For the right kind of rate and with the right collateral, you bet I would.
In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
I'm not sure the "right collateral" even exists for home loans, it's a weird case where the "collateral" is the item being purchased on credit instead of something the borrower actually has.
They are basically a flexible cash-out second mortgage.
> In the extreme, a home buyer borrows a million dollars to buy an expensive house, the economy tanks before the first payment, the borrower walks away, and the bank gets a house worth $400K.
You've just described ordinary mortgage risk, in no-recourse states. In recourse states, the bank can go after the borrower for the remaining balance of the loan ($600k). Generally if a bank was willing to lend $1 million to someone, they had reasonably high credit and cash flow at origination time (debt-to-income ratio, non-conventional jumbo loan). They may not get their $600k back, and in no-recourse states they will get $0 back, but that is priced in to the interest rate of the loan.
For a house worth $1MM in February and a first mortgage loan balance of $700K, it sure looks like the borrower has $300K in equity in the house.
If the economy, job market, and housing market evolve such that the house becomes worth $600K a year from now, how much equity does the borrower have at that point?
What I think most likely happened is that banks plugged their (new, very high) risk level into their interest rate formulas, got very high rates (imagine 10-20%) and decided it would be worse, for publicity, revenue, or other reasons, to lend at those rates rather than halt HELOC origination entirely.
Your thinking is circular - the house doesn't truly belong to the borrower exactly because it's the collateral of the loan. Nothing strange about it.
Let me throw this alternative out there. Let's say that you have a million dollar home that is paid in full(no mortgage or any other liens on the property.) You decided that given the uncertainty, you want to make sure you have a years worth of expenses in cash. The lender decides that they will lend you 100k (only 10% of the value of the home) at 2%(well above the fed rate which is near zero) as long as you agree to a lien on the property. Even if the home loses half of its value the lender will still be made whole.