what the underlying asset is worth. But with current accounting rules, real estate assets are treated like equities. It essentially makes the idea of collateral pointless from an accounting standpoint.
As an owner of RE, you are so correct. Yes, I have a small % of debt on that RE, but my bank must look at it as if there is no value, at all, of the RE. Which has made my life interesting, and damned messed up. The next few months are shaping up to be worse. Oh Boy, I can't wait.
MOgirl