the banks are a portion of people. Home value (equity) is NOT part of the banking equation...its part of a persons net wealth. Not all of which goes to banks.

If I loan money against a collateral item, my return is NOT the collateral. Its the payments on the loan. I only lose based on the value of the collateral if the payer defaults. So the valuation should NOT be the valuation of the home...its the value of the future payments.

The RISK assigned to that investment is the default rate and that is where the valuation of the cbos is a problem. Because it is discounting these values far above even the most pessimistic default rates.