Cause And Effect

The New York Times continues to display a stunning lack of basic economic knowledge. Today, the editorial board argues for giving bankruptcy judges the power to modify the terms and conditions of first mortgages, in the name of helping out the little guy. Dumber words have never been spoken.

Sure, the clods who overborrowed, or believed the entire "real estate only appreciates" hype will benefit. But what of everyone else?

If banks know that a bankruptcy court can rewrite mortgages on a whim, credit will become less available. Banks will not lend to marginal risks. A borrower's credit score will have to be significantly higher in order for banks to even consider lending money. Banks will only lend to those who don't need it, to quote an old saw.

Further, banks will require larger downpayments in order to push risk back down onto the homeowner. Say goodbye to 5% or even 10% downpayments. Hello, mandatory 20% down, and in areas that have volatile markets (Florida, Las Vegas, California), look for even higher down payments.

Third, banks will raise interest rates in order to cover the new risk of courts rewriting private contracts. Gone will be the days of mid single digit rates. Look for rates approaching 10%.

The only way this stupid idea will not crater the housing market (and lending therein), is if the government steps in to guarantee downside bank risk, as they currently do with FHA and SBA loans (and Fannie and Freddie). And we all know how that's going.

So, the NYT thinks it's a good idea to have some short term gain, and let the very negative consequences fall on future generations. Great plan, guys. It's worked out so well on social security, Medicare, public pensions and ObamaCare.