Steven Geoffrey Gieseler of the Pacific Legal Foundation makes an excellent point in decrying the great amount of attention paid to homeowner victims of subprime mortgages in the current presidential campaign relative to those who have lost their homes to eminent domain (hat tip: Tim Sandefur of PLF on Eminent Domain):
As the campaign for the presidency unfolds, candidates from both parties are squabbling over who can bail out defaulting homeowners first, and most. The mortgage crisis has become a central issue of the Democratic and Republican primaries. "Saving homes" is now a necessary mantra for everyone seeking the White House. Problem is, they're all trying to save the wrong homes....
As stressful as losing a home to foreclosure may be, most such homeowners at a minimum share in the blame for their predicaments. After all, many agreed to loan terms that amounted to little more than gambles that, it turns out, haven't paid off.
In contrast, those who lose their homes to their federal, state, or local governments via eminent domain for private purposes are victims in the truest sense of the word. These people have done nothing wrong other than live on plots of land that more politically connected parties, and the politicians they're connected to, have decided the owners are no longer worthy of keeping.
I would add one more point to Gieseler's compelling argument. Even if you do believe that those defaulting on subprime mortgages are innocent victims, any government bailout for them is likely to create innocent victims of its own: The taxpayers who will be forced to pay for it. This is doubly unfair to recent homebuyers who stayed within their means, and may now be punished for their financial rectitude by being taxed to bail out those who were more reckless. If you want banks and other lenders to pay for the bailout, that too will generate innocent victims. If lenders are forced to bail out defaulting homebuyers, they are likely to tighten up credit requirements for future buyers, thereby making homeownership less accessible to the poor and lower middle class.
On the other hand, we can help the victims of Kelo-style "economic development" takings with little or no collateral damage to innocent third parties. Not only are such condemnations damaging to property owners, they also tend to harm the general public by spending public funds on projects that usually provide less in the way of economic growth than would have occurred if the previous owners had been left alone by the government. I discuss the reasons why in great detail in this article. Banning economic development takings is a win-win for both threatened property owners and the general public. The same can't be said for proposals to bail out subprime borrowers.
All Related Posts (on one page) | Some Related Posts:
- Property Rights Three Years after Kelo, Part IV - What the Feds Have Done:
- Property Rights Three Years After Kelo, Part III - A New Cross-Ideological Coalition for Property Rights?
- Property Rights Three Years After Kelo, Part II - The State of the States:...
- Political Ignorance and Post-Kelo Eminent Domain Reform:
- "Victims" of Subprime Mortgages and Victims of Eminent Domain:
- The State of Post-Kelo Eminent Domain Reform:
As I discuss in my linked article, since WWII, some 3-4 million people have been displaced by economic development or urban renewal takings.
Who should be held responsible? Your comments indicate that no one should be held responsible because that will hurt everyone i.e. the banks or the taxpayers.
The borrowers and lenders should be held responsible for their mistaken decisions. And the market is doing that by forcing the former to default (and lose their properties) and the latter to take losses on the loans they issued. Thus, there is little need for government intervention.
It's easy once you know the tune.
That's the idea.
What could go wrong?[/tongue in cheek]
I wish I'd known that, just six months later, politicians would be proposing rate freezes and bailout packages. I definitely would have gotten an irresponsible loan and saved myself some money. This stuff actually offends me.
When a mean, evil corporation takes over property then something has got to change.
I agree with Somin: lenders lose money, borrowers lose money because of their decisions. Let's move on.
Apparently those mean old companies just need to start loaning money to people at low rates, even if they have poor credit.
I don't know how much merit this argument has, but it makes sense to me.
When people stay in their houses, it's great for them: they are, by definition, owning more house than they are able to purchase without a bailout. The cost is shouldered by the taxpayers - either those responsible enough to buy homes within their means, or those who are unable to afford homes and continue to rent. It is a double slap in the face to long-time renters who do not buy until it is financially feasible for them to do so.
Of course, the reverse would hold with measures that would increase the supply of houses (or reduce the supply of capital). In either case, why should one class of citizens be favoured over another class?
Giving tax money to people who made bad investments would hit renters with a double whammy: first directly, the cash they were saving to buy a house when prices when down would be taken away to be given to people who bought when they shouldn't have. Secondly, this will raise prices so the cash that was saved by those who wisely waited for the market to correct itself will buy less house than it otherwise would have.
