Contracts are Not for Judges to Re-write
Previous post: The free market at work
Next post: Morriss on Madoff and the S.E.C.
where orders emerge
EconTalk Podcast
Recent Episodes-
where orders emerge
Previous post: The free market at work
Next post: Morriss on Madoff and the S.E.C.
Recent Episodes
Podcast RSS Feed
Full EconTalk Text
{ 37 comments }
Couldn't the arguments against this proposal be equally invoked as arguments against the whole concept of bankruptcy law? To my knowledge, it is relatively non-controversial that when a person (legal or natural) cannot pay his/her/its debts, that debtor and the creditors should go to court and figure out how to split up what's left.
It seems to me that either everything's on the table, or nothing is. But why treat certain types of debt differently? That has the ring of special-interest lobbying, akin to tax incentives for spcific behaviour.
If Zywicki believes that we should do away with bankruptcy law, I'd be very open to the argument. But on what grounds should we treat car loans, mortgages, lines of credit, medical bills, etc. differently?
(if anyone here reads Hit & Run, apologies for the cross-comment)
"Likely" to destabilize? I'd have gone with "certain".
Isn't nearly the entire mortgage market already in the hands of the Feds, since they took over Fannie and Freddie?
Sounds like they want to set terms and interest rates based on government whim already, and can do it, since they own the mortgage market. The cramdowns might not have much of an effect, except to further scare away banks.
I had the impression that non-conforming "jumbo" rates were much higher for just this reason — those mortgages are still issued by the market.
Adam,
If there were no difference between having judges rewrite mortgage contracts and following already established bankruptcy procedures, why have the judges rewriting the contracts, why not just follow the already established procedures?
And if there is a difference, this would be a part of it. The lenders knew about the old procedure when they issued the loans, and factored it into their projections. But they didn't know about the new one, and inflicting it upon them introduces an element of uncertainty into the market that wasn't there before.
There is enough uncertainty without changing the rules in the middle of the game. Even bad rules known in advance are better than good ones taking us by surprise.
dg lesvic, that's true but a but weak as an argument. Bad rules shouldn't stay in place just because they're well-known. Otherwise we couldn't ever get rid of farm subsidies, the war on drugs, barriers to trade, the welfare state, etc. There are better and worse ways to go about changing rules (easing into the transition vs. doing it suddenly with no warning), but you shouldn't shy away from rule changes solely because it will create uncertainty. If the change is a positive one and the benefits outweigh the disruption costs, go for it.
Doing away with bankruptcy is mindless. You can't squeeze blood from a stone, and lenders properly share risks with borrowers. Doing away with bankruptcy is reinventing slavery and reflects an authoritarian impulse.
The issue with mortgages is not rewriting contracts. The issue is rewriting contracts without the usual standards and transparency of foreclosure or bankruptcy.
Mortgagors already enjoy considerable protection. Home mortgages typically are a non-recourse debt, so the house is the only collateral securing the loan, i.e. the lender can only recover equity from the house. The mortgagor's other assets do not secure the loan. The lender is entitled to foreclose and sell the house to recover what he can of his loan but may not recover more than the house is worth.
That sounds like the right balance to me. If your banker lends far more than a house is worth or if he doesn't require an adequate down payment, he's also on the hook if when the bubble bursts and well he should be; however, simply writing down the principal rather than allowing the banker to foreclose doesn't teach the lesson well.
I have to agree that this is an absolutely horrible idea. You would think, though, the banks would be frantically working with the borrowers to reduce foreclosures if only to keep the feds out of it! JPMC & Citi did halt foreclosures today, but that's just waiting for the federal government to step in. They should be negotiating – not stalling.
I guess when you're too big to fail, you don't care as much…
Sure you can M. Brock, haven't you heard of Debtor's Prisons?
Bring back debtors prisons!
Do senders bear the cost of feeding, clothing and housing the debtors in prison while they carry bad debts as illusory "assets" on their books indefinitely?
Or do lenders impose this cost on "the people" in the name of noble "justice"?
I believe the traditional arrangement for a loan was that the borrower was required to pay back a loan in its entirely – period. Which is to say, a person can't just discard the rights of the lender because they can't pay the lender. Anyway I suppose a Debtors Prison could be a place a prostitution in which the debtor could pay off a debt by working his or her arse off literally. :\
But when Todd J Zywicki says “At the very least, Congress should extend the time period for allowing lenders to recapture home appreciation beyond five years”, he shows a willingness to negotiate which is reasonable.
