I still hate the fact that people can borrow money against a stock. Stock should be sold, period. That is how the market sets a price for stock, through the volume of it being sold and bought. By allowing people to borrow against a stock, let's them get the money for the stock while still holding it. That artificially increases the stock price and value.
probably whoever makes the loan will hedge, maybe by shorting the stock. or buying puts, but then whoever sells them the puts will hedge by shorting the stock.
if they decide not to hedge, then it must be because they don't think they're exposed to much risk, which basically means they like the stock and would be willing to own it. it feels like it mostly works out.
Are you talking on the consumer level or the banking level?
On the consumer level, you need to have mortgages as I don't think most people have 500K lying around in order to purchase a home. As such, there needs to be some way for the common person to borrow the money to finance a home. Obviously there is no way to "sell" your mortgage, you can only sell your home. And yes, you can borrow money against your home in the form of a HELOC, but you doing so doesn't affect the price of the home or the market, just what you have to pay off.
Most banks on the other hand, bundle mortgages and sell them on the open market in order to recoup their cost of them rather than servicing the loan. To me this shouldn't be allowed. If a bank wants to sell their mortgage portfolio to another bank or group of bank, that's ok, that doesn't affect the market and is a private transaction. What I have a problem with is them bundling the mortgages and placing that portfolio on the open market as that causing collapse like we saw in 2012.
