Or several thousand laws. At least that’s what the New York Times seems to think. The New York Times editorial writers’ Sign of the Apocalypse of the Day is foreclosures, and the inability of current government programs to effectively combat them.
The liberal elites at the NYT reflexively advocate for even greater regulation. Essentially, the failure of one legal/regulatory scheme says nothing about the ineffectiveness of government action on a private sector problem. To the NYT and all right thinking people, the answer is clear: greater governmental interference will solve everything, including the failure of prior governmental interference.
‘Puter knows a little something about the commercial and residential mortgages and the secondary markets in both types of instruments.
Mortgages (‘Puter’s using this as shorthand, please read in the accompanying promissory notes (and substitute in deeds of trust for mortgages for states that swing that way)) are private contracts between a lender and a borrower. Both parties enter into a mutually acceptable contract, laying out the rights and duties of each party. Both parties have equal access to the current state of statutory law in the jurisdiction in which the transaction is entered.
For example, the lender and borrower in certain states know that residential mortgages are non-recourse to the borrowers. That is, if borrower defaults, the lender’s recovery is limited to the value of the property at the time it is sold according to the loan documents and applicable state law (see, e.g., California).
In other states such as New York, lenders can take deficiency judgments against borrowers. In these instances, upon default, the lender forecloses the property and sells it at auction. The lender is then entitled to petition the court for a deficiency judgment against the borrower personally equal to the difference between the sales price of the property and the total amount of borrower’s obligation.
This is simply a long way around of stating the following: the government has no definable interest in the private relations between a lender and a borrower, once the rules of the game are laid down. In the usual situation, the risk of loss is borne by private entities (the lender and its shareholders or the borrowers). Mortgages are usually arms’ length transactions between third parties. Here, however, both the NYT and the federal government are increasingly involved in private transactions.
Sure, the borrowers love it. The federal government is demanding banks give borrowers more time to pay. Sometimes, the feds even require banks to write down interest and reduce payments. But to what end? As the NYT notes in the editorial, everything the government has tried has not worked. Properties are still being foreclosed. Borrowers are still out on the streets. Banks are still taking losses. The NYT’s solution? More governmental intereference in private contracts.
Rather than having our benevolent solons in Washington pick winners and losers, let’s try letting the consarned free(ish) market work out these problems. Is the market perfect? No. But the sooner the market works through the bad loans, the better off everyone will be.
Borrowers will be foreclosed out. But in some (many?) instances, the banks will be better off leaving the borrowers in the homes or restructuring the debt. Empty homes in marginal areas are magnets for vandals and blight, which further reduce the value of the banks’ collateral, thereby limiting their recoveries. In some cases, banks will eat a loss on debt prinicipal of their own accord. Such a restructure may allow banks to return a loan to performing status (or at least sub performing status), thereby releasing a portion of the bank’s loan loss reserve to lending capital, hopefully loosening up the credit markets.
Further, letting the market work places the risk of loss where it should be: squarely on the banks and the borrowers. Banks that made bad loans should be punished, and by market pressures (coupled with existing bank regulations) forcing the banks take losses, they will be. Further, borrowers who borrowed beyond their means will also be punished. These borrowers will have horrible credit scores and bleak futures. Using taxpayer dollars to try to solve this problem creates moral hazard by rewarding bad behavior (banks and borrowers both) and punishing innocent bystanders (taxpayers who lived within their means).
If the federal government really thinks it knows best, it ought to be honest and transparent about its intentions. It should use its Fifth Amendment eminent domain power to purchase all the mortgages it wishes to restructure at fair market value. Banks couldn’t gripe because they’d have received the actual current value of their debts. The feds could hand these newly acquired mortgages off to a federal agency to restructure or collect subject to whatever crazy socialist Alice In Wonderland regulations Congress wants to impose. This would remove much of the uncertainty from the current market, and put the risk of horrible government decisions on the politicians, where it belongs.
So, feds, put your money where you mouth is. If you know better than lenders, buy them out and manage your own danged portfolio. Otherwise, shut up and sit down.