We cannot fall into the Marxist trap that the market is a lottery. The market, the free market enterprise system, preserves freedom and individual liberty.
No bank buys a lottery ticket. The gamble is absurd as is the analogy. During the 1980s S&L crisis the government changed the rules on S&Ls as well as on the tax-preferred treatment of certain investments. These changes precipitated a crisis that was unnecessary and political in nature, not market based.
The same thing is occurring now. A combination of low interest rates (set by government through Fed/Treasury actions), tax incentives on mortgage debt, the government dominated secondary mortgage market, and MtM accounting rules precipitated this crisis. Without government intervention/involvement and meddling in the market you would not have had a RE bubble in the first place.
The presumption that all asset classes have an immediate/liquid market is absurd. There are many classes which are improperly valued if sold in the next five minutes. RE is one of those assets. A bank lends on cash flows, not value. Your down payment isn't as critical as your ability to service the loan.
MtM ignores this and exaggerates the downside. At the same time, in a boom, it can exaggerate the upside as values race up. Loan servicing is the most important aspect of lending, not home values.
I agree. At our credit union, this is the most important of the three "C's."
Collateral
Character
Capacity to repay
There's nothing marxist about it. All investments carry risk. All of them. That's capitalism 101. The regulatory question is how an institution is required to book its risks. Banks don't typically buy lottery tickets because people actually understand the risks involved and the bank management would have its head handed to it. Call the "lottery ticket" a MBS and instead of a drawing you have some obscure model of credit risk and people think its a sure thing when it isn't.
I'm perfectly fine with a bank owning securitized debt instruments or other ephemeral assets. Where it gets messed up is when the instruments are considered to be capital instead of potential capital. You want to own MBS or other CDOs - great. Only the actual cash flow from the assets can be counted as capital for reserve requirements and not whatever its potential may or may not be.