What's So Moral About "Moral Hazard?"

I’m getting this week’s column posted a couple days late because I spent Monday and Tuesday on my annual Congress-to-Campus visit, this time to scenic Washington University in St. Louis, which is home to a certain favorite Political Science major in the Class of 2008. I asked former Rep. Bob McEwen (R-OH), whom I met on one of my trips to Ukraine as an election monitor, to join me on the visit, and Bob agreed, and he was fabulous. I don’t think we agree on anything except maybe breakfast, but he’s truly a worthy adversary (and why Republican primary voters selected Jean Schmidt instead of sending Bob back to Congress, well, it’s a mystery to me).

Here’s a picture from the trip, from the WU student newspaper. We didn’t plan that I’d be on the far left and he’d be on the far right; it just worked out that way. Go Bears!

My suggested headline was above but the editor went in a different direction. If you want to see the newspaper version, it’s available for another 10 days.

MORTGAGE CRISIS AFFECTS BIG, SMALL QUITE DIFFERENTLY
East Valley Tribune, Mar. 30, 2008

I got a call last week seeking help for a woman who’s about to lose her house due to mortgage fraud. That’s the first tragedy. The second is that nobody can help her. Unlike Wall Street investment banks, she is small enough to fail.

It’s a fairly typical story. Several years ago, she bought a house. It’s the American dream. She makes her payments.

But she doesn’t earn that much, and hasn’t got much saved. Her mother dies. She pays for the funeral and her mother’s debts. She falls behind on the house payments.

She sees an ad for “foreclosure assistance.” She talks with a very sympathetic guy who seems helpful. He says he knows an “investor” who could co-sign a new mortgage. The investor has good credit and can get a better loan than she could. After refinancing, she’ll pay the investor for using his credit. She’ll save her house. Everybody wins.

LITTLE GUY’S RISK

Except the papers she signed deeded the property to the investor outright. He and the promoter then refinance “his” house. They take the money, and run.

The refinancing is fraudulent. The scammers told the woman one thing, but did another. They probably submitted a false loan application, claiming the house was owner-occupied. They probably didn’t need an inflated appraisal; they could create a fake sale contract, justifying the higher loan.

The lender didn’t care; it was making as many loans as possible as quickly as possible, repackaging and selling them as soon as the ink dried. Nobody involved kept any risk, except our poor woman (who will lose the house) and investment bankers like Bear Stearns (which gets a government bailout).

Bear Stearns gets help from the Federal Reserve. But where can the woman, clearly a victim of fraud, go for help? Not a simple question.

I called the county attorney. They don’t prosecute mortgage fraud. Instead, they give you the main number for the Arizona attorney general’s office.

I called the attorney general. They have one -- one! -- assistant attorney general working on mortgage fraud. But the Arizona Legislature refuses to give the AG criminal enforcement powers. The AG can only prosecute fraud civilly, as if it were a contract dispute. The AG can try to take away licenses from mortgage brokers or lawyers, but the guys who pulled this scam either weren’t licensed or are long gone.

The Arizona Department of Financial Institutions has an email address you can write (fraudline@azdfi.gov) and a complaint form. But they can only go after state-licensed entities, and most foreclosure rescue scams don’t have state licenses. The best they can do is refer people to a national nonprofit with a 24/7 toll-free number (888-995-HOPE).

The AG’s office suggested calling the United States Attorney’s office, because the feds have both civil and criminal jurisdiction. So I called, which isn’t easy. I found a press release announcing a 2007 mortgage fraud indictment, and got a phone number for the prosecutor via a State Bar of Arizona database. The U.S. Attorney doesn’t investigate crimes, but I asked his assistant which agencies would investigate mortgage fraud. She said the FBI and IRS.

NO ANSWERS

You can’t get specific phone numbers for the FBI. You have to call the main number for the Phoenix office, say “mortgage fraud,” and hope somebody can listen.

But that’s incredible openness compared to the IRS. I searched fruitlessly for any way to contact the IRS Criminal Investigation Division, even with the name of the head of the Phoenix office. I gave up and spoke with a very nice woman with the IRS Taxpayer Advocate. She explained that you can’t talk with anyone at the IRS about mortgage fraud. Instead, you file an IRS Form 3949A, on paper, by mail. Maybe they’ll call you.

So that’s the mortgage crisis for you. If you’re big enough, the treasury secretary works all weekend to bail you out. If you’re a woman losing her home to fraud, well, we can’t help you. That might interfere with the workings of our awesome free enterprise system.