Today’s Wall Street Journal‘s op-ed piece deals with President Obama’s proposed bailout of people in danger of losing their homes due to foreclosure.  According to the article:

“Just listen to Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair. In Congressional testimony last week, Mr. Bernanke compared many troubled borrowers to people who accidentally start fires by smoking in bed. For her part, Ms. Bair told public radio that it would be “simply impractical” to review old mortgage applications and try to distinguish between honest and dishonest borrowers. All of this moved the Associated Press to report that the President’s “assurance Tuesday night that only the deserving will get help rang hollow.””

One of the reasons for the increase in foreclosures is mortgage application fraud.  In December the Mortgage Asset Research Institute reported that mortgage fraud increased 45% in the second quarter of 2008, compared to a year earlier. The Treasury’s Financial Crimes Enforcement Network reports a similar rise for the full year ended in June of last year. Without some sort of mechanism to separate people who lied on their mortgage applications from people who did not, the mortgage bailout makes no sense.  You are not only rewarding bad behavior, you are encouraging more of it in the future.

The plan to institute mortgage ‘cramdowns’ (letting a judge change the terms of the mortgage) will only make things worse–it will make investors less likely to lend money in the future.  The problem of a judge intervening in a previous contract is troubling.  President Obams’s solution to the mortgage crisis definitely needs a rewrite.