Forgive, or Foreclose?
As schoolchildren know, the Liberty Bell is inscribed with the words "Proclaim liberty throughout all the land unto all the inhabitants thereof."
Liberty in America is often equated with economic freedom. Constrain one's freedom to make a deal -- even a bad deal -- some argue, and liberty is diminished. In an era when rampant personal debt has led to widespread ruin, the efficacy of this view of liberty is thrown into sharp relief. Should some people who have made bad deals be forgiven their debts, or are we all better off if instead they face up to foreclosure and the dire circumstances that come with it?
Millions of Americans already have lost their homes through foreclosure in the last several years. With house prices plunging in the worst downturn in forty years, tens of millions of homeowners have lost trillions in personal wealth, and the problems are far from having run their course. Many who fancy themselves conservative free marketers argue that these borrowers made choices, took calculated risks, borrowed beyond their means, and now should live with the consequences. Emblematic of this view was the Report of the President's Economic Advisers last February:
"Policies that attempt to protect market participants from the discipline of the market risk delaying necessary adjustments and creating a potential moral hazard problem by giving lenders and borrowers less incentive to make prudent financial decisions in the future. Markets naturally self-correct, rewarding good strategies and punishing bad ones. In addition, any government actions mitigating the outcomes of risky behavior may create perverse incentives for reckless decisions by borrowers and investors who may come to rely on government interventions."
It is prudent to avoid moral hazard. But perhaps the real moral hazard is abandoning borrowers who are drowning in the current subprime debacle. Some portray them as irresponsible. They made bad deals; let them face the consequences. But is someone who was spending 40 percent of her earnings for a mediocre apartment really "reckless" if she decides to opt instead for monthly tax-deductible mortgage interest payments, even taking advantage of "teaser" rates? How could these borrowers have known in 2005 that when adjustable interest rates reset in 2008 they would not be better off paying mortgages rather than facing unpredictable rent increases? Consider the backdrop: More than 90 million Americans pay more than 30 percent of their income for housing. By 2005, roughly 17 million households were spending more than half of their income on housing, a 3.2 million jump from 2001.
When virtually unregulated, fiercely marketed subprime mortgage products flooded the market several years ago, it was little wonder that millions of nurses, firefighters, teachers, secretaries, tellers, and janitors felt they were ready to become homeowners. Today, they hardly need the "discipline of the market" to teach them lessons about making better choices next time -- if there is a next time. Even if they avoid foreclosure, default and damaged credit mean many won't get a second chance.
It is true that some borrowers gambled on getting a raise before the teaser interest rate evaporated. Some applicants even lied. But with more than 5 million borrowing households overextended to the point of default or foreclosure, the situation has reached systemic proportions devastating to the broader economy.
Failing to offer debt relief assistance while debating whether sub-prime borrowers or unregulated mortgage companies are most at fault is no more productive than arguing about whether negligent campers or neglected forest clearance practices contributed more to a rapidly spreading wildfire -- the first order of business is putting out the fire before it consumes more homes.
Moreover, when invoking that portentous term "moral hazard," many look solely at borrowing behavior. But isn't market discipline even more effectively applied to the lenders who promoted high-cost loans to low-capacity borrowers, yet now expect the government (through the foreclosure and debt collection process) to aid them in recovering every dollar possible from their borrowers' assets? Meaningful debt forgiveness for borrowers might best instill greater discipline in lenders and other Wall Street players, some of whom are perhaps already contemplating the next clever "innovation" to sell to consumers.
A purely economic perspective on this crisis, however, does not show us which policies advance our total well-being, spiritual as well as material. Market systems are human creations that should enhance our humanity; human beings should not instead be made to serve an ideal of the perfect market.
Those who claim that pure free-market policies are the only way to preserve and promote liberty would do well to consider the rest of the Leviticus verse that completes the Liberty Bell inscription: "It shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family."
The biblical Jubilee addressed the relationship between economic prosperity and human dignity. Land had been distributed equitably among the original Israelites -- each household had received land of roughly equivalent value. Over time, as market transactions occurred, some families became better at commerce and had more wealth with which to buy land. Eventually distribution would become unequal. The Jubilee mandated that every fifty years, regardless of what the market had produced, land was returned to its original distribution. In this conception, human beings were more stewards than absolute owners. Overturning the consequences of bad bargains freely made during the course of time advanced ethical goals more than strict adherence to contract enforcement. And in this spirit, promoting massive foreclosures rather than encouraging a policy of forgiving is a morally hazardous course for our society.
The Old Testament custom of the sabbatical (the "shmittah") -- which required that personal debts be forgiven every seven years -- is also relevant today. Time and again, the Jubilee, Sabbatical and other biblical precepts portray property as encumbered by a social obligation that competes with, and usually prevails over, pure economic efficiency.
