In our egalitarian society, some deadbeats are still more equal than others
A lot of people on the left complain about "economic injustice." Usually, this involves the fact that some people have more money than others, the assumption being that the Haves got whatever they have at the expense of the Have-Nots. The idea is that income differences are inherently "unfair" or "inequitable" and that they should be remedied. By government, of course.
Well, what about economic injustices that result from government action? Glenn Reynolds linked a post which talks about the huge debts incurred by law students -- debts which are non-dischargeable in bankruptcy. This means that for an increasing number of young lawyers (who are unable to find employment), their best bet is to flee the country and avoid living as perpetual, hunted, "deadbeats." The author sees the system as "unsustainable":
The economics of legal education today seem unsustainable to me. Here is an article of mine on the subject, with more gory details. It was for a symposium on "the ethics and economics of legal education today". Here are all the symposium articles, posted by Paul Caron.
Then again, unsustainability seems to be a theme in much of the country's - and not only this country's - economics and politics today.
I agree, except it seems that there's a double standard where it comes to unsustainability.
I am not saying that people should not pay their debts, nor am I saying that taking out $150,000 in student loans for a degree which offers insufficient job prospects is a wise financial move. But is it any more stupid than paying an exorbitant amount of money for overvalued real estate? By what standard of economic justice should a person be able to walk away from one and not the other? Is the rule that, a stupid investment in real estate we can forgive, but make an unwise investment in education and you're screwed for life?
It isn't the lenders that decided these things; it's the government. And it isn't just the borrowers who are getting away with bad real estate investments. The banks which made these irresponsible loans are able to walk away from them too. What frightens me most about the prevailing banking climate now is the near total lack of accountability. Almost by accident, I stumbled onto report in the Detroit Free Press involving a foreclosure which seemed to be of media interest mainly because the tenants faced eviction. The subtext, of course, is that evictions are another injustice that the politicians and bureaucrats ought to be tasked with rectifying. What shocked me was the near-total lack of any accountability of anyone:
Sister Brigid Johnson, a university math teacher who has made her home in a Plymouth fourplex for the last 22 years, will be evicted this month if her landlord can't work out a deal with his lender.
Johnson likes her home's proximity to downtown Plymouth, where she can walk to restaurants and shops. "I haven't looked for a new place yet. I don't want to," she said.
Her landlord, John Nicholas Wuest, 40, of Royal Oak, was having trouble making payments on the rental house in late 2008 after his mortgage business dropped off.
OK, so the landlord is in the mortgage business. That means he's hardly what we would call an unsophisticated investor who didn't know what he was doing and was taken advantage of by predatory lenders, right?
It strikes me as obvious that anyone in the mortgage business ought to be charged with knowing the value of his own property, as well as what he owes on it. Apparently not, for the Free Press says he only "learned he was underwater" after he attempted to refinance! And once he "learned" that, he simply stopped making payments:
So he attempted to refinance and learned he was underwater on the mortgage -- he owes about $240,000 on a house worth $85,000 in the current market. His lender wouldn't talk about options as long as he was making his payments, so he stopped.
A sheriff's sale already has occurred on the property, so the lender, GMAC, now effectively owns the home.
It's a familiar story and one that usually ends with an eviction.
I don't know whether he is using the tenants as leverage or not, but now he is trying to buy back the building for a fraction of what he mortgaged it for "so his tenants won't be out on the street":
"I'm now $150,000 underwater," Wuest said. "At the end of the day, you wonder what you are fighting for. Why throw good money after bad?"
Wuest, president of Liberty Lending in Troy, has hired an attorney and made an offer to buy the property back for $90,000. He wants to get it for close to market value, which he thinks he can afford, so his tenants won't be out on the street.
GMAC is putting off an eviction while talks continue.
So, he walked away from the property, but now he should get it back for a fraction of what he owed?
What happened to the hundreds of thousands of dollars that was lent to him?
Where did it go? Wasn't it other people's money? Do they get it back, or do the taxpayers now owe it? Am I alone in thinking there is something manifestly unfair about letting him walk away from the debt and get the building back anyway?
What sort of lesson in life does this impart to the young people who discover that they are now liable to be stalked for life because they can't pay their student loans? Why pick on students, when older people who know better and are guilty of far worse errors in judgment are allowed to walk?
Sooner or later, the institutionalized lack of accountability -- reflected at the highest levels in the persona of TimothyGeithner -- is going to cause the oppressed masses at the bottom to wake up and realize that despite record growth in unaccountability, there is still a major accountability gap, and a very unfair one. Unaccountability should be fair! Why should only some people not have to pay? Why don't we all get to be unaccountable?
