The Morality of Mortgage Relief

By Ray

With the President expected to talk extensively on economic issues in his speech tonight, I thought the following article of great interest, from both a political and religious point of view.

Tom McFeely
National Catholic Register Daily Blog:

Last week, President Barack Obama announced his $75-billion plan to help mortgage holders at risk of default because of the economic downturn and the global financial crisis.

Will the plan succeed? And is the mortgage relief plan, and the other elements of the federal economic recovery plan, based on sound moral and economic principles?

To get an informed opinion about these matters, the Daily Blog spoke via email with Dr. Samuel Gregg. Dr. Gregg, director of research of the Michigan-based Acton Institute for the Study of Religion and Liberty, is the author of several books integrating economics and morality, including Morality, Law, and Public Policy and Economic Thinking for the Theologically Minded.

What is your overall assessment of President Obama’s mortgage relief plan? Is it likely to work?

Without question, thousands are suffering as mortgage defaults rise across America. Their plight should not be trivialized. That said, I am deeply skeptical of the mortgage relief plan. I believe that it will be counterproductive and only harm those that it is intended to help.

First, we know that something like 55% of people who have defaulted on their mortgage and received a temporary reprieve typically re-default within six months. In short, this plan is likely to encourage people to stay in painful situations instead of moving on with their lives, rebuilding their credit, and investing their talent, time and energy in more productive activities.

Secondly, the plan will encourage some to stay attached to mortgages that are worth far more than the real value of the actual properties. Frankly, foreclosure or individuals renegotiating their mortgages with their banks would be better, and allow for a faster recovery of the housing market, which is truly in the interests of the common good.

In announcing the plan this week, President Obama said, “I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

Do you think that this is correct — that President Obama has structured his plan in such a way as to minimize the “moral hazard” of bailing out people who acted irresponsibly in obtaining loans they couldn’t afford, and of lenders who acted irresponsibly in making loans to people who were obviously a bad credit risk?

In a word: no. To “shore up” something usually means that you are engaged in a temporary delaying action. The Administration and Congress can try to make as many distinctions as they like, but they can’t change the facts that millions of people will take this as a signal that the government will protect them from the consequences of irresponsible behavior, such as borrowing too much money or seeking quick profits by “flipping houses.” Even worse, those many more millions who have worked hard, who have not played the house-flipping game, who have made sacrifices every day in order to honor those contracts which they made with banks and mortgage lenders, will wonder why they have bothered to do the right thing.

Based on what we have observed thus far — whether it is with the “bail-out” or the mortgage relief plan — it is difficult to believe that either the Administration or a good number of Senators and members of Congress particularly care about moral hazard. This will cost America dearly in the future.

Many Americans complain that there is a double standard in operation in Washington’s efforts to address the financial crisis that seems to reward the rich and ignore those who are less well off. That’s because huge amounts of taxpayer dollars have been spent to shore up banks and brokerages whose lending practices and speculative trading practices were responsible for creating the crisis, whereas it looks like many individual mortgage holders will receive little help and will default on their mortgages and lose their homes as a consequence. What is an authentically Christian and economically sound approach to addressing this problem of an apparent double standard?

Economic questions fall squarely, for the most part, into the realm of prudential judgment for faithful Catholics. In this area, they can disagree among themselves about specific policy-details. Americans are rightly outraged by some of the Wall Street practices contributing to the crisis. But we should remember that much of the responsibility for this crisis also lies on “Main Street,” where plenty of people neglected to save, over-invested in property, and borrowed excessively in order to live beyond their means.

In economic terms, it appears that none of the various government injections of taxpayer dollars (which presently total almost 7 trillion dollars) into our ailing economy have had any effect. I am skeptical that any further spending is likely to have any positive impact, regardless of whether it is in the banking sector or on individual mortgages. Keynesian policies of “spending one’s way out of recessions” have never worked, and never will. Populists will never accept the hard economic truth that we need to allow the normal processes of market exchange to clear out the bad debts on Wall Street and Main Street, thereby restoring the conditions that allow entrepreneurs to begin creating wealth again.

Of course, we as Catholics have non-negotiable obligations to those suffering in the midst of the crisis, and we should not allow the state to usurp our concrete responsibilities to our neighbor.

At the end of the day, do you think that the economic crisis is going to result in a mentality in the United States that is more or less moral — and one that is more or less economically sound — than the mentality that existed when we landed in this mess?

Much depends upon the guidance we receive from our political leadership.

If the Administration and Congress persist in pursuing New Deal-like policies — and let’s keep in mind that it is now generally accepted that the New Deal was a failure — then I fear we could be headed for a Japan-like decade of stagnation, especially if our banking sector is shielded from root-and-branch reform. In moral-cultural terms, the same policies are likely to facilitate inertia, rising resentment, a diminishment in personal responsibility, and growing attachment to the lie that politics and government are the solutions to all our problems.

By contrast, if we are humble enough to accept that the financial crisis is the result of interventionist policies, politically-driven lending, and old-fashioned greed on Wall Street and Main Street, then perhaps we might understand that free markets will only produce stability and prosperity over the long-term if they are grounded in a moral culture of virtue rather than relativism and skepticism.

In short, if we understand that markets need both limited government and a robust moral culture, America has a bright future.