Even folks who hate Thomas Sowell’s economic and political positions have to concede that he’s right a lot of the time. He is a proponent of looking past Stage One thinking, which he defines in his book Applied Economics as – in effect – the absence of an analytical approach to problem solving:
“Doing something almost always seems like such a good idea; to those who do not look beyond stage one, that they see no need to look back at history or to apply economics. The alternative to a “do something” approach is not to have the government always do absolutely nothing but, rather, to recognize that governments can only do something specific– and that these specifics must be assessed in terms of their specific effects, both immediate and long-term, as well as the general effects of extended experimentation.
[Among stage one thinkers], laws and policies that will produce politically beneficial effects before the next election are usually preferred to policies that will produce even better results some time after the next election. Indeed, policies that will produce good results before the next election may be preferred even if they can be expected to produce bad results afterward.”
Now, kindly consider Senate Bill 1451 — it’s hard to imagine a better illustration of Sowell’s thesis, or, in the words of Robert Robb of the Arizona Republic, a worse bill. State Senate supporters of S.B. 1451 propose to establish a state agency (Arizona Housing Finance Reform Authority) to refinance mortgages of virtually every Arizona homeowner who owes more than the home is currently worth. Their existing mortgage would be replaced with a new mortgage from AHFRA in the amount of what the home is currently worth – plus a small premium (“Time-Out Mortgage Loan”). It will be an interest only loan for a term of ten years. The existing lender would get paid what the home is currently worth (however that’s to be calculated), and receive a note for the balance of what is owed under the homeowner’s original note. But that “hope note” (known by the euphemism “loss recapture certificate” would bear no interest. And the chances of the original mortgagee’s getting paid back fully by the homeowner are what? The State is so confident that the repayment in full will be forthcoming that (i) the original loan servicers are permitted to opt for an immediate cash payment from the State of no more than $6,000; and (ii) the Bill makes clear that these certificates will not be insured nor in any way be construed as obligations of the State of Arizona.
Where’s the capital coming from to fund this program? Well, the refinancing of the principal will come, we are told from bonds floated to create a bond reserve. Payment of the bonds will come solely from the monies paid by the obligated homeowner-borrowers and the Arizona Home Insurance Fund.
Robb’s assessment: “In short, this is a legislated cram-down on lenders. As such, it blatantly violates the Arizona Constitution, which flatly forbids the Legislature from enacting laws “impairing the obligation of a contract.””
My take: not exactly correct as to the Chapter 11 bankruptcy analysis, Mr. Robb, but not too far off the mark on constitutional grounds. Patrick Harvey noticed a different problem, but one strong on pragmatics: the proposed new AHFRA lien would have a first priority over any other liens. What then happens to the lien of taxing authorities, and the liens of mechanics and materialmen, which always have enjoyed some priority under our law? At a tax lien sale, are folks going to want to help the State raise revenue when they may ultimately take title to a parcel subject to an AHFRA mortgage? Are contractors and materials suppliers going to want to sell services and goods to someone with an AHFRA lien? Well sure they are – so long as they are paid in advance, in cash.
To reprise Professor Sowell, “these specifics must be assessed in terms of their specific effects, both immediate and long-term, as well as the general effects of extended experimentation.” And then S.B. 1451 must undergo major surgical work, indeed. Let’s get some surgeons engaged who have the training to know whether the patient, our fair state, can survive the procedure.