When the government interferes with the sanctity of contracts, it scares future lenders and causes them to raise all interest rates, even to good borrowers. The responsible borrowers–those who have saved up before buying, will be penalized.
Cramdowns, bankruptcy judges forcing lower mortgage balances or interest rates, foreclosure holidays or delays, refusal by local authorities to enforce foreclosures–all these and other feel-good government actions are the mark of a banana republic that does not respect the rule of law.
For decades the US has had the world’s best and most efficient and respected mortgage market, attracting the world’s money. Now it is endangered by populist measures that will haunt us far into the future. Investors, foreign and domestic, will flee our shores, or stay and charge the appropriate risk premium.
Beware of the results when you move from the rule of law to the rule of men in this way.
