The number one business story of the week is surely the foreclosure story. A number of U.S. banks, including most notably Bank of America, have suspended mortgage foreclosures for the time being due to worries over flawed paperwork.
Here’s just one of many news items on the topic, by David Streitfeld and Nelson D. Schwartz writing for the NYT: Largest U.S. Bank Halts Foreclosures in All States
…Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well.
An immediate effect of the action will be a temporary stay of execution for hundreds of thousands of borrowers in default. The bank said it would be brief, a mere pause while it made sure its methods were in order….
As the NYT story points out, there is considerable pressure on lenders to put the brakes on. Members of Congress and various attorneys general are suggesting that it would be wise to do so.
A few quick points about ethics:
1) In case it’s not obvious, the freeze on foreclosures is an ethical issue, in addition to being a legal one. It involves shifting benefits, burdens, and risks among groups, including homeowners, banks’ shareholders, and taxpayers. (In this regard, it’s worth remembering that the banks are middlemen, essentially mediating a transaction between their shareholders, who have money to lend, and homeowners, who need to borrow. If there has indeed been any fraud or even lack of diligence on the part of the banks, it is an offence not just against homeowners, but against shareholders.)
2) Mortgages are not just like any other product. For starters, a home is by far the biggest purchase most of us will make in our lifetimes. Scale alone makes this an important issue. Further, home ownership is for most people laden with emotion. When foreclosures happen, people aren’t just losing a product; in most cases they lose a home. This is both morally significant, and accounts for at least some of the political attention being paid to the issue.
3) It’s not at all clear that a freeze on foreclosures is good for home-owners (or rather would-be home owners) over all. The ability to foreclose in the event of default is part of what makes it worthwhile for lenders to take a risk in lending money to buy a home in the first place. Also, foreclosures put houses on the market, helping to keep prices down. Fewer foreclosures may mean a rise in prices. (See CNN-Money: Foreclosure freeze shakes battered home market). Since ethics is, in part, about evaluating outcomes, recognizing the effects of the freeze on the full range of stakeholders is ethically important.