Ah, Minnesota

I’ve been away from Minnesota for too long; I forgot how stupid the liberals there can be. They have come up with a solution to the mortgage crisis; they are going to put a one year moratorium on mortgage foreclosures. I have a lot of responses to that.

It infringes the freedom to contract which is guaranteed under the constitution and by common law. It is a basic freedom and basic to a free capitalist market. The mortgagor AGREED to the terms and while you can make forward looking legislation, it can’t be retroactive.

I don’t see how it’s fair to the mortgage holder who would not have lent money, or at least not under those terms, had they known they would not be able to foreclose. It is their right and the fact the interest is SECURED by property is what makes the loans happen in the first place and keeps the interest rates low. If you take away the ability to level on the security, the risk to the lender drastically increases and they GET TO CHARGE FOR IT.

I think this is “a taking.” Legally speaking a taking is when the state comes in an commandeers a piece of your property. Think when they condemn land for building a highway. The state has the right to do so, but IT MUST PAY THE PROPERTY OWNER THE FAIR VALUE OF THE PROPERTY TAKEN. Since, if the Minnesota legislature does this thing, the value of a loan made to a Minnesota person will PLUMMET, and that means the State of Minnesota should owe the mortgage holder the difference in value.

If I were the banks of the United States, upon passage of this act, I would immediately suspend making ANY loans in Minnesota backed by mortgaged security. Period. The market there is clearly too risky because the crazy government might decide to screw me. All OTHER loans I made in Minnesota would have their interest rates doubled to cover my risk of loss if the State decided to meddle with them as well.

Suspending foreclosure does not stop the problem. The mortgage is just security for an existing debt and the debt can be sued upon without foreclosing on the mortgage. Were I the bank, I would simply sue on the overdue note and then, when I get my judgment, execute on the home anyway, and the car, and the bank accounts, and the personal property, etc. Further, because this costs more to do, I get to recover my costs from the executions which means in the end the home owner ended up losing more than they would have had I foreclosed.

The goal of this brainchild is to introduce stability into the home loan crisis. (I knew we should not have called it a crisis, because you have to take drastic steps to fix a crisis. If we called it a tragedy or a scandal, we wouldn’t have the linguistic baggage to deal with.) Somehow the State of Minnesota misses the fact that the crisis was caused because with all the foreclosures, the banks did not know how to evaluate the value of their bundled mortgages. I fail to see how introducing an inability to foreclose on those non-paying mortgages will do anything other than introduce EVEN MORE UNCERTAINTY into the banks valuation calculations.

Finally, if Minnesota does this, I can a huge wave of foreclosures being filed a year and a day later which will swamp the system AND all those homeowners will probably be in a bigger hole than when they started. This “crisis” will not end until those homes can be readily sold for a value that represents at least breaking even for the home owners. That requires the old inflated housing market to return and won’t happen soon. Until then, someone gets to take a bath on this and all the Minnesota solution does is put the entire loss on the bank instead of spreading it out.

It would make just as much sense to allow people to draw on IRAs, pensions, and Social Security benefits to make up their house payments. It would not solve the problem for the couple who has to move and has discovered that they can’t sell the house for the amount of the debt they have on it, but neither does the Minnesota plan. Likewise, it is robbing Peter to pay Paul by worsening the Social Security situation in the future and making it even more unlikely that these folks will be able to live on their Social Security payments. However, it would stabilize the situation by keeping people from being foreclosed without introducing more uncertainty into the bank’s value calculations. It’s a better, or at least a legal, solution than the Minnesota plan, but I’m still not advocating for it.