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What about the Sanctity of Mortgage Contracts?

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Among the solutions for dealing with the mortgage crisis is a government-imposed moratorium on foreclosures. Lost in all the discussion is the principle of sanctity of contracts.

When two sides voluntarily enter into a contract for a loan, then they should be expected to comply with its terms. That’s what a contract is all about. In loan contracts, the lender lends money to the borrower to assist him in buying his house. To secure payment of the loan, the lender takes collateral, which in most cases is the house that is being purchased. The loan agreement expressly gives the lender the right to a non-judicial foreclosure proceeding in which he can force a public sale of the house to get back the money he has loaned the borrower. Both sides agree in the contract that if the sale brings in less money than is owed, the borrower will be responsible for the deficiency.

Given that the borrower has voluntarily agreed to the terms of the contract, why should the government have the authority to interfere with enforcement of the contract? Why shouldn’t the lender have the right to enforce the contract pursuant to its terms?

Advocates of government intervention argue that it’s unfair, unjust, or inequitable for a person to be evicted from his home. But the fact is that he agreed to the terms of the contract when he signed it. What’s unfair, unjust, or inequitable about enforcing the terms of a contract that a person has voluntarily signed?

In fact, what’s noteworthy about those who call for intervention is that they always advocate government force to help the borrower. There is another alternative. The interventionists could use their own money or money raised from others to pay off the mortgage of people who have defaulted on their loans.

Of course, that would entail taking personal responsibility for one’s beliefs by using one’s own money to solve the problem. It’s far easier simply to run to the government and use force to interfere with the terms of a contract voluntarily entered into by the lender and borrower.

The Framers of the Constitution were not unaware of the propensity of people to use government force to interfere with the sanctity of contracts. That’s why they imposed an express restriction on the power of the states to interfere with contracts: “No State shall … pass any … Law impairing the Obligation of Contracts….” It’s also why they failed to delegate any power to impair contracts to the federal government.

Our ancestors understood the justice of enforcing contracts. They also understood the concept of responsibility. When people know that their contracts are going to be enforced, they tend to read them and make themselves aware of the risks involved in signing them. When people think that government will relieve them of the obligations set forth in contracts, they tend toward behaving foolishly and irresponsibly.

During the Great Depression, the state of Minnesota enacted a Mortgage Moratorium Law. The law was upheld by the Supreme Court in the case of Home Building & Loan Assn. v. Blaisdell, but the four dissenters had the better of the argument. The dissenters were the “Four Horsemen,” the four Supreme Court justices who were declaring much of Roosevelt’s New Deal in violation of the Constitution. Writing for the dissent and having pointed out that an emergency does not give rise to governmental powers that don’t exist, Justice Sutherland put it succinctly:

“I quite agree with the opinion of the court that whether the legislation under review is wise or unwise is a matter with which we have nothing to do. Whether it is likely to work well or work ill presents a question entirely irrelevant to the issue. The only legitimate inquiry we can make is whether it is constitutional. If it is not, its virtues, if it have any, cannot save it; if it is, its faults cannot be invoked to accomplish its destruction. If the provisions of the Constitution be not upheld when they pinch, as well as when they comfort, they may as well be abandoned. Being unable to reach any other conclusion than that the Minnesota statute infringes the constitutional restriction under review, I have no choice but to say so.”

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.