The problem is that those lousy mortgages were transformed by the credit rating agencies into false AAA credits. Now, discovered, as worthless they are indeed worthless. The only chance for those mortgages to be worth something is to transform them into real authentic AAA credits which can happen in only two ways, foreclosing and reselling the house of altering the current mortgage.
In normal time creditors would in their own self-interest make the needed modifications as this would usually be less expensive than the foreclosure route the problem though is that most of these mortgages are not in the hand of one sole creditor and the loan service agents face the threat of someone suing them in case they proceed unauthorized to modify the terms.
Do not forget that there are also outstanding derivative contracts that will make money if the houses are foreclosed and therefore could be opposing any modification of the terms, in other words, those who stand to may a bundle on the fact that the credit rating agencies got it so wrong.
Therefore, as I see it, the courts should be able to change the terms of a mortgage but only in those cases where a demonstrable fully authorized creditor does not appear before the court in 30 days and claims his right to foreclose or to change the terms,. the next 30 days
I'd say instead that, for a non-recourse debt, judges should have no authority to lower principal or otherwise to modify mortgage terms, and the lender should foreclose when the borrower stops paying, recovering whatever he can from the sale of the house at the time of foreclosure.
If a lender extends credit of $400,000 secured by a house ultimately worth only $250,000, on a first, second, third or fourth mortgage, enabling borrowers to buy big screen TVs and take vacations, the lenders are just stupid to do that. Like it or not, creditors can inflate. If they pay no price for inflating, they will happily do so.
We should not "extend the time for allowing lenders to recapture home appreciation", because this "appreciation" can be nothing more than inflation. We don't want to extend the time for creditors to repair their books by reinflating.
The lender is the "mortgagee." The borrower is the "mortgagor." The borrower is the one who has mortgaged his/her house.
Mr. Brock – Actually, most (certainly not all) places do allow the lender to recover deficiencies owing when the house/collateral is insufficient to pay off the debt.
Also, I am not sure I understand why it is fair to allow the borrower not to pay back the loan just because the collateral has lost value. The loan may have been imprudent, but after all the lender really did give the borrower that amount of money.
If you lend me $1000 even though I am a deadbeat, is it unfair to allow you to sue me to recover if I stiff you?
Right. That's how I used it.
On first home mortgages, I think most don't, but I haven't seen a precise figure. I certainly have no problem with non-recourse loans. If you don't want to lose money when a housing bubble bursts, don't lend into one. Expecting the home owners to bear all of this risk is unreasonable, particularly since creditors are the authorities with power to inflate.
I have no idea what "fair" means. It seems to mean whatever you favorite politician says it means.
Expecting creditors to share risks with borrowers seems completely reasonable to me, particularly the risk of falling prices inflated by excessive credit.
If I lend you $1000 though you're a deadbeat, that's my problem. What do I expect a judge to do about it besides ordering you to pay again?
And who's paying this judge? You? You aren't paying me. Why expect you to pay the judge? I suppose I'm paying the judge too, or we're imposing this cost of taxpayers generally. Why impose the cost on anyone else?
I'm the one who chose to lend to you. Why expect statesmen to bail me out of my bad investment?
Like you, Mr. Brock, I don't have precise figures, but I believe that in most states a lender is able to pursue a deficiency against a defaulting mortgagor, even though the mortgage is a first lien on a home.
Apparently you like the word "unreasonable" but not the word "fair." However, your use of unreasonable is indistinguishable from "unfair." Lenders are taking a risk whenever they lend, but they are not supposed to be gambling. Borrowers normally sign a note that says "I promise to pay. . ." not "if I choose not to pay you can take my house."
You seem not to understand the distinction between debt and equity – the bank is not buying an interest in your house, it is lending you money. No doubt there could be a financing structure where the lender buys the house and turns it over to the buyer when the payments have all been made, but that structure is not being used much these days. Really, it is hard for me to understand why you think the bank should be the one to take the loss when the borrower's house loses value.
In my way of thinking, "fair" suggests some sense of fundamental morality while "reasonable" suggests a utilitarian calculus. I don't know why you think it "fair" that mortgagees may recover losses on a loan secured by a deflated property by claiming the borrower's other assets.
