We have more details now about the mortgage bailout proposals and how it will supposedly work. I say supposedly because there will be many unintended consequences and more outrage as neighbor sees neighbor getting or being denied the Federal help. Today we will not focus on the equity of the program. That has been argued and will be argued as long as the program exist. To say the least it runs against the grain of basic American concepts of the rugged individual and taking personal responsibility for our actions. We won’t talk today about the people who are getting mortgage help with a new car sitting in the drive way and a state of the art plasma tv in the den when you and I might still be using that ten year old tv. Today we are discussing the legality and legal equity of the program. It has major implications for our beliefs in the rule of law. The rule of law is what makes us all equals.
Throughout our history we have had a great regard for the contract rights of the people and businesses. Our courts have historically been there to protect those rights. Contract rights are mentioned in the Constitution in several areas and in several ways. Remember that the States are required to respect the contract rights of other States. If you have a valid contract in Geo. and the other party defaults on the contract it can be enforced in Texas for example. The Constitution also mentions the right of property i.e., the Fifth Amendment. If you have a property then the Government can not take it away from you without just compensation. The whole notion of property is at the heart of contract law and contract rights. That is why you have contracts–to deal with property whether it is personal property or real estate. The contract rights themselves are property in the eyes of the law. That is well established in our common law and the Uniform Commercial Code in effect in virtually all States. In the typical situation you have the right to sell a contract right to another person.
In the current proposals many contract rights are being abrogated by the Government. They are not apparently so bold as to simply remove the rights of lien holders who hold first mortgages on homes. At least not yet. That can be done in bankruptcy and that would be Constitutional because bankruptcy laws are specifically given to Congress to draft and enforce. It is an enumerated power of Congress. However the reports are that the proposals will simply wipe out the rights of the second lien holders on houses. The proposal now offers incentives to the first lien holders to rework the loans and thus the mortgage. That would pass legal muster if indeed that is its only provision because the restructuring of the loan is “voluntary” by the lien holder. Voluntary is in quotes because you can imagine how voluntary it is when the bank is “encourgaged” by the very regulators who have the power to shut it down that they do this. Maybe there is a gun to their head but they signed the dotted line on their own. That will probably fly. However to simply rewrite the terms of the second mortgage or reduce it in amount will not fly. Those are often held by a completely different entity than the first lien holder. In most cases a default of the first mortgage is also legally a default of the second mortgage and reworking the first mortgage by giving more time for payment may well affect the value of the second mortgage. Further complicating the situation are the holders of securities, not the mortgage holders themselves, who invested in the notes and mortgages. Their interest will be dramatically affected by the reworking of the liens. It diminishes the value of their asset. The Government is taking that asset (property) without just compensation. You are probably like me and have no sympathy for those investors here and around the world who bought these securities. But to me the crux of the issue is how they are treated under our Constitution. That does indeed impact us all. I don’t like the Government treading on our Constitutional rights in an “emergency” or otherwise. Those rights are supposed to be inviolate. It is very dangerous for all of us when one group out of favor can be treated so cavalierly. If you look hard enough in the news you will see a couple of stories on the back pages of the paper where this issue is being considered by the Treasury department. They know damn well that they are going too far. They are concerned about lawsuits. They should be. If they persist in pursuing the current proposals I predict that suits will be filed and that after the cases wind their way through the courts that the rulings will be in the favor of the second lienholders and the security holders on Constitutional grounds. The law is clearly on their side. We don’t allow, so far anyway, the confiscation of property by the Government in this country. We aren’t Venezuela yet.
When that happens then there will be an even bigger mess on our hands as the Government will have to figure out how to undo all those unconstitutional reworks and takings of property and how those injured by the Government action will be compensated. I have a feeling that many of them will get 100 cents on the dollars plus interest and attorneys’ fees. They should and we should all hope that they do. If they don’t what will be next? The Government decides your car is a polluter and simply seizes it to remove the danger from the streets? When one person’s constitutional rights are trampled on, all our rights are trampled and endangered.
“Time was when every Englishman had a musket in his cottage, and along wit it hung a flitch of bacon; now there is no flitch of bacon for there is no musket; let the musket be restored and the flitch of bacon will soon follow”. George Harney, English Journalist