Stop Coddling Mortgage Deadbeats

Right now, there’s a big manufactured outrage over the fact that at a few banks, paperwork errors occurred in foreclosures.

The Wall Street Journal summarizes it well:

A consumer borrows money to buy a house, doesn’t make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front. The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

At CNBC, John Carney has an insightful column entitled “Let’s Not Start Lionizing the Anti-Foreclosure Deadbeats.”

Dismissing foreclosure actions based on technicalities that have nothing to do with whether a borrower defaulted on a loan will lead to negative “consequences” for borrowers in the future, like much more costly handling of paperwork, that will likely lead to increased closing costs for people purchasing a home.  “Total war over missing paperwork” is a bad thing for honest borrowers and lenders alike.

As The Journal notes,”Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states,” vetoing it last week simply because one possible use of this measure would be to speed foreclosures otherwise slowed by interstate red tape.  At the liberal publication Slate, Stephen Sachs explains why that bill was a good idea for reasons having nothing to do with mortgages or foreclosures, and how it will promote interstate commerce and protect honest creditors.  Sachs notes, “The vetoed bill wasn’t aimed at the housing crisis. It was introduced back in 2005 and passed the House with bipartisan support in December 2006.”

I was an outspoken critic of the 2008 bank bailout at the time it was being pushed through Congress (I called it “unconstitutional,” “dangerous,” and “unnecessary”), and I completely understand and share public outrage at mismanaged banks that ended up being bailed out.  But I don’t understand why people think the bailouts should be compounded by letting deadbeat borrowers avoid hundreds of billions of dollars in unpaid mortgages without consequences — which would be the result of a permanent foreclosure freeze — at the expense of healthy banks that never wanted a bailout and repaid their “bailout” in full with interest.   (Healthy banks like BB&T that didn’t need or want any bailout were pressured by the Treasury Department into accepting a bailout loan along with their unhealthy competitors, so that the public would not know which banks really needed a bailout, resulting in a possible run on those banks).

It’s worth keeping in mind that a $75 billion mortgage bailout program backed by the Obama administration actually ended up harming the real estate market and the economy.  Other Obama administration mortgage bailouts have involved giveaways to even high-income borrowers who were financially irresponsible and had mortgage payments that were not especially high as a percentage of their income.  Preventing foreclosures may also end up creating a class of bailout-seeking deadbeats who don’t pay their mortgages and then agitate for giveaways at taxpayer expense.