One of the most remarkable (and frightening) things about the foreclosure crisis is the number of lawyers and judges who care so little about the rule of law and the problem of moral hazard that they think that the appropriate remedy for some alleged immaterial technical violation of the law or deal gone bad in hindsight is to let someone live rent-free in a house they don't own. Daniel Fisher reports on Jean Robert and Edith Saint-Jean, who were $30,000 behind on their bills and made a conscious decision to borrow $66,500 in cash off of the equity of their home at an 11.75% rate, and then stopped paying their mortgage. Emigrant Bank, extraordinarily, offered to cut the interest rate to 6% and forgive the resulting penalty payments. No dice: the Saint-Jeans are instead suing Emigrant, alleging that it committed racial discrimination by offering and granting them a loan they wanted and needed. The plaintiffs are asking for a free house and damages, but are apparently willing to settle for a fraction of that.
Tactics like this in New York state has increased the cost of a foreclosure from $1,500 to $30,000—and Justice Lippman is proposing having taxpayers pay for lawyers to increase those costs further. This is a wealth transfer from honest people to lawyers and homeowners who engage in dishonest gamesmanship. The threat of such strategic behavior means that banks like "Emigrant can't even consider lending money on a $150,000 home any more, since the foreclosure costs if the borrower defaults would dwarf any potential profits on the loan." Does that really make homeowners better off?