I see nothing fundamentally moral or proper about this standard, but I do see how it might encourage creditors systematically to overleverage properties, and this bias toward overleveraging does seem fundamentally inflationary.
I've just distinguished it, so it is distinguishable even if you don't like the distinction.
I don't understand the distinction between "taking a risk" and "gambling". "Gambling" is not a dirty word in my lexicon, and "taking risk" is precisely "gambling".
If the loan is executed under a non-recourse standard, that's exactly what the note says, even if you think the terms "not fair". Statesmen needn't enforce contracts for any purpose, so when you go begging to them, you get whatever force they hand out.
"Public purpose" exclusions are common. In my neck of the woods, judges won't enforce a contract selling a mental incompetent into slavery for a lollipop either, even if you think the terms "fair", even if the would be slave no nominally "agrees" to these terms. In fact, slavery contracts are generally excluded. They won't enforce contracts executed under duress either.
You seem not to understand the security of collateral. Loans secured by specified collateral are not secured by anything and everything a lender can force a borrower to surrender at gunpoint, even if you think Moses wanted it this way, even if Moses really did want it this way. Moses is dead.
Why do you say this? Non-recourse loans are not so unusual, and if we're concerned about the excesses of inflationary credit, they seem completely reasonable to me.
Really, I've specifically addressed this misunderstanding, and you've completely ignored the point. The issue is creditors' incentive to lend against the true value of collateral nominally securing loans rather than inflating systematically. Why not address this point?
After some research, I agree with Ak Mike that non-resources mortgages are not most common but are more common in western and southeastern states. Home mortgages typically are non-recourse in my state (Georgia) but not in many other states. Obviously, if you're deeply under water on a home mortgage, you should investigate your rights specifically.
After some research, I agree with Mike Ak that non-recourse mortgages are not most common but are more common in western and southeastern states. Most home mortgages are non-recourse in my state (Georgia) are non-recourse but not in many other states. If you're in this predicament, you should discover your own legal rights.
Patience is a virtue, but my last post didn't appear for several minutes, and it seemed important enough to repeat.
Mike, if you live in Arkansas, your home mortgage is probably a non-recourse debt.
Mr. Brock – first, you might check your postal abbreviations for "AK."
Second, I think the difference in our outlooks is that you seem to view a home mortgage as essentially a transaction where the lender buys the house and then resells it to the borrower. In that case, as it seems you are viewing it, there is something wrong with the lender selling it to the purchaser for far more than its value, and the lender deserves to get burned. The lender, as you view it, seeks to have the value inflated ex post so its sale is protected.
In contrast, I view these transactions as essentially loans, with the purchase of the house and its use as collateral as significant but essentially incidental. It is the purchaser who gets all of the bank's money, and he has the ability to do whatever he wants with it, so long as he provides collateral to the bank. If you buy your house for cash, or pay off your original mortgage, you can get a loan using the house as collateral and use the money to invest in the stock market, or buy an airplane, or whatever.
Viewed simply as a loan, the debtor should pay back the money, as he promised to do. The bank may have been imprudent to use only the house as collateral, and the bank could wind up getting screwed if the debtor files for bankruptcy, but I can't see anything wrong with the bank going after other of the borrower's assets to get its money back.
I fear turning this into a dialogue, so I hope a few others will also comment, but let me follow up on Martin Brock's 9:10 comment:
1. "Utilitarian calculus" just uses utilitarianism as a source of ethics. Utilitarianism is a respectable ethical approach, but a lot of philosophers have rejected it. Anyway, I think that you are wrong that your approach promotes the greatest good for the greatest number.
2. I know that you are wrong about your claim that specifying collateral in a loan excludes the ability to pursue other assets. I do a lot of legal work in this area, so believe me you are wrong. It is true that there are such things as non-recourse loans, but they are definitely the exception rather than the rule. Moses has nothing to do with this.
3. To reiterate: the basic difference seems to me to be that you view the lender as the one creating the purchase transaction, and I view the lender as simply willing to lend money to the buyer, with the buyer and not the lender as creating the purchase.
4. Or more simply, the deal should be the deal. If the loan was based on a restriction of recourse to the collateral, then the lender should be restricted to foreclosure. If the loan was predicated on law and contract that allows other assets to be pursued, then the lender should be allowed to pursue those other assets.
Alaska then. Don't know about your state. Sorry if you don't like being confused with Arkansans.
