Someone has to pay.

Photographer: Justin Sullivan/Getty Images

There's No Such Thing as a Free House

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Should people be able to get a free house by refusing to pay their mortgage?

That's the question Florida has to answer. The housing crisis is over, and the housing market is healing itself, though slowly in some places. But a backlog of foreclosures still remains ... and it has been going on so long that some homes are now past the statute of limitations for collecting debt. Lawyers for the homeowners are arguing that this means they get to keep the house. Lawyers for the banks are, unsurprisingly, arguing that each month they fail to pay the mortgage payment starts the statutory clock anew.

Both arguments create problems if the courts endorse them. If failing to pay really restarted the clock every month, then there wouldn't be a statute of limitations on debt -- creditors could just keep sending you bills forever and dun you right up to the edge of your grave. There's a very good reason that we have statutes of limitations on most crimes and most debts: The law recognizes that our interests in justice and contract rights must be balanced against other considerations. People need to be able to plan their lives without decades-old problems coming back to bite them, and also, as cases age, they get harder and harder to prove as witnesses die, evidence gets lost and memories fade.

On the other hand, well: Should people be able to get a free house by refusing to pay their mortgage? Most debts aren't secure, and after some time we say "Tough luck, should have collected earlier." 

But home mortgages are huge loans, and more important, they're secured loans; the bank made the loan on the condition it would at least be able to sell the property and recoup some of its losses if the homeowner defaulted. Should a homeowner like the one in the article -- who by her own admission refused a modification offer because the paperwork took too long to arrive -- really get a free house, leaving the bank with nothing? Should someone who defaults actually do better than someone who dutifully scraped together the money to pay the mortgage every month?

This is not a question of simple relief for debtors -- while I opposed "jingle mail" as a matter of principle, I generally favor making things pretty easy on people who find that they can't pay their debts. But there's a world of difference between "make it easy for someone to get a fresh start" and "give them a free house to reward them for defaulting." The legal system should not be a lottery.

Even if you're pleased by the idea of sticking it to the banksters, the risk of saying "Yes, the bank should have gotten its act together" is that this will be priced into future mortgages in the state. If the bank has to accept the risk that it'll end up being out several hundred thousand dollars and the borrower will get to keep the house she pledged as security, then the banks will charge mortgage holders for the added risk. Susan Rodolfi's free house will ultimately be paid for not by the banks, but by people who want to buy homes in her area.

On the other hand, one imagines that the excesses of the housing bubble will probably not be repeated soon, which means that future foreclosures will not be so hampered by the backed-up court dockets and paperwork that disappeared into the maw of the financial crisis. So the odds that future homeowners will get free houses out of the foreclosure process are probably pretty low. As with so many things about the financial crisis, it's hard to predict exactly what the impact would be.

But the courts do have to predict, then rule. Let's hope their guess is better than mine.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net