The Bully Pulpit Versus the Housing Industry
President Obama has announced he was prepared to break the law. After blaming the senior debt bondholders of Chrysler for pushing the company into Chapter 11, he sanctioned a plan to abrogate their covenants and force them to take pennies on their loaned dollar. No matter that their bonds were secured by the company’s assets. The rights of “speculators” are easily swept aside in populist frenzies. Notice how the President didn’t blink a teleprompter-eye when he stood with the union workers, the families and the communities - while transferring to them 55% control of the company assets.
American lenders filled with American workers who loaned American savings to Chrysler for decades were expected to simply take massive losses. Apparently it’s no longer American to repay one’s debts. The Bully Pulpit declared “needs” more important than “rights.” And since mere mortals barely understand all this financial jargon, especially REALTORS, the rule of law was quietly killed. Contracts, it seems, aren’t worth the paper they’re written on in America.
REALTORS had better beware.
This isn’t the first President to simply throw contracts out the window. Franklin D. Roosevelt passed an executive order voiding contracts repayable in gold during the Great Depression. He further eroded the contract-relationship between Greenbacks and gold (essentially, treasury contracts) by setting the daily price of gold by fiat, from his bathtub each morning. Back then, millions of contracts held by bankers, speculators, lenders, retailers and other American citizens were instantly eviscerated. Today, the New New Deal improves this rewriting policy to not only abrogate contracts but quickly steal any available assets and transfer them to preferred political gangs. The United Auto Workers will receive five times the assets un-paid-for. Bondholders receive an ample serving of populist scorn.
What will be the effects of such government capriciousness? How will an open policy of disdain for contracts chill the economy further - especially the housing industry?
Contract law is at the heart of all American property rights. The right to hold clear contractual title to something - real property or loaned monies - underpins the greatest economic engine in world history. Centuries of legal tradition support the common understanding that a contract commits the parties to the terms of exchange. Sign a purchase contract and you agree to pay for goods and services received. Sign a loan, and you agree to pay the lender for your borrowed sum. Even a credit card purchase is a contractual promise to pay the company who fronted you the cash at the register.
Contract law is the heart of our very civilization. The Constitution itself is a contract between States and the Federal Government. We are a country of contracts.
REALTORS do everything by contract. Agents sell homes by contract. Sellers pay them by contract. Buyers purchase homes using a contract. Brokers pay each other by contract. Salespeople are affiliated to companies by independent contractor agreements. Developers use sub-contractors to build homes. Mortgage brokers contract with lenders to provide the credit that makes it all work. Contracts codify the trust - like written handshakes - that all parties rely upon. Contracts create “legal confidence” for some to take risks and others to assume them.
Contracts make selling homes possible.
What will happen to the housing industry when trust in contracts erodes? Last year more than 5 million homes sold using multiple contracts to list, offer, accept and finance the transactions. That’s nearly 20 million executed contracts. Hundreds of millions of other contracts, for inspections, appraisals, insurance and so on, supported the industry. Each contract clearly spelled out mutual obligations of all parties. Contracts enumerate your claim of ownership in a home. Backed up by the power of the law, the confidence of government enforcement.
Contracts had consequences. Until this year.
If contracts become worthless, subject to political rewriting (rather then enforcement), systemic risk will rise. This is the opposite of the pathway out of the recession. If lenders doubt contracts stability, (think, cram-down legislation) they will increase the cost of lending to offset the risk. Consumers will pay more for loans or become unqualified to receive them. Real estate sales will decline further. If agents worry that listing contracts outlining their commissions become worthless, another kind of credit will freeze. The real estate industry performs most of its services on “contingency” outlined in contracts. If repayment becomes unlikely, consumers will have to pay up-front.
Nobody will take an un-secured risk that their client, agent, broker or lender will be “good for the money.” Without clear contract law, anyone can simply cry hardship and a political operative will get them off the hook. When the President makes it clear that his role in enforcing the law “depends” upon which Americans he prefers to stand with, confidence ceases to exist.
People don’t buy and lenders don’t lend in uncertain times.
When American bondholders fear their contracts worthless, foreign investment will flee even more quickly. States like New York, Florida and Nevada are major destinations of foreign real estate investment. Since those housing markets currently don’t even provide positive returns, increased contractual repayment risk means global capital might look for other banana republics for investments.
Do REALTORS see this as a problem?
Apparently not. In fact, it looks like they have joined the suicide pact with the government. The National Association of REALTORS and the National Association of HomeBuilders have both decided it’s better to have friends in Washington than contracts enforced. Both have thrown their support behind the “Helping Families Save Their Homes” Act (HR 1106) which passed the House (but failed the Senate today). Apparently the industry cannot see beyond its next commission, to the day when even those checks will be worthless - no longer enforceable contracts of obligation on anyone’s bank account.
When that happens, maybe a million REALTORS will be able to get a union job at Chrysler?