No. I view a home mortgage as a legal claim on a property to secure repayment of a loan.
I'm not moralizing. I don't care what you sell your house for. The issue is credit and inflation.
No. You're projecting your sense of "fairness" onto me. I don't think lenders "deserve" anything. I'm discussing inflationary credit. Creditors have a job. They perform a function. If the incentives are perverse, they'll overextend credit and inflate housing prices.
We create money to extend credit. That's how our monetary system works. Creditors inflate to lend more money and to create more home sales to close more loans, because they earn their own money in proportion to the volume of money they lend and also on the volume of transactions.
The mortgage is distinct from the loan. The mortgage, specifically, is a claim on title to the property securing repayment of the loan.
"A mortgage is the transfer of an interest in property (or the equivalent in law – a charge) to a lender as a security for a debt – usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower."
http://en.wikipedia.org/wiki/Mortgage
A creditor extends me credit to purchase a home, and I mortgage the home back to him as security.
No. A "mortgage" by definition secures a loan. That's all a mortgage does. A mortgage is nothing else but this security, so the role certainly isn't incidental. If the collateral is incidental, why bother with it at all?
That's not how a home mortgage typically works. The mortgagee writes a check directly to the home seller, and the mortgagee typically holds the title until the debt is paid.
That's why the house secures the loan, not your stocks or airplane or whatever. In this case, the creditor understands that the house secures the loan; otherwise, he could simply lend the money.
You think that the creditor "deserves" to get "his money" back, but I don't think along these lines at all. The reality is that creditors essentially create money out of thin air to extend credit, and the issue is an incentive of creditors to inflate housing prices, not what they "deserve" from their borrowers.
Creditors creating too much money deserve to see some of it evaporate; otherwise, they'll go on creating too much.
The banker screws himself by overextending credit secured by assets with inflated prices.
Bankers routinely create money to lend it. They're monetary authorities. Lending only against reasonable market valuations is how monetary authorities avoid inflation.
If we had a gold standard, bankers would still create money (notes promising gold) to lend it, but they'd be much more reluctant to overextend, because a housing bubble collapse like the one we're seeing now would create excessive demands on their gold reserves, since they'd be unable to sell mortgaged houses for enough gold to meet the demands of their note holders.
"Utility" has broader usage these days than "greatest happiness for the greatest number". Modern utilitarians speak of maximal "satisfaction" or something similar. "Satisfaction" is what you and I get by exchanging our goods in a market for example.
Regardless of what you think of my approach, you don't persuade me of its error by ignoring the realities of credit and inflation in our monetary system.
You don't know it, because it's a fact in my state of Georgia and several other states. Also, I made no general claim about collateral on loans. I said that residential mortgages (first home mortgages) typically are non-recourse loans. I then amended this assertion, because although it's true in my state and some other states, but it's not true in most states as I thought.
You don't do your legal work in Georgia. I've already corrected the record above.
They're the rule rather than the exception in my state.
Reiterate all you like, but you're completely missing my point. The "goodness" of the contractual obligations are not my point.
The reality is that both creditor and buyer create the transaction.
It goes without saying that the law is the law, and law extant at the time a contract is executed properly carries great weight, but laws change, and I certainly don't agree that entitling creditors to inflate is a sound public policy.
Now, Mr. Brock, let's argue fairly. You deny saying that lenders are generally restricted to their collateral in collecting defaulted loans, but here's exactly what you wrote:
"Loans secured by specified collateral are not secured by anything and everything a lender can force a borrower to surrender at gunpoint, even if you think Moses wanted it this way, even if Moses really did want it this way."
You didn't say "loans secured by first mortgages on residences are not. . . " You were wrong.
I am coming more to understand your perspective, which despite your denials is extremely moralistic: you think the bad banks are just getting what they "deserve" (your word) in lending too much money on the basis of too little collateral, because of their "inflationary" powers. The fact that this was exactly the transaction that the borrower agreed to is irrelevant to you.
I agree that in Georgia, with its non-recourse law, the lender shouldn't be able to pursue other assets of the debtor – after all, knowing the law, the lender nevertheless agreed to lend that money. But in the majority of states, both parties entered into the transaction knowing and expecting that the creditor would have the option of pursuing the debtor personally if the debtor defaults. Changing the rules on that once the lender has sent over the cash is wrong – not just because of Moses, but because if we know that the rules can be changed on us once we have fulfilled our side of the bargain, the concept of a contract loses its meaning, with potentially devestating effects.