For example, witness the obligation regarding the farmer to leave the corners of fields "for the poor and stranger," un-harvested, to be picked for free by those in need (Leviticus 19:9-10). It can hardly be ethical to view property as fully under the dominion of individuals (and by extension, corporations) while also finding fault for failing to share some portion of property with those unable to pay the market rate. The Leviticus approach to property is imbued with the notion that people deserve a second chance. The idea that economic affairs should be arranged to afford this second chance -- including recovery from bad deals -- is not limited to biblical precepts. Unfortunately, however, we see too little evidence of these wise values in our economic policies today.
Bankruptcy, a right enshrined in the Constitution, for centuries has provided an orderly process of reducing or forgiving debts. A path to a fresh start is not only beneficial to a vital and dynamic economy, but also stands in sharp contrast to the debtors' prisons rampant in England and elsewhere into the nineteenth century.
Under the current bankruptcy rules, however, Donald Trump can file for bankruptcy for large real estate ventures that have freely borrowed money and then force lenders to write down the debt through the "cramdown" (which affords an opportunity to reorganize). Dana Trump, on the other hand, who buys a house and gets into trouble, cannot modify or write down her personal home mortgage debt.
If we accept that collectively we are better off morally and economically with speeding recovery from the current crisis through avenues of forgiveness, many practical actions are possible. The recently enacted housing legislation contains some important features -- such as offering borrowers a long-term fixed rate federally insured mortgage refinancing option if the lender agrees to a partial loan write-down. (Yet even this program is voluntary for lenders.)
A change in bankruptcy laws to even the playing field for borrowers, or a change in the tax laws that benefit the large pools of mortgages (known as Real Estate Mortgage Investment Conduits) to penalize them for failing to move defaulted loans off their books after some period of time, may be necessary to spur widespread alternatives to foreclosures.
The wisdom of centuries, that our society does better when it provides a path to a second chance and a new start, is profound. What better time to see its embrace of forgiveness as a path that benefits all of us applied than in today's economic earthquake, before the aftershocks do still more damage?
David M. Abromowitz is a Senior Fellow at the Center for American Progress, focusing on housing policy and related federal and state programs and issues. He is partner in the law firm Goulston & Storrs. This article originally appeared in the Fall issue of In Character Magazine, http://www.incharacter.org/
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A modest proposal:
Since the Federal Government is hellbent on purchasing worthless commercial paper, rather than foreclose on the unlucky, the greedy, the misguided, the unwise; let's forgive part of each loan.
How would we come to an equitable amount for each loan:
1. Let's take the average US home price as of June 2008, $276,700.00, and multiply that number by 80% which equals $221,360.00. This represents the traditional mortgage amount on an average home( buyers were once expected to come up with 20% of the price of the home).
2. Forgive $221,360.00 of each home mortgage loan. This will mean that some people's loans will be wiped out entirely. That's okay. This also means that some people's loans will hardly go down at all. That's okay, too. Everyone would get the exact same dollar amount, and this would free up massive amounts of capital for our economy.
3. Establish nationwide mortgage standards to prevent anyone from purchasing any home with a mortgage who does not have 20% of the value of the home to put down.
Someone check the math, as I am sure you will.
I think that it would be infinitely more prudent for banks to get --something-- for their mortgage notes than to get --nothing.--
If I've bought a house at $400,000 and it is now worth $250,000 with no prospect of ever going up again, face it, "I'm gonna walk." I'll leave the keys under the doormat and "you can whistle for it, banker-boy."
So... the bank now "owns" a house that's worth $250,000 ... and must somehow maintain it until it can get the thing off their hands. It has flat-out LOST, not just $150,000, but the whole schmeer.
An infinitely wiser scenario would be, "come, let us reason together." Let us all acknowledge that the house has lost value. Let us forgive, say, $175,000 of the loan. You now have a $250,000 house and you owe $225,000 on it. In exchange, you promise not to sell it for at least three years. Furthermore, I promise that if the value continues to drop, we'll do this again. If it shoots way up, then, well, in three years you've just made a wad of money, good for you.
But I, the banker, just constrained my $400,000 loss to be a $175,000 loss, and I've still got a customer. The customer still has the house so it's not on my books.
"Come. Let us reason together. This is happening to us BOTH..."
How about you hand the deeds of the house back to the bank and the bank rents it out to you. You pay lower rent now and the banks keep the house.
both of you win !!
As a potential homebuyer that watched house prices rocket out of affordability in my area from 2000-2007 all I can say is: "Where in the WORLD did our representatives get the idea that "propping up house prices" should be within their constitutional powers?"
