Wednesday, March 9, 2011

Just and Christian Arguments

In today's Times, Bank of America explains why there can't be any principal reductions for homeowners who aren't already in default:
Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. “There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan, the chief executive of Bank of America. “Our duty is to have a fair modification process.”
Of course. Bank of America isn't interested in maximizing the payments it receives from homeowners, it's just trying to be fair.
Even the most outspoken attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth.
God forbid that homeowners be encouraged to act in their own financial self-interest!

“There may be as much as $1 trillion worth of mortgages that are underwater,” said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?”

“This is an unsolvable question,” he said. ...

The comments by Mr. Moynihan and Mr. Laughlin came at a daylong meeting with investors and analysts in New York, the first of its kind for Bank of America since 2007. ... Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

One's heart goes out to those Bank of America executives, tossing and turning all night as they wrestle with the unsolvable question of how to help borrowers without imperiling the recovery or creating "moral hazard". The profound ethical dilemmas our betters must struggle with, as they try to do what's best for everyone. Laughlin, Moynihan and their fellow Bank of America executives must hardly have time to think about the "$35 to $40 billion a year" of profits they're expecting in coming years. Including -- much to their dismay, no doubt -- the payments from those homeowners whose principal they would love to write down, if only it weren't for their strict regard for fairness and the good of the economy.

Where have I read about such scrupulously ethical creditors before? Oh, right, here:
Don Ramon ... made no secret of the business he conducted. ... The Mexican citizen, he explained, was free. Slavery was strictly forbidden and severely punished. No Mexican citizen, whether of Spanish, mestizo, or Indian descent, could be kept or sold as a slave.

But debt was not slavery. A man, any man, was as free to contract debt as not to contract it... Nobody compelled the Indian to get into debt, to drink, to set off fireworks in honor of the saints, or to buy his wife necklaces of glass beds and glittering earrings. There was no reason to call Mexico uncivilized because the dictatorship recognized debt and supported the creditor in exacting payments. He who has contracted a debt must pay it...

"And over and above all that, and however you look at it," don Ramon went on, putting forward the just and Christian argument for his trade, "the monterias and coffee plantations must have labor if the prosperity of the country is to be maintained... It's all aboveboard. There's no compulsion. But all the same it is made clear that debts must be paid. Business depends on convincing the people that their debts must be paid."


  1. Check this out:
    $750 billion in negative equity as of Q4 2010. I wonder what it is now, as home prices have fallen even lower?
    CR also has a post laying out the argument against principal reductions. Bottom line is, the banks will never, ever do it.

  2. Hey Tom. I saw that CR post. I'm not convinced. First of all, it's not at all clear to me that principal reductions for owners in default will encourage more owners to default. There are a lot of costs to getting foreclosed on (like being kicked out of your house), so I don't know how many people are going to take the risk unless they absolutely can't pay. Especially when you consider for how many people the financial incentives are already in favor of default, yet they keep paying. But even if you do think people respond strongly to these kind of incentives, that's not an argument against principal reductions, just an argument against reductions that are contingent on the loan already being in default. Across-the-board reductions for underwater mortgages -- or in regions where home prices have fallen the most, or whatever -- won't change incentives at all. Which is maybe the reason for what I love about the BoA guys in this article, that they don't lead with moral hazard, but with fairness -- they feel terrible throwing people out of their houses, but it's their moral duty to "responsible" borrowers to punish defaulters.

    Of course you are right the banks will never agree to principal reductions -- unless the alternative looks worse. Which is why I continue to think it would be a sensible & productive policy intervention for a few more foreclosed-on houses to be mysteriously burned to the ground.

  3. @Josh:

    You wrote:

    “I continue to think it would be a sensible & productive policy intervention for a few more foreclosed-on houses to be mysteriously burned to the ground.”

    Arson is not an intellectually responsible policy to advocate, even in half-jest. If you think it is, then have the courage of your convictions! It would be easy for you to download a list of foreclosed properties, buy a can of charcoal starter and a book of matches, and intervene away. In fact, as a leftie grad student with no family obligations, that kind of social banditry is more your province than it is that of the desperate families who are being driven from their homes; you’re the obvious demographic to be risking life and liberty to wreak the people’s vengeance. Of course, you would never do that, so don’t advise other people to.

    Not that I’m against direct action. It would be great if leftists came up with a campaign of civil disobedience to protect people facing foreclosure and otherwise physically interfere with the proceedings. Or how about a mass sit-in/takeover of the CitiTower or some other bank in New York? That would be politically constructive, morally exemplary, and a wonderful propaganda coup.