I express no opinion on the goodness or badness of fractional reserve banking (which is what I assume you mean when you talk about "entitling creditors to inflate"), but the right way to change that is to change the rules for banking, not to change the terms of individual loan contracts after the bank has already paid over the loan proceeds.
You omit the context in which I wrote it.
Me: Mortgagors already enjoy considerable protection. Home mortgages typically are a non-recourse debt, so the house is the only collateral securing the loan, …
You: Actually, most (certainly not all) places do allow the lender to recover deficiencies owing when the house/collateral is insufficient to pay off the debt.
Me: On first home mortgages, I think most don't, but I haven't seen a precise figure.
You: You seem not to understand the distinction between debt and equity – the bank is not buying an interest in your house, it is lending you money.
Me: You seem not to understand the security of collateral. Loans secured by specified collateral are not secured by anything and everything a lender can force a borrower to surrender at gunpoint, …
Clearly, in context, I am discussing residential mortgages, and you're aware of the context. You only omit it here to create a misimpression that I addressed loans more generally. Then you lecture me on "fairness".
After you object to "typically" and I find that you're right about most states, though not about my state, I correct the record three times, and you continue the fairness lecture. I ask you to address the inflation issue, and you simply drop the point before renewing your attack on you bank hating straw man.
I certainly did say it. You simply excised one statement in which I didn't mention home mortgages specifically because the context was already very clear.
No. You aren't coming to understand my perspective. You only persist in projecting your moralistic attitude onto me. I don't think banks are bad at all. I think banks are banks. I think banks in our banking system are monetary authorities, essentially entitled to create money to extend credit. [This practice is fine with me. I'm one of the forum's few defenders of fractional reserve banking and also one of the few who understands that a gold standard is not an alternative to fractional reserves.]
I think monetary authorities should be structured so as not to overextend credit, because overextending credit is inflationary. If we don't limit the authority this way, inflation is a natural byproduct of the process of extending credit, not because the banks are "bad" but because the structure of the incentives generates inflation. This assertion is less moralistic than scientific.
No. The word "deserve" is yours. I never use it myself until you attribute it to me. The record is clear. You prefer bickering with yourself.
You're right. It is irrelevant to me. I don't worship at the altar of the god of Contract. Monetary authorities have the power to overextend credit and thereby to inflate prices, particular house prices since most people require long term credit to buy a house. People require houses regardless, and they'll pay what housing costs. Ignoring this fact while focusing narrowly on the terms of individual contracts is missing the forest for the trees.
I have already conceded this point. If the mortgagee has recourse to other assets, the issue falls under bankruptcy protection. Actually, I think that bankruptcy laws protecting a primary residence make a lot less sense than non-recourse home mortgages. A mortgage lender knows what he's lending against.
If a home owner negligently wrecks a house or doesn't carry reasonable insurance, that's one thing, but if excessive credit simply inflates prices which then naturally correct, that's a horse of a different color. I see nothing fundamentally "fair" about leaving the full weight of this correction on the borrower.
If you want moralizing, I do have a problem with bailing out banks in this scenario, and we're bailing them out to an incredible degree right now.
I haven't suggested changing the rules after loans are executed, but I don't pretend to know what's fundamentally "right" and "wrong". Changing rules this way can be counterproductive if it creates too much uncertainty in markets, but I do argue that non-recourse mortgages constrain extensions of credit rationally, and I do support changing the laws.
And this word "rational" is not simply moralistic. It shares roots with the word "ratio". It means "proportionate", not "fair" or "logical". When I say that the extensions of credit are "rational", I mean that they're in proportion to a realistic market valuation of the collateral.
Fractional reserve banking is practically inevitable and is not what entitles creditors to inflate.
I nowhere suggest changing rules after a bank has paid over a loan; however, we're changing rules for banks left and right, these days, to the tune of trillions of dollars, practically enough to pay off every home mortgage in the country, much to the benefit of established banks, long after they made poor loans, so I just don't have many tears to shed for them, and I'm not in the business of shedding tears for them either.
Can I barge into the conversation? If judges can rewrite the contract without the agreement of the lender, the loans become more risky and the credit spread on those loans will simply shoot up to compensate the lender for the additional risk and whole segments of the population will simply not be able to acquire mortgages.