In the meantime, rent looks like a pretty good deal.
So in short, I have no sympathy for people who bought better houses than me without making the sacrifices that I made or without doing the very minimum ammount of work to learn what the consequences of their financial decisions would be. And I have no sympathy for lenders who were irresponsible with the money in their charge. I hope none of my tax dollars go towards bailing any of these people out of the mess they made for themselves.
There are no victims here, except for people who fell "victim" to their own greed, ignorance, or laziness and the third parties who will suffer because of these people's foolish choices.
Re "compensation" for a taking. A "just" compensation, properly speaking, is one a seller voluntarily agrees to. If the transaction is coerced, then no amount of compensation is "just."
I agree completely. The entire notion of bailing out people who make foolish choices is offensive, and it just makes me more cynical about politics and all politicians.
Like Pete, I too had to choose whether to buy a house I could afford or a take a mortgage that would be easily approved, but leave me essentially "house poor". So I bought a dump and spent $110,000 renovating it. I bought the worst house in the best neighborhood, cleaned out my 401K and all my savings, and took cash advances on credit cards, and then I hoped I could re-finance it enough to pay off my debt. I lucked out and it worked out. Luckily for me, the values didn't drop until about a year after I refinanced.
I now have negative equity in my house. But I have the house I wanted, and I can afford the mortgage. I'm slowly working my savings back up, but I put off retirement by years because I cleaned out my 401K to do it.
It is offensive to me, as some who did gamble and knew the consequences, to be forced to bail out people who can't do basic math.
Part of the problem with the subprime debacle is that these loans were packaged and sliced and sold through so many different parties that it's difficult to tell who should be doing what. And the market was somewhat distorted to begin with, since banks, brokers, FHA, FNMA, etc. all have different regulations. Much of the talk I've seen (around the industry, not from presidential candidates) about the 'bailout' isn't really about taking tax dollars to save anybody, it's about modifying various rules to facilitate the negotiation process for those cases where foreclosure may not be the best possible option.
If the government can come up with a sensible solution that will address the regulatory distortions, facilitate transactions, and let people work out their situations, I'm all for it. I'm not optimistic about what our politicians will actually come up with, but there are some ideas out there that make sense.
With eminent domain, there are (arguably) cases where a government taking with (more or less) just compensation may be necessary to facilitate the broader market. If that's the case, I can support the government dong what it deems necessary. On the other hand, there are an awful lot of cases where the government seizure obstructs rather than facilitates the market.
To my mind, the comparison between foreclosures and eminent domain is useful not so much because the situations are similar, but because they're both good examples for working out the proper scope and purpose of government intervention. It's the kind of thought exercise more people need to do more of.
That's called "predatory borrowing".
Should there be a distinction made with these folks, whatever percentage they are, ineligible for relief?
Similarly, I have no sympathy for those speculators who are losing their shirts or those who took out so much equity that they are in a bad situation.
I do have sympathy for those who were sold high mortgage rates because they did not know better. Those who took advantage of these people should disgorge their profits. If that is not possible, they should be tarred, feathered, and run out of town on a rail.
As for eminent domain. Yeah, I feel sorry for those folk. But, in theory, they are not out any money, just property. And, like it or not, real property is fungible. They, conceivably, can find another place to live.
Not in the same sense that water or gasoline are fungible. Aside from the fact that not all houses are alike, and you simply cannot find an identical house in a similar neighbourhood on short notice, there are other rights and privileges attached to owning a home. Your children will be able to attend a certain school in the district. Depending on where you move to, you may be represented by a different elected official (very likely at the town level; slightly less likely at the state level). Houses in different towns are subject to different tax rates. Even within a town, zoning regulations may differ, which will make a difference in terms of long-term value of the property and the potential to have intrusive and undesireable neighbours, traffic, or businesses around one's home.
When you move, you do not have the same "property" (house, backyard, land, neighbourhood, school district, precinct) as you did before; it is a far cry from choosing, say, Shell over Mobil.
Maybe. But I don't see why lower property values are necessarily a bad thing. It hurts existing property owners, but benefits potential buyers and makes homeownership more feasible for the less affluent. Furthermore, it's not clear to me why foreclosures should lower the value of nonforeclosed properties, at least in the long run.
In any event, lots of factors may reduce the value of property. No one argues that all of them should be offset by the government merely because property owners will lose some of their equity.