They're dropping because they're too high, and all the easy money in the world will have difficulty changing it. Congress & Paulson are fighting the financial decisions of the American people, and They Will Lose.
Buy more house than you can afford & you deserve to lose it. The end... I'm sick to death of "Where's MY bailout?" mentality. No one should be "bailed out," the government is not your mother waiting to clean up your dirty socks; it's a malignant entity that sucks up your money & spends it on wars at worst, and inefficient social programs at best.
Ok, meds are kicking in...continue with your day!
lets have a beer together!
Okay, so I lost it. And the bank lost it. And squatters have just moved into the house and set up a meth-lab in the front room. And I'm a homeless-person sitting in a Bush-erville tent city. Is that what you want? Okay, you say, "I had it comin' to me." Okay, but my former house is next-door to yours and it's now a crack-house. Do you still feel that this problem is simply "mine?" Is it still that cut-and-dry for you??
Do we want to put aside our design-driven partisan politics and come together as Americans for constitutional republic principles and our constitution - throw these new world order plutocrats out and hold them accountable?
http://www.jbs.org/index.php/about/jbs-50th-anniversary
here is an excellent article on the destruction of currencies. I do not wonder why, but perhaps others will start asking about motive.
http://www.naturalnews.com/024427.html
You make some very valid points. What I think you fall a bit shy upon is what true free markets are. We haven't had true free markets in decades, but especially since the breakdown of Brenton Woods in 1971.
What we've just witnessed is free markets trumping managed markets. That is, Keynesian economics in its death throws, based upon fiat currency created out of thin air by the Federal Reserve, a private banking cartel - not Congress. The Bible also calls for sound money.
"do nothing" would have been a free market correction. A deep, painful recession would have resulted, but even in a managed market (corporatism - aka fascism) it would have corrected itself. That is because free markets have a tenet that is not manageable or abled to be regulated in Keynesian economics: Trust.
"a bailout", however, is pumping billions more of fiat currency into a system and destroying our very currency. It does not matter who the money goes to in the long run, but certainly calls attention to who the money should go to in the short run.
I agree, some sort of forgiveness should be applied to the innocent and the righteous. Perhaps retribution? Forgive half of the principal and interest to the homeowners, and make these firms that manufactured this theft accountable to pay it directly. But, we would still have to address the issue of coin vs. fiat currency, otherwise we will end up in the same place in a few years.
"Forgiving," in this case, has nothing to do with "righteousness." It's a business decision and it happens all the time.
Anyone "with a lick o' sense" is NOT going to be left holding the bag. He's not going to dump money down a black hole. After a point, he does not care anymore what happens to "that wretched pile of sticks." He moves on. And the bank, which IS left holding the bag in every way, now wants to slough-off the loss to the public? Instead of trying to do anything at all in the way of compromise, to reduce that loss and perhaps turn a non-performing asset back into a performing one?
the bank could take back the house and just let the homeowner be the renter. that works best for both.
When your federal reserve note is worth half of what it was 10 years ago, what is the morality of forgiveness? It is akin to giving the junkie another needle so that he feels better in the interim.
We must address our Constitution. We must address sound money and end the Fed, the real moral hazard that created "easy money" through low reserves, low interest rates, and printing paper. They enabled the creation of Fannie/Freddie, dot.com, S&L, Brenton Woods breakdown and lobby-whoring and Wall Street short selling America.
We are indeed in a pickle. But we must conquer the false paradigm of blaming free markets. We've had managed markets. Sarbanes-Oxley is a good example of "regulating" a moral hazard to success.
www.vonmises.org
Thank you again. Dig deeper please and get back to us. It is high time We the People stood up and recognize that our very ability to practice Life Liberty and the Pursuit of Happiness has just been pummelled.
Subprime mortgages were meant for use in poor neighborhoods where unemployment was high and few jobs to be had.
This was to keep neighborhoods from falling into squalor and disrepair.
The sub primes were never meant for Sub dividisions or million dollar homes.
YOU CAN FIND A WAY TO ABUSE ANY GOOD PROGRAM !!!!!!!!
and you can find a way to abuse the free market too.
but the free market will prevail and put you out of business.
In our area, this time last year the median average home sold for $250K. There seemed to be very few "starter" homes available for half that----anywhere in this region---at least in or near the "better" neighborhoods.
My husband and I often walked our dogs in a nearby neighborhood of $225-400K newly built "McMansions" with BMW's & Mercedes parked in the drives, wondering aloud how so many obviously young couples just starting out could afford such expensive lives.
Now we know. They couldn't. So, will they all get bailed out, too?
And, if so, what does that just make us for having scrimped, saved, and worked double time for paying our mortgage off ? Chumps who dumped good money into a property now worth half what it was two years ago?
