Asset-recourse loans are not usury

April 3, 2010 § 23 Comments

Pope Callistus III (1455-1458), Usury and Contract for Rent, from the Constitution “Regimini universalis” May 6, 1455 (quoted in Denzinger):

A petition recently addressed to us proposed the following matter: For a very long time, and with nothing in memory running to the contrary, in various parts of Germany, for the common advantage of society, there has been implanted among the inhabitants of those parts and maintained up to this time through constant observance, a certain custom. By this custom, these inhabitants — or, at least, those among them, who in the light of their condition and indemnities, seemed likely to profit from the arrangement — encumber their goods, their houses, their fields, their farms, their possessions, and inheritances, selling the revenues or annual rents in marks, or florins, or groats (according as this or that coin is current in those particular regions), and for each mark, florin, or groat in question, from those who have bought these coins, whether as revenues or as rents, have been in the habit of receiving a certain price appropriately fixed as to size according to the character of the particular circumstances, in conformity with the agreements made in respect of the relevant properties between themselves and the buyers. As guarantee for the payment of the aforeseaid revenues and rents they mortgage those of the aforesaid houses, lands, fields, farms, possessions, and inheritances that have been expressly named in the relevant contracts. In the favor of the sellers it is added to the contract that in proportion as they have, in whole or in part, returned to the said buyers the money just received, they are entirely quit and free of the obligation to pay the revenues and rents corresponding to the sum returned. But the buyers, on the other hand, even though the said goods, houses, lands, fields, possessions, and inheritances might by the passage of time be reduced to utter destruction and desolation, would not be empowered to recover even in respect of the price paid. [Note: precisely what I have termed an asset-recourse loan, as distinguished from person-recourse loans. -- Z]

Now, by some a certain doubt and hesitation is entertained as to whether contracts of this kind are to be considered licit. Consequently, certain debtors, pretending these contracts would be usurious, seek to find thereby an occasion for the nonpayment of revenues and rents owed by them in this way… We therefore, … in order to remove every doubt springing from these hesitations, by our Apostolic authority, do declare by these present letters that the aforesaid contracts are licit and in agreement with law, and that said sellers, yielding all opposition, are effectively bound to the payment of the rents and revenues in conformity with the terms of the said contracts. [Ellipses in original.]

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§ 23 Responses to Asset-recourse loans are not usury

  • Jct: http://johnturmel.com/biglie.htm In the mort-gage musical chairs death-gamble, everyone borrowed P, everyone owes P+I, only P/(P+I) survive, at least I/(P+I) are knocked into foreclosure resulting in Shift B inflation, same money chasing less goods, not Shift A inflation, more money chasing goods. If the demand for increase causes death-gamble mortgage game of musical chairs where someone must be thrust into foreclosure and poverty, that's usury.

  • Zippy says:

    Well, one nice thing about that theory is that it is empirically testable. Is the mortgage foreclosure rate precisely equal to the interest rate? That seems not to be the case, which falsifies the theory.

    In (what I understand to be) the Church's teaching on usury, most mortgages in the US are not materially usurious. (In full-recourse states they may be formally usurious in their terms, but not materially usurious in what actually occurs). Rather, the bank and the homeowner jointly own the house, and the interest payments made by the homeowner represent rent paid on the bank's portion of the house. Even when such a house goes into foreclosure and the bank recovers its principal and unpaid interest, that is not materially usury. Usury is a demand of payment for the use of money, as distinguished from payment for the use of some asset.

    As is typical, what the Church actually teaches doesn't seem to lend itself to any of the conventional staked-out ideologies. It provides no support for dismissive capitalists who think that the Church was just silly about money in the middle ages and needed to grow up. It provides no support for gold bugs who think fiat currency is the Devil's brew. It provides no support for Labor Theory of Value Marxists who think that earning through investment is nothing but exploitation of labor. Etc, etc.

    In short, once I understood the teaching it seemed extraordinarily commonsensical and fitting: it is unjust to charge “rent” for the use of money -qua- money, since money -qua- money has no productive use in itself; but it is not unjust to charge “rent” for the use of real co-owned assets.

    These notions in the air that either (1) medieval Church teaching on usury was hopelessly naive, (2) modern conditions are such that that teaching hardly ever applies in practice in the modern world, or (3) that if we accept Church teaching on usury we have to abandon private property or go down some other ideological rat hole, are simply wrong.

  • Zippy: “Well, one nice thing about that theory is that
    it is empirically testable. Is the mortgage foreclosure
    rate precisely equal to the interest rate? That seems
    not to be the case, which falsifies the theory.”

    Jct: You're the type of gambler who plays results:
    “Gee, 10 heads in a row, must be better odds for a tail
    now!” But you are right. My “theory” is empirically
    testable. You just haven't tested it yet. So I'll refer
    you to my http://johnturmel.com/bankmath.htm advanced
    engineering analysis of the banking system and at the
    end, I provide a model you can test. Keep in mind that
    mathematician who wrote “Game theory and economic
    behavior” John Von Neumann said: “Important questions
    arise in a more elementary fashion in the theory of
    games.” That's because Monte Carlo methods let you can
    run the test 100 times and get the statistical answer!
    So go play mort-gage on Interest Island and then try
    “no mort” gamble on Service Charge Island.

