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Thursday, March 25, 2010

Obama Threatens Sanctity of Contracts


The Obama Administration is proposing that banks grant forbearance to unemployed homeowners and undertake mortgage principal reductions as ways to combat the housing / foreclosure crisis.   See this story from Friday's Washington Post.
These proposals threaten to undermine the very sanctity of contracts which is the basic building block of our capitalist economy, which depends above all else upon the rule of law.   Note the comment from one activist about required principal forgiveness, which is the equivalent of giving away money -- which ultimately comes from your pocket and mine -- to delinquent homeowners.   The reduction of mortgage principal equals the creation of equity.  The math is undeniable.
Remember that banks have relied on mortgages -- contracts -- as borrowers' promises to pay.   If the federal government can unilaterally modify the terms of contracts in this instance, what other commercial relationship remains safe?   What guarantee does a bank now have that the government won't come in and pressure, or compel, a change in terms in the future.   Banks now have to deal with an element of political uncertainty with American contracts which they previously have experienced only in Third World countries.   The equivalent of the risk of nationalization introduces uncertainty to every commercial relationship, and should surely make banks much more reluctant to lend to anyone in the future.   How this is not a grave danger to the economy is a mystery.

 Eric Dixon is a New York lawyer who has been practicing law since graduating from Yale Law School in 1994. Mr. Dixon cautions that this article is not legal advice. Mr. Dixon has handled election law and other matters for over two dozen political clients, and also handles corporate investigations, due diligence and sensitive matters including crisis management.  Mr. Dixon is available for consultation or comment at edixon@NYBusinessCounsel.com and 917-696-2442.

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