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TechnoratiSanctity of Contracts: Mortgages and Credit Cards
Momentum is building in Washington for a large-scale housing bailout. It is virtually certain something will happen. The big questions are how large will the package be and will it be designed to help homeowners or to bailout out the banks?
The latter question will be determined primarily by whether the government steps in to try to prop up bubble-inflated housing markets in places like California, Florida and the East Coast cities. While the government may be able to play a useful role in stabilizing house prices in depressed markets like Detroit, Cleveland and Atlanta, the main effect of bailouts in the bubble markets will be to reduce the banks' losses on their mortgages.
In these markets, prices must still fall 20 percent to 40 percent to get back in line with fundamentals. If the government were to guarantee new mortgages at near the current market prices, it will just be allowing the lenders to cut their losses.
Since prices will continue to fall, homeowners will not accumulate any equity and the taxpayers are likely to have to make good on the mortgage guarantees. Furthermore, homeowners will be paying far more than necessary for housing costs each year that they live in their house, draining money away from health care, child care and other necessary expenses.
There is a simple and costless alternative policy that could be applied to these bubble areas. We can temporarily change the foreclosure laws to allow moderate-income homeowners facing foreclosure the option to stay in their homes as renters paying the fair market rent.
This would guarantee homeowners some security, since they could not just be thrown out on the street. If they like the house, the neighborhood, the school for their kids, they would have the option to stay. More importantly, since the banks will not want to become landlords, this policy will give banks a real incentive to negotiate terms that allow homeowners to stay in their house as owners. It is likely this would be the more common outcome from this policy.
I have been pushing this "own to rent" plan for more than half a year. Many people from across the political spectrum have embraced the proposal as the most realistic way to help homeowners facing the loss of their home. However, there has been one widely voiced objection that seems to carry considerable weight in policy circles. This plan would interfere with the sanctity of contract since it would be changing the rules for enforcing payment on mortgages and could cause lenders to involuntarily end up as landlords.
This objection is interesting because there seemed no concern whatsoever for the sanctity of contract when Congress went in the opposite direction with the bankruptcy law reform passed in 2005. In that case, Congress established much stricter rules for bankruptcy, which made it far more difficult to use bankruptcy to discharge debt.
What makes the bankruptcy reform analogous to the own to rent proposal is Congress applied the new bankruptcy rules retroactively. In other words, people who had accumulated credit card or other debt under the old set of bankruptcy rules were suddenly subject to a new set of bankruptcy rules.
Presumably, both the banks and credit cardholders understood the bankruptcy rules that were in place when loans were issued prior to the bankruptcy reform. Banks would have charged an additional premium because debt was harder to collect under the old bankruptcy laws.
However, Congress had no qualms whatsoever about just ignoring these contracts when it decided to tighten the rules to make it easier for the banks to collect. Congress could have written the law to just apply to debts incurred after the passage of the new bankruptcy bill, but apparently this route was never even considered.
Given this recent history, it seems strange there is such great concern now about the sanctity of contract. The only obvious difference is this legislative change would benefit borrowers, while bankruptcy reform benefited lenders. Does anyone smell a double standard?
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
16 Comments so far
Show AllThere are lots of arrangements that should not exist in my view: Nations with borders that keep out other residents of earth, ownership of land, ownership of water, monopoly on food production, patents on naturally growing plants. The earth is a gift of God or nature or whatever you choose to believe and is not the property of any person.
Houses are necessities, built by human labor, so as such they are not nature's gifts. Considering the state of human morality, I believe a house and the land upon which it sits can belong to an individual so he or she can count on a secure shelter. Contracts should favor the basic right of each person to have at least one shelter over the rights of speculators.
I would like to point out the obvious here. Property ownership is a farce. One cannot own property. Any Native American could tell you this. One can live on land, yes, and even depend on it, but property ownership as the average American understands it is a complete and utter fiction. The Earth owns us, we do not own her.
I am hoping the entire financial market collapses (and it looks like it will). Then all the speculators and absent landlords will be f**ked. And it's way overdue. Crawl back under the rocks you crawled out from under and (hopefully) die.
jclientelle - While I normally say that in a free country, people have the right to be stupid, in this case, I have to agree with you that we need to have rules to protect the public from overspending. This not only include morgages, but also credit cards and consumer products. The government needs similar regulation, as they have put us all in terrible dept for which our taxes now pay the interest. we clearly can not be treated as adults (seriously).
