First, Do No Harm -- Revisited

Last month, I posted on some of the problems with the foreclosure moratorium legislation pending in the Michigan House. The House has now passed this bill, so I thought it would be timely to re-post my comments on this poorly conceived law. We should note that the bill passed the House 73-34, reportedly on a mostly party line vote.
***************************
Liberals just don't get it.

When government does something, it has an impact. Tax something? You get less of it. Subsidize X? You get more of it. Similarly, when government imposes additional costs on an economic activity, the activity dries up or becomes more expensive.

Such is the case with the state legislature here in the Enchanted Mitten. As reported in today's Macomb Daily, House Democrats are drafting a bill that would impose a 90-day moratorium on foreclosures:

"The state legislation would provide a 90-day redemption period for those facing imminent foreclosure. If the homeowner submits to financial counseling offered by state or federal housing experts, they would then enter into negotiations with their lender. The mortgage company would be required to attempt to seek some middle ground — a loan modification that could prevent the impending mortgage default."

Ah, the genius of our elected officials. Take a contract between two willing parties in which one of them is not performing and force the other -- the one who put up the money in the first place! -- not to utilize its contractual remedies for at least 90 days, while the balance due continues to grow. As I said, genius.

Let's say that foreclosure proceedings don't begin until someone has missed two mortgage payments (it's usually longer than that, but, true to our ideology, we are being conservative). After two months, the lender notifies the borrower that it intends to foreclose, at which point the borrower invokes the new 90-day moratorium. Negotiations fail to produce a solution, so the lender commences foreclosure. Under Michigan law, this takes about 6 weeks, so we are now six and a half months since the last payment. After the foreclosure sale, Michigan law already provides for a redemption period, most often six months long. The lender thus waits six months after the foreclosure sale to see if there will be a redemption, which brings us to 12 and 1/2 months now since the last payment. If the lender then wants to recover possession of the property, it must begin summary proceedings in court, which could add a month or more to the waiting period, putting the lender at 13 and 1/2 months since the last payment.

Where is the borrower during this process? Living in the house, of course, without making any payments at all.

Under current law, the borrower would be in the house for about 10 and 1/2 months without a payment, during which time the borrower can always negotiate with the lender. Why add three more months to the process? This question is even more appropriate when you consider the lender is only required to negotiate during those 90 days, not to come to an agreement. The only effect of this law will be to impose additional costs on lenders, which will in turn cause lenders to raise mortgage interest rates or decline marginal borrowers even more frequently.

On a more sinister note, since this is a government-sponsored negotiation program, the government will no doubt keep track of lender negotiation records, visiting all kinds of mischief on those who are deemed intransigent or unwilling to capitulate to borrowers. Might this affect their licensing or other government largesse in the future? Who knows? And what if a borrower claims the lender isn't negotiating in good faith? Does this provide a basis on which to enjoin the foreclosure altogether? We'll see. Never underestimate the creativity of a plaintiff's lawyer and a desperate debtor.

Our hope at this point is that more sensible heads prevail in the Michigan Senate.