Mortgage Default - The Questionable Worth of Federal Regulation
By Marion Edwyn Harrison (10/11/07)
Mortgage defaults, foreclosures, evictions, a shaking economy - a host of gloomy words pervade, often dominate, contemporary financial reports, headlines and bylines.
The Department of the Treasury top officialdom prestigiously offices next door to the White House. It is one of the smaller Federal bureaucracies. However, bureaucracy it is. Almost buried amid the overall vast and relentlessly growing Federal bureaucracy lies the Financial Crimes Enforcement Network (“Network”). It is among the offices subordinate to the Assistant Secretary of the Treasury for Terrorist Financing. (Pardon the title, obviously not meant to be read literally!) That position, in turn, is subordinate to the Under Secretary for Terrorism and Financial Intelligence, who is subordinate to the Deputy Secretary, who reports to Secretary of the Treasury Henry M. Paulson, Jr.
Don’t give up. That introduction leads to a pertinent point. The Network produces some interesting and probably reasonably reliable statistics. Those statistics need not involve terrorist activity - at least not in the sense one normally uses the nouns “terrorist” or “terrorism.” Sometimes the subject is very domestic. This year the Network has compiled figures on mortgage-loan fraud. For this purpose it matters little, if at all, whether one limits the definition of “fraud” to legal fraud or mere massive misrepresentation. The point is that fraud reports involving mortgages have been on the rise since at least 1997 through 2005. The Network counts 1,720 mortgage-fraud reports in 1997, steadily increased to 25,989 in 2005. The 2006 figures, not yet available, are expected to be higher yet.
How much guidance, supervision or other form of Federal Government activity, intervention or oversight there ought to be in the clearly local business of mortgaging real estate is a separate question. The present sources of Federal activity, among others, include (in alphabetical order): Comptroller of the Currency (within Treasury), Department of Housing and Urban Development (“HUD”), Department of Justice, Federal Housing Administration (within HUD), Federal Reserve Board, Federal Trade Commission. In the context of the subprime-mortgage fiasco these agencies in the aggregate dramatically have failed.
Failed in what? Speaking generally, they have failed to police the patently false and misleading advertisements and other forms of solicitation for subprime mortgages and the banking and other lenders which knowingly - aye, often enthusiastically - sold mortgages to people who could not afford them, upon property which could not support the debt, often both. They also have failed to police the “Wall Street” interests which bundled often-risky mortgages, facilitating the salesmanship of those banks and other lenders which should not have sold the mortgage in the first place.
Of course, two trite but true phrases are applicable: “A fool and his money soon are parted.” “Anything that looks too good to be true is.” This Commentary is not a psychological treatise. Suffice it to say that many of our fellow citizens who own, or want to own, their own home are greedy, gullible, ignorant or some combination of those characteristics. We should be especially sympathetic to the many honest and not unduly greedy souls among those people even though many brought their misfortune upon themselves. However, the salient point is that if there is to be Federal regulation, as rather pervasively there now is, that regulation should be forceful in restraining the lenders and, perhaps with more difficulty, in educating the borrowers.
Meantime, hundreds of thousands of Americans are in unanticipated financial trouble, economists are analyzing the long-term affect upon the economy, markets at home and abroad are shaking. Extensive Federal regulation at best has been of questionable worth. More likely, it has failed.
Marion Edwyn Harrison, Esq. is President of, and Counsel to, the Free Congress Foundation.
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