If a contract was made in bad faith, is it still sacred? Many of these mortgages were offered with the full knowledge that the borrower would not be able to pay in the future. The lenders took their commissions and bonuses and waltzed off.
I know a European who recently bought an apartment in his city. The apartment is a little small for his family. He told me that, by law, banks in his country must limit the amount of a home loan based on a formula that predicts how much the borrower could reasonably be expected to pay monthly. So they are a little crowded, but still have a comfortable home. They hope when they get some equity, they will move to a larger place. Rational.
Here everything must be BIG BLOATED EXCESSIVE EASY FAST IRRESPONSIBLE DUPLICITOUS PREDATORY.
Matti and many many others are on it...
Heard an interesting interview on New Dimensions the other day, and this issue, along with all of the others on CD, was addressed. Time for a major paradigm shift: are we going to make it happen, starting in our own circles of influence, and then radiating outward?
Check out: "The Real Wealth of Nations", by Riane Eisler....
From Booklist
Forward-thinking social scientist Eisler, author of The Chalice and the Blade (1987) and Tomorrow's Children (2000), is renowned for her innovative perspectives on relationships, education, sex, and spirituality. Now in a similar vein as Bill McKibben in Deep Economy (2007), she addresses the need for a "more equitable and sustainable economic system" based on the "essential work of caring for people and nature." Current economics fails to value the most fundamental aspects of people's daily lives, Eisler observes, and she identifies the "lack of caring" as the "common denominator" underlying grave social and environmental problems. Eisler precisely maps her detailed vision of a caring economy and diligently supports her concept with a fascinating spectrum of information and analysis of everything from how little we value child care to the true cost of war and pollution. On a deeper level, Eisler writes about how the cultural stories we absorb--women are inferior to men, nature is indestructible--perpetuate an economics that is proving disastrous. Eisler argues cogently that now is the time to invest in life. Donna Seaman
Copyright © American Library Association. All rights reserved
Real change, or re-arranging deck chairs on the titanic? Swapping out for a Prius, but still commuting one hour to work? Making substantive changes, moving to a smaller home closer to work w/ a garden space, putting food by, walking or biking to work, examining work/barter/income, economic trade systems, and "recreating" by volunteering in our communities, reaching out, improving our hometowns?
Or do we keep flying off to Ulanbattar Mongolia or the Bahamas to fish for Taimen and bonefish, fiddling while Rome burns?
Thank goodness I have a check coming soon to go buy more plastic crap
Our industrial processes average 32 tons of waste for every ton of material produced
Slow down, think carefully, make good choices, and Act!
Jefemt
Mr. Obvious gets at an excellent point:
There is no crisis in home ownership, there is a crisis in "home" "ownership".
The purchase of a suburban tract home 20 miles outside of a city you recently moved to from halfway across the World's second largest continent because of a job offer is the purchase of a "home" in only a vague commodity sense.
The "ownership" one derives from making the mortgage payments to the bank on this "home" can seem quite genuine. As a long-time renter/never "owner" I can tell you that the frustration I feel at having to get someone's approval to install a woodstove to replace the current oil-furnace is Quite real. But even the "owner's" freedom to modify his home to meet his needs is restricted by Homeowner' Assoc. rules, City ordinances, and County, State, and Federal "land-use" laws.
And of course, as is happening now, even this limited form of ownership is made false "ownership" by an inibility to pay the true owner-the bank/lender.
I think in the article, Baker, as usual, manages to come up with a more equitable temporary band-aid for the problem, but I still remain skeptical that we can do much from this end of the socio-political spectrum until we cease discussing these issues as if they can Truly be overcome to the fair and just benefit of all the People without a fundamental change in our system of government, our system of Capital and money movement, our system of food production and the meeting of the other 5 human needs.
Yeah these are big problems in need of big solutions, but there not going to go away, and all that delaying the inevitible will do is leave us with an even lesser chance of overcoming them.
As possible seedstock to the Solutions, I will write only this.
Most, if not all, of these problems can be traced back to the concentration of powers over most aspects of life into Nation-States, the Solution might very well be to strip these powers away from the Center, and return them in many peices to the Periphery from whence they came.
I think we could have FUN with the shift too -if we tried to.
-matti.
The people that settled this country lived in one or two room shacks and raised families in them. Now we are supposed to feel sorry for folks that had to have a 12 room mansion that they could not possibly pay for equipped with every item of luxury and a three car garage full of gas guzzlers.
It is partly the governments fault that debt was encouraged and credit was allowed to be abused, but it is the individuals own business to buy only what he can reasonably pay for and forget keeping up with the peer group.
