Wednesday, October 27, 2010

The real reason why a foreclosure moratorium would be a bad idea

I was on Marketplace the other day debating Mike Konczal about whether a foreclosure moratorium  would be a good idea.  I took the no position for two reasons:

(1) A moratorium would slow down the eventual resolution of the housing crisis;

(2) A moratorium would add yet another level of uncertainty about the ability to foreclose going forward, which would discourage the private sector from returning to the mortgage market.  If lenders can't take away the houses of people who don't make their payments, they will not advance mortgage money in the first place.

But last night it occurred to me why I have such a visceral reaction to such things as moratoriums: they strip property rights without due process.  If a borrower agrees to repay a mortgage, and everything about the mortgage is legitimate, and the borrower ceases to make payments, the lender has a property right to take the house.

I am at times a card-carrying member of the ACLU, because I think the rule of law and due process should apply to everyone.  Many lenders have behaved badly and appear to still be behaving badly.  That doesn't mean that all of them should lose their well-defined rights--even temporarily.


Cetamua said...

"Many lenders have behaved badly and appear to still be behaving badly. That doesn't mean that all of them should lose their well-defined rights--even temporarily."

Many lenders broke the law in a systematic fashion (Read "The Monster" and weep) during the creation of MBS AND during the foreclosure epidemic. In a word, right now, it is the homeowners who have their property rights trampled upon.

Are you arguing their rights are less important than the lenders' rights?

I'm so sick and tired to read again and again and again about how unimportant and disposable ordinary people are in the eyes of those who pundit or decide in this country.

By the way, the housing crisis will start to resolve when those who so eagerly broke the laws and nearly brought down the economy start to be declared "GUILTY!" and are given the orange jump suit to put.

I know of no other way than re-establishing the preeminence of the rule of law to reset the market psychology.

Do you?

Ken Houghton said...

Strangely, property rights are exactly why there should be a moratorium.

As you note, "the lender has a property right to take the house."

Well, let's replace lender with "original owner" or "holder of the note and/or lien."

What is that entity?

So far, we know who hasn't been paying. (Let's pretend, foolishly, that we're not talking about people who are foreclosed while in the midst of HAMP trials and the like--just the real deadbeats. Just to make your case as strong as possible.) And we know they have been maintaining the property at a bare minimum (mowing lawns, being present).

But we don't know--because the lien/note is "lost"--who actually owns the property.

So we can pretend some bank does. At which point, we give it to the bank that "lost" paperwork? And expect it to be maintained, valuable, and eventually re-sold?

Because banks are such skilled Property Managers in the first place?

You don't want the 1934 Moratorium? Fine. The "you either deliver the correct paperwork, prove no one was working with the borrower on a HAMP modification, and show that you are willing to maintain the property at least as well as they do" moratorium works as well.

Richard H. Serlin said...

Yes, but what if the courts are not handling this fairly and well; we've heard some bad stories.

A brief moratorium may give the courts time to access this situation and learn how to handle it more fairly, learn what to ask for, what sources to trust, what judges appeals courts can trust. And, if not for Republicans, it would give the government time to award more resources to the courts to handle this fairly and well.

deano said...

Your argument that lenders would be stripped of their 'well-defined' legal rights is of nothing as it does not include consideration of their equally well defined responsibilities.

Resolution of the crisis demands that it be resolved by the weight of law.

Damon Slivers, a member of the COP, concluded the 10/28/2010 testimony by noting: "We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can’t do both. Which shall we do?”

Unknown said...

Every event or thing has two sides like coin. The same way moratorium has both some benefits and some pitfalls. But it depends on the bank or the lender that how they treat with the borrowers. This decides the net effect whether it is beneficial or non beneficial.

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Unknown said...

A short moratorium to allow time for the courts to access the situation and learn to manage it more equitably, knowing what to ask, what are the sources of confidence that the appeals court judges can be trusted . And if not for Republicans, it will give the government time to allocate more resources to the courts to deal fairly and well.
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