Richard Green has a nice post up about his recent appearance on Marketplace discussing the pros and cons of a foreclosure moratorium.
Richard brings up property rights, which does strike me as salient to the foreclosure process. In response to Richard’s post about property rights, a commenter goes off about “the property rights of ordinary Americans.”
So how do we interpret this?
Strictly Rights. Strictly, Richard is correct about the property right. This is especially the case given the prevalence of low downpayment and no downpayments. Legally, you don’t own your house until you hold the note, just like you don’t own your car until you have the title; you own your equity. If you borrowed a lot and put down a little, you have very little (or no) equity. Nobody argues that you’re entitled to stop paying on your car when it loses value. Why are homes different?
Vulnerable class arguments. So let’s think about the “ordinary citizen’s rights” argument. It’s hard to believe that a debtor “has a right” based on of his/her class position when such an entitlement has not been recognized or extended to everybody of a particular class or lower. But that’s not the case here. If a renter unwisely borrows a ton of money to use to fund his career as a professional gambler, doesn’t do as well as he thought, and then becomes unable to pay his rent, nobody seems willing to portray this sort of person as a victim, nor do many people really think he should be entitled to keep living in his apartment, letting his landlord eat cake and go without rental income. Yet, homeowners who borrowed loads and took what turned out to be a bad gamble are thought to be victims, and many feel they are entitled to have their losses forgiven.
Social welfare and utilitarian claims. Konczal suggests that preventing more foreclosures is a social welfare question: since foreclosure is bad for banks, bad for communities, and bad for owners, we should just stop the process now. But as usual, utilitarian and social welfare arguments like this ignore the fact that somebody is going to pay, too. These same investors, home owners, and bankers are going to foot the bill, as taxpayers, for bailing out mortgages just as they will for dealing with the foreclosures, and spreading their costs to those with more prudential judgment. If it were a simple matter of paper loss, we’d be sorted by now.
Foreclosure relief at this point hasn’t passed a cost-benefit nexus–maybe it has, but I just haven’t seen those numbers. There’s a lot of speculation about how “we’d all be better off” saving individual homeowners, but I’m told on a daily basis “we’d all be better off” with high speed rail, streetcars down every street, a lower capital gains tax, a flat tax, smaller government, etc.
There are people who are still priced out of home ownership: wouldn’t they be better off with houses liquidated at lower prices? Aren’t there businesses that are growing up around foreclosures (it looks that way to me)? Wouldn’t those businesses flourish if they had lots of business? Wouldn’t underwater homeowners be better off moving to less costly digs sooner instead of holding out and waiting for Obama to wave a magic money wand to forgive their debts or the market “to come back”?
Thus I have trouble believing that this is a clean social welfare argument rather than what social welfare arguments usually are: a distributive argument about who gets to win, who winds up losing, sugarcoated as an overall welfare gain, when the benefits are concentrated and the costs dispersed.
Dirty contract. This is the only justice-based argument I really buy for saving defaulting homeowners. Not all contracts are enforceable, for good reason. To use Michael Sandel’s arguments: if somebody with dementia gives a plumber a $40,000 check for plunging her toilet, most courts can and would allow the person’s son to stop payment on the check. It’s not a fair contract; she’s not capable of judging even if she voluntarily entered the contract.
So in the case of mortgages during the bubble, Richard Green has argued to me (though not in terms of contracts) that there were a lot of these types of dirty contracts, where innocent buyers just didn’t understand their mortgages or their conditions well enough for the contract to be valid.
However, there were also borrowers who were the real estate equivalent of swaggering I-bankers, who were simply reckless and made bets they shouldn’t have with other people’s money. It’s hard to distinguish the dirty contract victims from these types of buyers. We’re all adults here; there was a time in California where I swear the only thing people discussed at dinner parties was their last clever house deal. In these cases, the the dirty contractor is the debtor whose (unstated) caveat upon entering the agreement was: “I will pay back my debt but only so long as my speculation pays off.” That wasn’t the deal that banks entered into: they were perhaps in a better position to see the walls of the bubble getting thin, but if you try to legitimize taking large profits on your good market bets, you’d best be ready to suck up the losses with your bad market bet. This is the reason everybody hated the banker bonuses: bonuses seemed fair play in labor markets when the banks were performing well, but why do you get a bonus when you’ve driven your company into the toilet? (Again, to use a Sandel example.)
Community arguments. Konczal also argues that foreclosures are bad for communities. And yet, nobody objected when, during the bubble, they found that comparables in their neighborhood were selling for ridiculously high prices. Instead, home owners put their feet up and their arms behind their heads and enjoyed the fact that their house prices were connected to their neighbors’. So we are around for benefits of neighborhood effects, but not for the downside. Convenient.
So much of this debate turns on whether you think home owners were victims of bad contracts. The other arguments don’t make much sense unless you think home owners should continue to be privileged in public policy (more than they already are.)