“HOME, HOME ON THE (GOVERNMENT)…”

2/13/09

Today’s (i.e., Friday, 2/13’s) Wall Street Journal’s opinion page featured a piece by Professor Todd Zywicki of George Mason University law school arguing against proposed legislation enabling mortgage contracts on first homes to be modified in bankruptcy. This is an outstanding article that makes many good points; I recommend it highly to my readers. Professor Zywicki makes several major arguments against mortgage modification, including that such modification will result in:

Mortgage costs’ rising

A torrent of bankruptcies as underwater and/or behind on their payments homeowners seek to stay in their homes, taxing the bankruptcy court system to the breaking point

Other forms of credit, including credit cards, unpaid medical bills, etc. being caught up in the new wave of bankruptcy filings, and

Bankruptcy abuse as people living over their heads see a chance to escape paying for their big screen TVs and expensive vacations.



Some of these arguments are very strong; loyal readers know that I especially like the last one However, as I reflected on Professor Zywicki’s first argument (i.e., that allowing modification will result in the mortgage costs’ rising), I wonder if that is such a bad thing.

If one’s objective is to prop up a still grossly inflated housing market, then making mortgage loans more expensive and harder to maintain is a bad idea. But the reason that our housing market is so distorted, and such a disproportionate amount of our GDP goes toward owner occupied housing, is the special treatment housing gets from the tax code, the regulatory structure, and, consequently, by the financial system generally. Such privileged treatment arose from the long held American notion that home ownership is so inherently desirable that we must encourage it by all means possible. We have come to believe, with very little evidence, that putting people in their own homes gives them a piece of the rock, if you will, a stake in the system and thus less likely to somehow challenge the system. Somehow, owning a home makes people more patriotic, the thinking goes. So our tax code, bankruptcy system, regulatory environment, and, hence, our financial system generally favor home ownership to an extraordinarily generous degree.

This policy has worked well, or at least hasn’t blown up in our face, until recently. But perhaps now, when we need a return to personal financial sanity if our once great nation is to survive, is a good time to reexamine the notion that home ownership is an overriding good that must be encouraged at the expense of other economic and social goals. Maybe making home ownership a bit more difficult would be a salubrious course to pursue.

This is not necessarily, if at all, an argument in favor of legislation allowing modification of mortgage contracts on first homes, and certainly not in favor of allowing modifications of existing contracts. This is simply a call for the reexamination of the sacrosanct treatment home ownership is afforded in this country, a treatment that has been brought to ridiculous and ruinous ends of late.