Maybe this homeowner mortgage bailout will be retroactive.
Right....
I am very sympathetic to the people losing thier homes or in homes that are now upside down. My concern, is that for those of us who didn't get sucked in, are we gonna carry those who did and make them solid again while we sit in houses that have lost value too and maybe are paying interest rates that are higher than will be expected of them. That brother-in-law has a perfect right to object to any program that gives advantage to another with his tax dollars.
I truly want a bottom up approach but I think fairness has to be included, not just a bailout. I prefer to think we need a way to help people to stay in thier homes and if and when the market recovers to let us recoup that discounted amount of loan. So if your house is only worth 250,000 and you owe 450,000 then you get a fixed rate loan amount for the discounted value but a lien placed on your property for the difference that taxpayers had to pick up tab on ( so if you sell you don't walk away with profit until lien is met). Anything else is a give away that favors those who were gullible or erred over those who will help pay for thier mistakes.
This is not a moral issue it's a pragmatic one. Simply put, under-performing assets far out weigh mark-to-market illiquid ones. Lenders receiving a consistent stream of discounted loan payments, are in better shape than those facing unknown alternatives. The stock market is screaming for solutions, and this is absolutely is a real solution.
good points.
it all hinges on sound money and congressional issuance.
we don't have that. we have keynesian economics privately managed. we haven't had free markets in a long time, even though its principles always trump corporatism (at our suffering, and "their" profit).
End the Fed. Support HR2755
http://www.youtube.com/watch?v=4dpJL6ANnV0
I think comparing the culpability of low income homeowners who might have never seen a mortgage contract before and the premedidated immoral scams devised by bankers isn't really fair. There is a DIFFERENCE between making a mistake because you haven't been given all the information or it isn't explained to you and INTENTIONALLY misleading people for profit. And I think Timothy 6:10 is more appropriate passage.
And I was worried when Paulson chose someone from Goldman Sachs to be in charge of our money but now I know he made the right choice. On May 2nd this year Paulson and Kashkari had a meeting with investment bankers about the economy and how to solve this "banking crisis" but most of us didn't know about it because only a few people were invited. I'm sure they talked about this creating the "asset relief program" at this meeting.
"Treasury Department officials plan private meetings with Investment Banking executives on May 2nd, in an apparent attempt to counter Congressional Democrats seeking steps to handle the housing crisis.
Six meetings with investors, loan servicers and bankers are planned on Friday, and one of them is to be held at the NewYork City offices of JPMorgan Chase , the report said.
Neel Kashkari, a senior adviser to Treasury Secretary Paulson, and Phillip Swagel, assistant secretary for economic policy will lead the Treasury"s Friday efforts, The Journal said."
sometimes when you are in a bubble, it's hard to tell you are in a bubble. Especially when you do not have an MBA and work in the mortgage lending industry. My wife and I used equity to fix up a run down house and make it a wonderful home. Our plans were to sell when our second son graduated from high school and went off to college. Now our house is upside down and there is no equity for a re-financing. The Housing Bill that went into effect on Oct 1 was an option I hoped for. But the lenders are not volunarily opening up this option. Meanwhile they use financial blackmail to clear up their own debt. We fit the formula, we have good jobs, we have lived in our home since 1995. I can only hope that a new administration will show its democratic values and begin to bail out the homeowners from the disaster created by a few who seem to be walking off with millions of dollars in their severance packages, leaving the tax payer to pick up the pieces. I hope the new Congress will have the power and compassion to help the tax payer with his own problems.
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You are one of the real victims of this appalling mismanagement of the economy.
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The banks and regulators allowed anybody who could breath get a loan. Flippers, liars and crooked lenders helped artificially increase demand.
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The person who wanted a home to live in was effectively robbed.
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It's a tough nut to crack. It is true, after all, that there is no such thing as a free lunch. I loved Freddie the Free-loader and I still laugh when I think of his christmas dinner. But when you get right down to matching the appropriate mortgage loan amount commensurate with market value reduction and juxtapose this with the available income stream of a depressed overburdened obligor... then you have yourself a task that approaches the spiritual and the metaphysical. And (I've witnessed this in prior decades) as soon as you make a liveable modification to an obligor, his brother-in-law who has not defaulted will complain to his congressperson and scream in the local news media about the horrendous give-a-way of unfairness paid for by taxpayers. And the truth will be stretched. The governmental agency wll be contacted by the congressperson and the whole system glues up due to the belief that somebody done somebody wrong. Fairness will be suborned to the pious hyprocritical elements and an informed bureaucrat will reckon that the only solution is to sell the whole shootin match to the free market and let the vultures sort the mess out. This was the sav & loan mess, it will be the same for the subprime mortgage mess.
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