And why should ordinary taxpayers be footing the bill for mistakes that weren't theirs?
As I say, it's economic injustice.
MORE: Speaking of economic injustices, as if it wasn't bad enough that a man who failed to pay $34,000 in taxes was put in charge of the Treasury Department, the unaccountability gap has struck again! The agency over which he presides has sent "very aggressive, very condescending" agents to hassle a small business owner over four cents.
What sort of message was this supposed to send? ($34,000 owed by a big shot is a trifle, but four cents owed by a little guy is serious business?)
Can it be that they like economic injustice?
posted by Eric on 03.14.10 at 07:21 PM
Comments
First... why would GMAC, the new owner of the property evict the tenants because their landlord couldn't pay his note?
That would be incredibly stupid on their part, I would think. An uninhabited property disintegrates much faster than one with tenants.
Second... if GMAC repossesses, they have a much better chance of selling the property if it is already rented. That increases the value!
Third... have stupid government interventions so polluted normal transactions that GMAC is somehow better off if the property loses even more value?
Forth - why wern't the rents the tenants were paying make the mortgage payment?
LYNNDH · March 15, 2010 4:39 AM
By what standard of economic justice should a person be able to walk away from one and not the other?
When one walks away from a piece of real estate they have surrendered all future claims to the property, and therefore will garner no future benefits from whatever was bought with the defaulted loan.
The same cannot be said for an education. Even if current job prospects are poor there is always the possibility for improvement (an income) in the future.
I suppose we could have the deadbeats surrender their degrees, which would represent a concern for anyone who needs a particular degree for professional licensure, but for all the others whose degrees are nothing more than a line on a resume (a never verified line on a resume) then this approach would be a clossal waste of time.
No, like most other problematic loans the underlying issue is the government guarantees that allowed most of these loans to be issued in the first place. Eliminate the guarantees and the problem will be substantially reduced.
Will that mean less loand, and will some not be able to afford college? Perhaps, but - so the argument goes - we are talking about people who, upon having obtained a college education, are unable to gain an income sufficient to cover the cost of that education, and to require future repayment would doom them to a life of penury.
But you really can't have it both ways, either the education was a wasteful, unwise investment, never to be paid off, and therefore one that should never have been made in the first place; or it was a useful and valuable investment, one that will eventually bring in returns substantially greater than it's cost, meaning the loan can be paid of some day in the future.
ThomasD · March 15, 2010 9:22 AM
I'm currently in one of those situations. My landlord has defaulted and offered the property to the bank. The landlord used the property as an ATM and has claimed the tenants haven't paid rent for 2 years which is a flat out lie. We have made that fact known to the lenders who may be able to charge her with fraud if they so desire.
So as soon as the foreclosure goes through and the new owner takes possession we will be moving from a place we had hoped to stay in for at least another five years after only three years of residence.
Uh, "all animals are equal, but some are more equal than others"?
There are "public servants" [er, govt employees] and there are the rabble?
"Let the eat cake"?
"It's good to be da king"?
Let me know when I get close.
JorgXMcKie · March 15, 2010 12:48 PM
How is a house materially different than a share of stock in a company?
If you buy high and the stock price declines, you do not get to charge the company for the lost value reflected in the stock price. "Sorry your investment lost value. Sucks to be you."
Yet when you buy a home and the value of the home declines, you are stuck paying for the inflated purchasing price with no recourse to reset the mortgage to reflect the lower home value.
Don't take the above incorrectly. I am an ardent supporter of free markets and capitalism. Like Eric, I like the idea of personal accountability.
At the same time, I am dismayed at the impression I get that companies would like nothing more than to define individual debt in terms that limit the ability of the individual from escaping that debt while simultaneously defining corporate debt in terms that permit "re-organization" and other tactics that force their lenders to accept losses in principle and reductions in interest rates.
Why isn't the sauce for the gander also sauce for the goose?
The Anti-Idiotarian Rottweiler
Don?t bang your head!
First... why would GMAC, the new owner of the property evict the tenants because their landlord couldn't pay his note?
That would be incredibly stupid on their part, I would think. An uninhabited property disintegrates much faster than one with tenants.
Second... if GMAC repossesses, they have a much better chance of selling the property if it is already rented. That increases the value!
Third... have stupid government interventions so polluted normal transactions that GMAC is somehow better off if the property loses even more value?