Bad things are happening in Philadelphia — but first, a refresher on home mortgages.
To begin with, Mr. and Mrs. Brown do not have a home, nor do they have any money to buy one.
They go to a bank or mortgage company, which I will call Lender, and ask for a loan. I repeat, they have no home and no money. Lender has money. The Browns have jobs and expect to be able to pay back their loan. However, Lender requires that there be a mortgage on the house they will buy. The contract is: If the Browns do not pay off the loan as promised, Lender can foreclose on the mortgage and have the house sold, with the proceeds of the sale used to pay the Lender back the money that the Browns borrowed.
I’ll get to Philadelphia in a moment, but first a few words about how foreclosures work. If the Browns do not make their mortgage payments, Lender will hire a lawyer to bring a lawsuit to foreclose the mortgage. A court will order that the mortgage be foreclosed and that the house be sold at a sheriff’s sale, with the proceeds to be paid to Lender. In some states the mortgage process is called a deed of trust, but the end is the same — it will be up to the local sheriff to enforce the right of Lender to take back the house and sell it. The Browns will have to move out.
One more point before talking about Philadelphia: No lender ever wants to foreclose on a house loan. Nearly every foreclosure results in the lender taking a loss. Lenders will go to great lengths to avoid a foreclosure if they can. Thus, when the matter becomes a foreclosure case, Lender will have tried very hard to find some way for Mr. and Mrs. Brown to keep the house and eventually pay off the loan.
Now we come to Philadelphia, where a man named John Green has been sheriff for some time. The housing market is soft, credit is scarce and, like much of the country, Philadelphia has seen a sharp rise in mortgage foreclosures. Sheriff Green has been ordered by the courts to conduct foreclosure sales, which are a part of his job, and which the law states that it is his duty to do. But last March, Sheriff Green heard that the Philadelphia City Council had passed a “non-binding resolution,” stating that there should be an indefinite moratorium on foreclosure sales. Sheriff Green immediately announced that he would do just that. He simply refused to conduct any foreclosure sales until July, maybe later. Maybe never. Since then, there have been “negotiations” among the lenders, local housing activists, local politicians, Sheriff Green and the courts to try to resolve this issue.
I frankly don’t know how this will shake out over the next few weeks in Philadelphia. I do know one thing; it is going to be really hard in the future for Mr. and Mrs. Brown, or anyone else, to get a mortgage loan in that city. Suppose that you are a lender. You have money to lend, and you can lend it to borrowers in Colorado, Indiana, Texas or some other place where local officials obey and implement the law. You will know that if the borrowers don’t pay their loan, you can, as a last resort, foreclose the mortgage, have the house sold and get back at least a part of your money. Knowing that Sheriff Green and local politicians will not allow you to enforce the agreement, are you likely to make a mortgage loan to a couple who lives in Philadelphia? Fat chance!
There are presently about 2 percent of all mortgage loans in America that are in foreclosure. Much too high a number. However, that means that 98 percent of homeowners are making their mortgage payments. Those who live in Philadelphia are probably asking themselves why? Why make payments if the lender cannot collect? Why should some people have to pay their bills while others get a pass?
And once Sheriff Green basks in the accolades of activist groups and local politicians, perhaps he will no longer evict tenants who do not pay their rent, will not cooperate in the repossession of automobiles from those who don’t make their payments, and will generally play the part of Robin Hood until there is no commerce left in Philadelphia at all. Foreclosures are unpopular and unpleasant, but they are essential to a home-lending industry, in Philadelphia or anywhere else. If housing prices are falling there now, wait and see what happens to them when no one will make mortgage loans.
And what about the equity in all this — the right and wrong of it. Yes, there have been some cases when lenders followed improper practices that caused some people to have houses they could not afford. There is no denying that foreclosure causes extreme distress and unhappiness, and any steps that can be taken within the law to allow people to stay in their houses are laudable. But the legal enforcement of contracts is a vital part of our economy. Sheriff Green and his supporters are throwing sand in the machinery that allows our system to work. In the long run, it will do much more harm than good. Foreclosures are like taxes — no one wants them, but we have to have them.
Did I mention that, at the beginning, Mr. and Mrs. Brown had no house and no money, and that it was the lender who furnished the money to buy the house?
Howard Chapman is an Adjunct Fellow of Discovery Institute