Photo: Robert Johnson — Business Insider
Yesterday, Dick Bove went ballistic on CNBC in response to the mortgage settlement (click here to see the video).His argument boils down to the idea that the settlement punishes homeowners who made payments on their mortgages and rewards those who were delinquent.
This isn’t a new argument.
It’s largely the same argument that Rick Santelli made in his now famous rant, which included asking if we “really want to subsidise the losers’ mortgages?” and demanding that we “reward people that can carry the water instead of [the people who] drink the water.”
It’s an argument based on the idea of moral hazard: if you reward people for bad behaviour, you encourage that same bad behaviour. But it bizarrely heaps the blame on homeowners.
Out of the ample amount of bad behaviour that led to the mortgage crisis, they’ve reimagined that the apocryphal welfare queen of the ’80s has resurfaced among American homeowners and remains ever eager for a handout.
The problem for Bove and Santelli is that this argument never held water before and certainly doesn’t for the mortgage settlement.
There are five key problems with the argument:
1. It assumes that homeowners who are now behind on their mortgages perniciously schemed their way into a loan they didn’t deserve and never planned to pay because they knew the Federal government would bail them out. That’s pretty outlandish, especially considering how long the settlement has taken to materialise and the modest amount of aid homeowners will receive, if they even qualify.
2. It completely ignores the possibility of malfeasance by the banks who lent to now-delinquent borrowers. The mortgage crisis exists in part because banks acted at times in unseemly and deceptive ways towards borrowers.
3. It further discounts subsequent improper behaviour by the banks when these borrowers became delinquent. And this goes to the heart of why the mortgage settlement exists in the first place: improper foreclosure practices (e.g. robosigning) is the one item in the settlement where banks were granted immunity.
4. It incorrectly assumes that the settlement will suppress home values. The idea here is that if principal reductions are agreed to, similar assets will be valued at these reduced price levels, regardless of whether the homeowner receives aid or not. Good homeowners will be cheated out of any equity they have in their homes and bad homeowners get cash and a smaller mortgage. But the government isn’t causing principal reductions beyond what the market would have eventually required. Principal reductions will bring home values closer to their marketable value and will do more to bring banks’ balance sheets in line with reality than they will destroy home equity.
5. It incorrectly imagines that we live outside of a society that protects people from harm. Often, that harm is caused by things outside their control. Sometimes, it’s caused by things theoretically within their control but systemically difficult to manage. And in some cases, we help people who have caused themselves harm that they could have directly prevented.
The fact is, the U.S. Government helps people every day in dozens of ways. Many of these are taken for granted, a few are debated.
To single out delinquent homeowners for blame ignores this fact. But if you don’t want to pay attention to the systemic causes of the mortgage crisis, it conveniently allows you to shift the moral blame onto a bogeyman who lurks among otherwise virtuous American homeowners.