Letters to the Editor don’t always get posted, but sometimes I see one anyway. I thought I would pass along this one that was sent in response to a Wall Street Journal article:
To the Editor:
In Mortgage Madness [Wall Street Journal, Friday, August 3, 2007, page A9], Lawrence Lindsey looks forward from the present nationwide mortgage default and foreclosure crisis. He cautions lawmakers that laws have unintended consequences — for buyers, sellers, and the real estate markets themselves.
He warns of consequences if remedies against lenders and their transferees are altered. Yet the unintended consequences of the status quo must be considered too. Change is needed because existing mortgage remedies have been proven inadequate. As an example, undisclosed bonus cash to brokers for pushing borrowers up to the highest interest rate was okay. When challenged, the practice got regulatory blessing (and then the markets themselves did not seem much concerned about maxed out borrowers). The very weakness of remedies fostered mania, and inane and dangerous financing schemes, now exposed. A hawk eye must certainly be kept out for consequences, but that is no excuse for inaction.
To see unintended consequence peril, lawmakers need look no further than the mortgage default and foreclosure crisis itself. Federal bankruptcy law was altered in 2005 to reduce filings, by making the process more expensive and less effective. The poorly drafted changes were controversial, with significant creditor opposition. Today, bankruptcy filings are fewer and less effective. Foreclosure prevails over orderly sale or preservation in bankruptcy, and the markets reflect this downward pressure. As legal change limited bankruptcy relief, so the economy lost much of the utility of bankruptcy as a restraint in a declining market (similar to market volatility controls in the stock markets). Today, the buyers, sellers, and real estate markets with which Mr. Lindsey are concerned, are bound together in an experiment with the consequences of real estate price decline without the braking device of former bankruptcy law. As examples of mortgage madness the unintended consequences of these bankruptcy law changes are hard to beat.
Yours very truly,
Frederic D. Grant, Jr.
The writer is a Boston lawyer and an economic historian (candidate for a doctoral degree in History [international economic], Leiden University, Netherlands).
