Contracts? We Don't Need No Stinking Contracts!

Anytime you hear someone say that the way to fix the “foreclosure crisis” is to “modify loans,” what you are really hearing is a desire for the government to destroy the concept of contracts.

People, for good or bad, made voluntary decisions to sign mortgage contracts which they, for whatever reason, cannot afford.  If such a contract was obtained by fraud, there is already a mechanism in place to address this; it's called suing the crap out of them.

If, however, people voluntarily jumped in over their head, then they do not deserve the drastic action being contemplated by people like Rep. Conyers.

Why do I say drastic?  Because the entire concept of contracts will be potentially voided by a move like this.

If government can unilaterally and post hoc dictate new terms to voluntarily signed mortgage contracts, what businessman in his right mind will expect that any contract they sign might not be later "modified" to his detriment by a Congress trying to "help people"?

Belief in the enforceability of contracts will go out the window here, incurring a massive future cost as businesses adjust their approach to contract laws.

This is exactly what Bastiat, Hazlitt, and Sowell warn about: failure to think beyond stage one and (a) to consider the effects of policy on people other than the intended beneficiaries and (b) to think of long-term defects over short-term "gains."

Worse, Conyers, in the article linked above, specifically does think of some long-term effects (i.e. moral hazard).

To those who claim that my bill will end up harming consumers by increasing the cost of credit, I would respectfully suggest that they are not taking account of the track record of the modern-day bankruptcy code.

For more than three decades, the bankruptcy code has permitted the very kind of court modification we are considering today, for every other form of secured debt, including loans secured by second homes, investment properties, luxury yachts, and jets. For over 20 years, this very kind of modification has been available for home mortgages already -- if the home is a family farm. There is no indication that this has in any way increased the cost of credit for any of these kinds of loans.

As for my legislation, we have narrowed it to apply only to existing mortgages. So it will have no effect on new mortgages and cannot impact their cost. This is one reason why Citigroup is now among the many business and consumer groups that support this proposal. It's also one reason why the Obama administration supports my bill.

Finally, to those who argue that this legislation constitutes some form of "moral hazard," which will encourage reckless borrowing in the future, I would simply ask them to come to Detroit, my home town.

While Conyers appeal to emotion may play in Peoria (that's why he is suggesting this in the first place), logically and ethically he comes to the wrong conclusion . . . that his voiding of the concept of contracts will somehow not cause a shift in the practical actions of business owners and lenders! 

He actually believes that businesses will believe that his “narrow application to existing mortgages” will stand in future “crises.”  he actually thinks that, because, under very limited circumstances, courts (not Congress) have allowed such modifications, that the expansion of this power to include anyone whom Congress deems worthy (i.e. they might vote for them) will not effect the future contracts written by lenders.

As if, once the principle is established, Conyers & Comrades will not gleefully expand this government power to force new contracts to comply with their concept of “fairness" in other areas.

As if, once the principle is established, Congress will readily repeat itself next time it wants to “do something to help the people" (read: to get reelected).

As with so much of Congress’ actions in the face of this crisis, this step toward national control of the market will lead to benefits for the few at the cost of the many and the future.*

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* And this isn't even taking into account that the very group of people Conyers and Co. are supposing to help -- people with les sincome or worse credit -- will face much stiffer loan requirements later on and thus will be less likely to be able to afford a house . . . . Though I suppose that would solve the "foreclosure crisis" wouldn't it?