April 9, 2008 | Commentary on Taxes
Remember what our mothers taught us?
These core teachings will be violated if Congress goes forward with plans to spend hundreds of billions to bail out people who lied to get a home mortgage loan.
Whether it's a huge institution or a single individual, nobody who engaged in mortgage fraud should be given a free pass. And fraud was very much at the heart of the mortgage meltdown - so much so that the industry coined a term: "liars' loans."
By some estimates, borrower fraud accounts for most of the mortgage crisis now troubling the nation. It was certainly abetted by dishonest brokers. But just as honest taxpayers should not be expected to bail out dishonest brokers, so they shouldn't be expected to bail out dishonest borrowers.
Many in Congress and in the media want to point fingers solely at the big guys. They blame "predatory lenders" while disregarding evidence that "predatory borrowers" milked a faulty mortgage system for billions by lying on their loan applications.
Whatever is done about the current mortgage mess should follow a very simple rule: No public help for anyone who got a mortgage by falsifying his or her application or committed any other dishonest act. Those claiming they deserve help should be expected to demonstrate that they've been honest.
Is that too much to ask?
The rest of us are already paying a price from how this misbehavior has impacted the economy generally and each of us as individuals. It's wrong to ask us also to bear the mega-billion-dollar cost of a massive consumer bailout.
A January op-ed in the New York Times noted, "As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications," citing a study by BasePoint Analytics.
That article, by George Mason University economist Tyler Cowen, noted:
Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn't seem to matter.
In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.
Fraud was so rampant that the FBI has a special project under way, "Operation Quick Flip," to pursue the perpetrators. However, it's an open question of whether that effort will focus on those who made the practice a regular business or will include the individual borrowers who took part - and who now may be bailed out.
There's an active effort to recast many of the guilty as though they were victims. Too typical is this statement by a Colorado official, "Lenders are crying today that people lied about their income and expenses. But they were absolutely pushing a product that allowed that abuse."
But isn't everything subject to abuse by those willing to lie? Those who condemn the bad lenders yet excuse the dishonest borrowers need a refresher course in ethics - or perhaps some more time being re-taught by their mothers.
The official who made that statement, Kathi Williams, executive director of the Colorado Division of Housing, nevertheless assigned a 60-40 culpability ratio of lenders to borrowers, according to World magazine. That 40 percent - if accurate - is huge and should not be ignored. Why should any of the culpable get a free pass, much less a reward at taxpayers' expense?
The political class, in considering a massive consumer bailout, may be reflecting the moral slippage of America. When we seek to define some as victims deserving of help without regard to their own misconduct, we undercut the virtue of proper and honest behavior.
Some seem to be claiming that it's OK to lie so long as it's about money - unless you are depicted as a fat cat, of course. But could a person who lied to get a home mortgage be trusted to be truthful on their application for more money, via a federal mortgage bailout? And would their original loan applications be scrutinized as a part of that process?
The Seattle Times wrote this all-too-typical account about reviews of these subprime loans:
The biggest problems, the reviewers said, were appraisals that looked inflated and "liar's loans," so nicknamed because borrowers weren't required to prove they earned enough to make their payments.
"You can't tell me a Kmart or a Wal-Mart or a Target floor worker is making $5,000 a month, or a house cleaner is making $10,000," said former loan reviewer Irma Aninger, a 40-year financial-services-industry veteran.
Aninger ... said she tried repeatedly to have such loans marked as unacceptable but was overruled by supervisors, known as project leads. "The lead would say, 'You can't do that. You can't call these people liars,'" Aninger said.
Using tax dollars to redeem such mortgages insults (and financially injures) the 95 percent or so of American homeowners who make their payments on time - even when it's tough - or who have already paid off their mortgage without assistance from Uncle Sam.
Will America's prosecutors rise to this challenge of reviewing the cases of those who gained "liars' loans" as well as those who turned a blind eye to them? After all, the rest of us are paying every day for their excesses. As credit gets tighter, those who want to buy a home are hurt. As housing values decline, those who need their home equity are hurt. And if billions of tax dollars go to bailouts, all who pay taxes are hurt.
Greater than the financial threat to America is the moral threat of a bailout. What's next? Paying off car loans for those who were "seduced" by a glib salesman? How about those who bought a bigger TV or a more powerful stereo system than they could afford? Where will this practice end of treating dishonest or incautious consumers as victims?
President Bush gave us a caution that should be heeded: "The temptation of Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment." He and his administration should remember those words and match their actions to them.
We don't need for politicians to prove their compassion by using our tax money to reward dishonesty. Our mothers taught us better than that.
Ernest Istook is recovering from serving 14 years in Congress and is now a distinguished fellow at The Heritage Foundation.
First appeared in the World Net Daily