This will make loans more expensive and work against the government's desire to increase home buying. The government may then decide to subsidize more loans to push home buying rates back up, which just means that taxpayers will foot the bill for more homes – until the entire scheme collapses. Beyond that, aren't we just arguing over the minutia in this grand scheme?
Whether contracts become more or less risky depends on how judges rewrite the terms. Judges don't necessarily favor debtors.
In a non-recourse jurisdiction, judges don't "rewrite" contracts as much as they apply statutory or common law limiting recourse to the mortgagor's other assets. This standard seems completely reasonable to me. It places a reasonable burden on the creditor to value the mortgaged property realistically and to lend only against the property. It doesn't place a creditor requiring a reasonable down payment unduly at risk.
Apparently, the government's desire to increase home buying was a significant part of the problem. The incentives encourage home buying with as much leverage as possible, as opposed to home keeping with as much equity as possible.
I'd like to see the end of the mortgage interest deduction. If home ownership is the goal, a deduction for equity makes more sense, but home ownership is not the point at all.
These "home ownership" programs, by design, benefit mortgage lenders, real estate brokers and other corporatist interests, not individual home owners. Regardless of what politicians say they're doing, the effect is obvious enough.
Mr. Brock – you obviously have a hobby horse about inflationary bank loans that you want to ride. You deny that you are moralistic, but anyone reading your responses can see that your denials are meritless. You are obviously incensed about banks, as you see it, creating inflation, and that is really, for you, the only issue.
You don't worship at the altar of "Contracts" you say, but your reasoning is not derived from the issue posed here. Remember that the original post is about bankruptcy judges rewriting contracts to reduce the obligations of debtors.
Now you're saying that judges might favor the creditor, or that judges in Georgia or California apply the law to prevent personal liability of the debtor – a point totally irrelevant to the issue.
OK, you don't care about contracts. I'm not moralistic about it – I recognize that in bankruptcy you are allowed to discharge promises to pay, and that's ok, because that's already accounted for when the obligation is incurred. What I do not think is healthy for our economy is changing the rules after one side has already committed its funds. This is the kind of thing that makes investors reluctant to invest, makes banks reluctant to loan money to anyone, and has a banana republic quality. There is a reason that the U.S. Constitution has a provision that congress cannot alter the obligations of contracts.
Right, you don't care about that. Got it. Others, perhaps, do.
"Whether contracts become more or less risky depends on how judges rewrite the terms. Judges don't necessarily favor debtors."
The increased risk that Methinks refers to is the uncertainty of judges' decisions. Lenders will compensate for this risk with higher rates and premiums.
She's right.
You write "hobby horse" as though the housing bubble now bursting doesn't exist, as though well established and uncontroversial measurements aren't evident, as though the multi-trillion dollar bailouts aren't happening.
You write "meritless" while completely ignoring the point.
I'm not "incensed" about banks. You simply project your moralizing onto me without discussing assertions of a relationship between credit and inflation. Banks are institutions without human motive responding to incentives created by established standards.
Yes, inflation is the issue I'm discussing here. How is the discussion of a relationship between particular mortgage standards and housing inflation "moralizing"?
I'm close enough to the topic.
I address this issue in my first post. I write, "… simply writing down the principal rather than allowing the banker to foreclose doesn't teach the lesson well." I also discuss non-recourse mortgages as an alternative to writing down principal, two different policies with different effects. You then assert that non-recourse mortgages are "unfair" to lenders, and you attribute similarly moralistic motives to me for reasons only you can explain. I'm discussing inflationary effects of particular lending standards.
Of course, judges might favor creditors. Are Fed chairmen, Treasury secretaries, Presidents and Congressmen handing out multi-trillion dollar bailouts to banks the only politicians who can behave this way? Why would that be? Do you deny the reality of these bailouts? Am I imagining them?
It's a fact that Georgia and other states have non-recourse mortgage standards. I haven't focused on personal liability of the debtor except to reply to you. I've focused on lending standards requiring banks rationally to evaluate the value of assets securing their loans. I never say a word about California.
You don't dictate "the issue".
The inviolability of contract is not a principle handed down by God on stone tablets. That's not saying that I don't care about contracts. The words you place in my mouth are still your words.