If you can't pay, then you can't pay, so what's the problem? You get foreclosed on. Then the bank gets a house that it must auction off, possibly for a fraction of the original price, and for far less than the occupant would have paid on a re-negotiated loan. Sometimes the house gets trashed before it can be sold--asset gone. Who wins? Nobody, everyone loses.
One wonders if it would be better all around to re-negotiate the loans, rather than have an abandoned house that no one wants, or that must be sold for a song. And should banks be bailed out while the homeowner alone takes the hit? I'm no accountant, but seemingly there is a better solution than that, meaning better to get something for house rather than nothing, or far below what it would have gotten had the banks renegotiated with the homeowner. Some complain that they should not be made to 'pay their rent.' No, but neither should they be made to bail out banks who rolled the dice and lost.
It does not matter who receives the bailouts, banks or home owners or both, the end product maintains the inflated price tags for new and existing homes that we all now know are artificially high, thus prolonging the current housing bubble and creating a new worrisome time frame for home buyers and sellers to calculate just when it will next burst. And all bubbles eventually burst.
You should see all the "bank owned homes forsale" in my area. And in Los Angeles people are selling thier $900 dollar sneakers at half-price on e-bay.
The mortgage contract wouldn't be totally ignored. The mortgagee would still have the right to foreclose, and in many jurisdictions would use the legal process to force transfer of ownership (a sale) to pay the debt. So far, the mortgage contract remains intact.
The difference would be if new law required the foreclosing banks to purchase the property of owner-occupants at foreclosure sale, and then offer a lease/purchase option to the former owners.
Society for Preservation of Continued Homeownership
www.spoch.org
MISSING HENRY B. GONZALEZ
The late Congressman from Texas has a son, Charlie in the House, who may want to step in now and recall his Dad's fight against the Loan Sharks of the 50s. There was legislation passed then that guaranteed the safety of one's homestead from foreclosure, no matter what. So where is that law now? The American home must be protected from the greedy banks and capitalists who have been given free reign under Republican rule. Home owners are different and should be treated differently than speculators and investors. Henry B., as the Texas Congressman was affectionately known must be turning over in his grave with the foreclosure tsunami happening across the U.S.
New Mexico Governor Richardson, perhaps you could help Charlie take up where his Dad left off.
I don't understand. If they own their home, why do they have a morgage. It sounds like the bank owns their home and they can't pay the rent that they promised to pay. So now I get to pay their rent? I better take out a loan on my house quick and run up a big credit card bill so I can get my own money back.
Isn't fascism fun? How about voting for more fascism - like the DFL or GOP? You deserve what you're getting - fascism - because you Americans don't know the difference between 'conservative' and 'fascist' - and you never seem to learn. Welfare for the rich and tax the poor - look how great that works! So go ahead - vote for more of the same - every year. It's your country. Ruin it, just like the Germans, the Italians, and the Spanish did - with America's help, of course.
What about the 'social contract' - the ONLY important one in our lives? Isn't it about time to join the civilized countries and give up fascism? Responsible conservatives know that you don't kill the Goose that lays those Golden Eggs - fascists don't care, just as long as they can feast. (You get the feathers and innards.)
The "sanctity of contracts" was already seriously breached when government spent your Social Security and Medicare trust funds on tax cuts for the wealthiest Americans.
The "sanctity of contracts" was thrown clear out the window in the early 1970s and 1980s when employers discovered that some judges would hold the statements in their employee handbooks to be "contracts"---so they revised all the booklets to be wholly dependent on the doctrine of employment at will, stating plainly that anyone can be fired (by a corporation) at any time for any reason or no reason--rendering everything else in the handbook as empty and meaningless.
The "sanctity of contracts" was ignored when government set out to mis-measure "inflation" and then allow the Federal Reserve to abandon its responsibility to maintain interest rates high enough to protect the value of your money.
The "sanctity of contracts" is a phrase for corporations to smoke you with. Elect some Democrats and change some laws about corporations and whether/how they are permitted to write their own contracts and shove them down your throat.
Be sure to get your Democratic president too, so that your Supreme Court appointees know "sanctity" from a hole in the ground.
Charles A. Beard [1913] and the more recent Howard Zinn have traced this double standard to the very founding of the Constitution. When considered in context with Shays' Rebellion and the Whiskey Rebellion, the true American Revolution is only partially complete. It's still a conflict between creditor and debtor, going to very core of money itself.
http://theformofmoney.blogharbor.com/blog/_archives/2008/2/17/3530057.html