This would be true if the only use they made of the property is economic -- owning it, renting it etc. You see, living in a house is valuable -- but you normally don't get compensation for that. The fact that you live in the house today represents an investment of time finding the new house, negotiating its purchace, arranging for a move, furnishing, learning the environment etc. It's true that the value of the house represents this to some extent -- except that normally you get to decide when to make this investment of time. Perhaps this year you can't afford to take time off work? Perhaps you'll have to accept a worse deal for a new home because you have a deadline to vacate your old one? Perhaps right now you have medical issues to deal with and don't need the extra stress?
It is true that all of these "damages" can be quantified. If you give me enough money I could hire someone to go house-hunting for me, or not have to bargain so hard for the replacement house. But the real issue is that the same house can have different values to different people. Here's a simple example: a house where one of the rooms has a separate front door. To a therapist, this is an immense value: he can use the room to see patients without admitting them to the "private" parts of the house. To the average person, not so much. So how much compensation is due when the therapists loses this house? As much as anther therapist would pay for the house? As much as an average joe would pay for it? For an even simpler example, in your scheme do people who lose houses which are within walking distance of their work get extra compensation?
But if real property is fungible, why does the government demand MY property? Won't any other fungible piece of real property do just as well?
"You keep using that word. I don't think it means what you think it means."
Ilya Somin,
One argument for why foreclosed properties effect other homeowners is that foreclosed properties tend not to be maintained and thus detract from the neighborhood. There was a piece on msnbc.com a week or so ago about cities taking lenders to court over this. Also in some areas abandoned homes attract squaters or other illegitimate residents. In some of the cases the msnbc piece cited the lenders simply walked away from the property and allowed the city to proceed with forfieture for unpaid taxes.
These factors produce a drain on value that is much greater than simply having many properties in the same neighborhood that are surplus.
Politically, the logic is actually little different than the arguments against a subprime bailout for the borrowers. A wave of foreclosures in a down housing market would be an inevitable loser for the current holders of the mortgages (likely in securitized form). The idea is that getting your hand burned teaches you not to play with fire in the future. I realize that economically, the two ideas are opposites--one involves government compulsion "making banks and other lenders pay for the bailout," while the other involves the government just letting the cards fall where they will. However, given that the latter is likely to involve (and indeed, already has involved) substantial losses for the financial players, the "burned hand" political lesson would theoretically be similar.
You keep using that word. I do not think that work means what you think it means.
The way it's always been explained to me, real property is almost the classic example of a *non*-fungible good.
But the point does highlight one of the key problems with the political spin. The fact is, very few people who lose their house to foreclosure end up homeless.
In fact, believing both "foreclosures will result in battalions of people not having a place to live" and "foreclosures will result in a large oversupply of housing" requires a considerable effort at doublethink.
Eminent domain, on the other hand, although it rarely results in homelessness (at least in this country), doesn't (necessarily) directly address alternative housing.
The second component is the credit crunch in the secondary market. This credit crunch is due primarily to the pricing of the loan protfolio's in the secondary market and only marginally affected by the recent upswing in the number of foreclosures. Essentially, the pricing did not take into account the normal risk factor for normal foreclosure range for that type product.
That might be why Sub-prime is a bigger deal than Kelo. It simply affects more people.
IS responds:
As I discuss in my linked article, since WWII, some 3-4 million people have been displaced by economic development or urban renewal takings.
Since the end of major federal urban renewal projects in the early 1970s,(*) has there been a lot of eminent-domain related displacement? My sense is there has not been.
(* Public housing construction slowed substantially when the Section 8 housing voucher program was enacted in 1974. I'm guessing urban highway development slowed considerably after the 1960s due to budget constraints and environmental concerns.)
(I think it might get a lot more interesting if highway privatization becomes a widespread fashion among the political classes, though. I'm waiting for a case in which eminent domain is proposed for the construction of a privately owned and operated highway in a state where the state high court has come out on the side of the Kelo dissenters.)
Stock shares are fungible; one share of a corporation is equal to another, and thus can be sold short and repurchased later. An ounce of gold is fungible. A dollar is fungible. But houses?? They are pretty much the antonym of fungible. That's the basis of specific performance.
How about interchangeable. If we both have wives they may be equal but seldom interchangeable.
If you told your wife that she is fungible, I think you would be without a wife.... :)