    Zippy: In (what I understand to be) the Church's
    teaching on usury, most mortgages in the US are not
    materially usurious. (In full-recourse states they may
    be formally usurious in their terms, but not materially
    usurious in what actually occurs). Rather, the bank and
    the homeowner jointly own the house, and the interest
    payments made by the homeowner represent rent paid on
    the bank's portion of the house. Even when such a house
    goes into foreclosure and the bank recovers its
    principal and unpaid interest, that is not materially
    usury. Usury is a demand of payment for the use of
    money, as distinguished from payment for the use of
    some asset.

    Jct: I stated clearly: “If the demand for increase
    causes death-gamble mortgage game of musical chairs
    where someone must be thrust into foreclosure and
    poverty, that's usury.” I don't care how you
    rationalize it, if someone gets knocked out of the game
    in poverty and foreclosure for no good reason but that
    they decided to keep chips in short supply, it's usury.

    Zippy: “As is typical, what the Church actually teaches
    doesn't seem to lend itself to any of the conventional
    staked-out ideologies. It provides no support for
    dismissive capitalists who think that the Church was
    just silly about money in the middle ages and needed to
    grow up. It provides no support for gold bugs who think
    fiat currency is the Devil's brew. It provides no
    support for Labor Theory of Value Marxists who think
    that earning through investment is nothing but
    exploitation of labor. Etc, etc.

    Jct: Too bad they don't and I do.

    Zippy: “In short, once I understood the teaching it
    seemed extraordinarily commonsensical and fitting: it
    is unjust to charge “rent” for the use of money -qua-
    money, since money -qua- money has no productive use in
    itself; but it is not unjust to charge “rent” for the
    use of real co-owned assets.

    Jct: Why should the guys who print up the chips get to
    say that they own half the house I'm pledging? I'd
    rather that the house remain the backing for my chips.

    Zippy: These notions in the air that either (1)
    medieval Church teaching on usury was hopelessly naive,
    (2) modern conditions are such that that teaching
    hardly ever applies in practice in the modern world, or
    (3) that if we accept Church teaching on usury we have
    to abandon private property or go down some other
    ideological rat hole, are simply wrong.

    Jct: Yes, they are. And since, from consideration of
    the efficiency of the banking systems engineering, 1)
    the church teaching condemning the positive feedback on
    debt was not naive; 2) that interest-free software is
    not only possible but currently sweeping the world; 3)
    abandoning Satan's Usury gives us God's dividend on
    time http://www.youtube.com/watch?v=x55e5IZaIyQ

  • Zippy says:

    I provide a model you can test.

    Thanks, but I prefer to make my empirical tests on actual reality. And in actual reality, as far as I can tell the relation between foreclosure rates and interest rates does not match your proposal. Ordinarily when a model does not match reality I consider that a reason to reevaluate the model.

    Why should the guys who print up the chips get to say that they own half the house I'm pledging?

    I don't understand the complaint here. When you buy a house with a mortgage, you agree to a price with the seller. The bank pays for part of it, and you pay for part of it. In a non-recourse state your payments represent repayment of principal and interest. The principal is you buying the bank's share of the house over time. The interest is the rent you pay for the part of the house that the bank owns.

    While I don't doubt that particular injustices can arise in such dealmaking, there isn't anything inherently usurious about such an arrangement: you aren't in effect paying interest for the use of money, you are paying interest for the use of the house. Usury is charging interest for the use of money.

    I'd rather that the house remain the backing for my chips.

    No clue what you mean there.

    As for the rest, I don't claim to understand whatever economic theory it is you are advancing here, but it doesn't seem offhand to have much to do with the particular species usury.

  • Zippy: “I don't understand the complaint here…”
    “No clue what you mean there.”
    “I don't claim to understand whatever economic theory…”
    Jct: And it seems you haven't been able to follow the simple grade-school algebra explaining how the mort-gage death-gamble works in http://johnturmel.com/biglie.htm or
    http://johnturmel.com/bankmath.htm
    Just take it from Thomas 95: Jesus said:…

  • Zippy says:

    Well, to be fair to my math skills, I haven't read your personal economic theory and don't plan to. Several things convinced me that my time is better spent elsewhere, among them the curious significance you attach to a shall we say tendentious etymology, not to mention the treatment of fractional reserve banking as if it were some great gnostic secret rather than part of every freshman econ curriculum.

    I'll be the first to admit that there may be more there than meets the eye; but telling me that by doing grade school algebra the world of great truth will open up to me isn't especially encouraging.