Bankruptcy is essential to properly functioning capital markets and is also a principle of liberalism (the classical variety), but I haven't discussed bankruptcy except to note that some bankruptcy laws protect a principal residence. This standard is far less advantageous to lenders than a non-recourse mortgage and doesn't serve the same purpose. The point of a non-recourse mortgage is not to let the borrower off the hook. The point is to keep the lender on the hook for over-leveraging the collateral.
That's a separate issue I haven't addressed, but we are changing the rules after the fact on a massive scale, and we're changing them largely to benefit huge, established banking institutions that are "too big to fail". How these changes extend to individual debtors is to be determined, but we're already changing the rules, largely to bail out "investors".
There is no such provision. Article I Section 10 concerns powers prohibited to the States, not powers prohibited to Congress.
Here again, you bicker with yourself. You don't decide what I "care about". You only construct straw men to knock down. It's child's play.
She writes, "If judges can rewrite the contract without the agreement of the lender, the loans become more risky …" Contracts involve two parties. The lender is one party. The borrower is the other. Judges can rewrite contracts without the agreement of either party to the benefit or the detriment of either party.
That's not obvious. For weeks, we've discussed statutory standards and monetary policies that had lenders offering lower rates, despite the now evident and very substantial risks. Judicial standards can have the same effect. Under the circumstances, with money flowing like water into large banks, I have no idea why anyone expects statesmen to act against the interests of creditors. Where is this actually happening?
"Judges can rewrite contracts without the agreement of either party to the benefit or the detriment of either party."
Right. That's the uncertainty we're speaking of.
"That's not obvious."
True enough. However, underwriting involves evaluating different forms of risk. I suspect this might become one of them. I have a friend who is an underwriter. I hope to get his thoughts on this soon…
It does, and Alaska Mike wants underwriters evaluating the risk of recovering any asset from a mortgagor after foreclosure, not only the house itself. This standard clearly requires far more diligence, even omniscience, on the part of the creditor, and it makes a mockery of the "home mortgage", since this "mortgage" by definition is the creditor's security in the house, not the creditor's claim on every other asset recoverable from the mortgagor when the house turns out to be worth much less than the creditor lent against it.
Banks, real estate brokers and other interests closely related to the monetary authority (which is part and parcel of the state) share incentives to inflate housing prices, and without checks on their authority, they will.
What I do not think is healthy for our economy is changing the rules after one side has already committed its funds. This is the kind of thing that makes investors reluctant to invest, makes banks reluctant to loan money to anyone, and has a banana republic quality. There is a reason that the U.S. Constitution has a provision that congress cannot alter the obligations of contracts.
Spot on.
U.S. Constitution, Article I. Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
[my emphasis]
Nothing in Section 10 binds Congress, because everything in Section 10 refers specifically to the powers of the States.
Section 9. does forbid Congress to pass an ex post facto law, for example, but Section 9. says nothing about laws impairing the obligation of contract. No provision of the Constitution forbids Congress to alter the obligations of contracts.
Denying reality doesn't change it.
Börse im Jahre 2009 Minus
von Raivo Pommer
Sorgen über die Auswirkungen der Finanzmarktkrise haben den deutschen Aktienmarkt am Mittwoch den dritten Tag in Folge belastet. Nach zeitweise kräftigen Verluste im Tagesverlauf erholte sich der Leitindex Dax jedoch weitgehend und schloss mit minus 0,28 Prozent bei 4205 Zählern. Die Erholung wurde durch die amerikanischen Börsen ausgelöst, die zum europäischen Handelsschluss in Plus gedreht hatten. Der MDax gab um 1,12 Prozent auf 4952 Zähler nach, der TecDax büßte 0,5 Prozent auf 480 Punkte ein.
„Die Finanzmarktkrise belastet die Märkte nach wie vor“, sagte Fondsmanager Gerold Kühne von LLB Asset Management in Vaduz, Liechtenstein. „Erst wenn die Konjunkturdaten in den Vereinigten Staaten eine Bodenbildung anzeigen, könnte das vom Markt als ein positives Signal verstanden werden.“
Am Tropf von Wall Street
Für die späte Erholung im Dax verwies ein Händler aus Frankfurt vor allem auf die Vereinigten Staaten: „Wir hängen wieder ganz am Tropf der amerikanischen Börsen. Geht es dort runter, haut es auch den Dax nach unten. Geht es dort hoch, hilft das auch der Börse hier.“