Mortgages are not Social Contracts

Mortgages are annuities, financial instruments, not social contracts. Familial relationships, households, are social contracts. Our closest bonds form the fabric of our social structure. Changes in one household ripple through other households. Unjust acts in one household damage other households. Generally, we pressure each other to behave honorably. Sometimes we ask one person to maintain their household structure even though they are being treated unjustly within it. Here I am referring to abusive relationships and the social censure the abused faces when trying to dissolve the relationship.

Mortgages are not social contracts. When one household borrows money to purchase a home, they are not promising to help their neighbors maintain the value of their own investments. If a store offered to charge a minimum price for an item so that they and other stores could make a profit, we’d call it price fixing. We’d say it was illegal — unless they were selling gas, but that’s another question for another time.

Mortgages are financial instruments, annuities, like savings accounts. A person might offer to let a bank hold, and use, their money in return for a small periodic fee. Typically the bank reserves the right to change that fee at anytime. If the fee, the interest rate, is too small, the person might move that money to another bank. Too bad for that person the Federal Reserve sets interest rates, but that’s another question for another time.

A bank might offer to let a person use their money in return for a small periodic fee. They don’t want the person to change the fee at will, so they ask the person to agree to pay a specified interest rate, or rates, for as long as they are using that money. Banks also know that they can’t just move their money from one person to another if the first person isn’t paying enough. The money typically isn’t there. So they secure their investment with physical property of equal or greater value. Essentially banks are buying a financial interest in a physical property.

Generally, if a store tried to substitute one item for another, say glass for diamond, we’d call it fraud. If a broker tried to sell financial interest in a company that didn’t exist, we’d call it fraud. If real estate is said to have a greater value than it does, we call it ____?

Banks have purchased financial interest in physical property of lesser value than their investment. Sounds like a bad business decision. One way to remedy this is to drop the bad investment and move to more profitable investments. That’s business. Another is to convince people the physical property is worth more than the investment. That’s fraud.

One way to convince people that the physical property is worth more than the investment is to attach emotional equity – a social contract – to it. Still fraud.

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