  • Zippy: “Well, to be fair to my math skills, I haven't read your personal economic theory and don't plan to… I'll be the first to admit that there may be more there than meets the eye; but telling me that by doing grade school algebra the world of great truth will open up to me isn't especially encouraging.”
    Jct: Hey, I can understand how a 1-page explanation with some grade-school algebra may daunt you. Maybe you've got a child in school who can help you. And as long as you admit that there may be more than meets the eye that you don't want to look at, it lets us know the worth of your opinion.

  • Zippy says:

    Have a nice day!

  • brandon field says:

    …as if it were some great gnostic secret…

    Doyathink the reference to the Gospel of Thomas give him away?

  • “as if it were some great gnostic secret…”
    brandon field: Do ya think the reference to the Gospel of Thomas give him away?
    Jct: Jesus said: If you have money, do not lend it out at interest. Zippy said: Go ahead. Who are you going to rely on? Jesus or Zippy?

  • brandon field says:

    Mr. Turmel,

    I'm going to rely on authentic sources for Jesus' words, and authentic scholars (such as St. Thomas) who apply them and Church teaching to modern events, not words gleaned from heretical concoctions of mish-mash put together to stupefy and deceive. The Gospel of Thomas is no more an authentic representation of Jesus' life than the Prosperity Gospel is an authentic treatment of economic reality.

  • Jct: Jesus said: do not lend your money at interest,” but if you say it's okay, who's Jesus to contradict Brandon Field.

  • brandon field says:

    Indeed. And who to be Jesus' prophet but the great John C. Turmel.

  • Zippy says:

    PBUH

  • brandon field says:

    Right. I always forget that part.

  • Brandon Field: “Indeed. And who to be Jesus' prophet but the great John C. Turmel.”
    Jct: All I did was quote Jesus but if knowing that makes me that far-sighted that you'd qualify me a prophet too, well sure, I can see where Jesus said you would “be forever hearing without hearing and seeing without seeing or understanding about interest.
    Zippy: “PBUH”
    Jct: Whatever it is, I doubt it's a coherent rebuttal to Thomas 95. Sounds like a baby babbling up his pablum.
    Brandon Field: “Right. I always forget that part.”
    Jct: I guess they both come with the same pablum.

  • zippy says:

    Mr. Google is your friend here.

  • [...] when it is asset-recourse as opposed to person-recourse, is really just a specific kind of preferred share.   When interest-bearing debt has recourse to a [...]

  • tz2026 says:

    I think your arguments and analysis is correct, with one proviso.

    Theoretically, if I am a person in default, 100% of my wages could be garnisheed. Any clothing could be taken. Any food which I might obtain even from charity could be snatched before it went into my mouth. Which means I would freeze or starve to death even if only property was taken.

    Compare what the Torah says about giving a cloak taken in pledge back and such.

    Even not going that far, you can create something between like a virtual debtor’s prison.

    There has to be some estoppel like bankruptcy provides – the creditor can get what he can recover today including any property, and maybe some potential for “accounts receivable” for a very limited future period, but cannot threaten the life of the debtor even indirectly, nor impose any permanent penalty.

    Of life, liberty, and property, the creditor can only deprive a person of property, and only for a limited time after moving against the debtor for default.

  • Zippy says:

    tz2026 :
    Theoretically, if I am a person in default, 100% of my wages could be garnisheed. Any clothing could be taken. Any food which I might obtain even from charity could be snatched before it went into my mouth. Which means I would freeze or starve to death even if only property was taken.

    Agreed; I also think that in order to avoid usury, the property used as collateral has to actually exist and has to be specific. I think profitable lending against any and all future earnings is definitely usury, and lending against future labor earnings at all – as opposed to, say, the crop produced by a given field – is probably usury. Possibly if payments were limited by contract to some percentage of income from some specific job/source it wouldn’t be. I’m also suspicious of the idea that statutory limits like bankruptcy can make a formally usurious contract non-usurious.

    (I’m just talking about the subject, not attributing anything to you or any particular commenter).

    I don’t pretend to have a hard and fast rule to solve every puzzling boundary case though. In my experience such rules often don’t exist, which makes casuistry into a bit of a two-edged sword, as likely to produce a permissive result where it shouldn’t as to clarify a particular question. So ultimately an ethic of rules has to be a stepping stone to an ethic of virtue.

  • [...] it is usury).  This is my shorthand for a contract distinction that was well understood by the medieval Magisterium but that many modern people would perhaps rather not [...]

  • [...] In a case of usury, though, no new currency is being created by the issuing entity to pay the “interest”.  A usurious transaction is a mutuum  (person recourse) loan between two third parties independent of the sovereign who issues the currency.  Currency is not in itself capable of creating more currency.  Therefore in a mutuum loan (where a borrowing person is on the hook to repay the principal amount in full, independent of a specific and limited recourse to specified contractual assets) the lender is really only entitled, in justice, to return of precisely what was lent and nothing more.  On the other hand if a “lender” purchases shares in real assets for production or consumption he can contract for the investment or consumption of those recoverable real assets in an asset-recourse loan, which is not usury. [...]

  • [...] know on magisterial authority dating from the middle ages and from St. Thomas Aquinas that asset-recourse loans are not [...]

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